Securities Trading and Settlement

Trading, Settlement, and Prohibited Activities

• Placing orders for securities involves understanding different order types
• Acceptable and unacceptable sales and trading practices must be understood
• Trade settlement, securities transfer, and error handling are important functions

Key Terms

• Various key terms are defined and highlighted in the chapter.

Efficient Order Placement

• The efficient and correct placement of orders ensures client satisfaction and loyalty.
• You must know order types, settlements, and error procedures to enter orders correctly.

RR Responsibilities

• RR responsibilities include gatekeeper duties: preventing breaches of securities laws or regulations by clients or colleagues
• Penalties for failing as a gatekeeper include regulatory penalties, financial loss, damaged reputation, and termination

How Securities are Traded

• Key components for understanding securities trading: standard trading unit, settlement period, and minimum quotation spread.

Standard Trading Units

• The UMIR defines the quantity of a security in a standard trading unit
• CIRO rules specify trading units for debt and unlisted securities.
• Orders not in multiples of standard trading units are odd lots. For example, an order for 550 shares of a $5.00 equity includes five standard units and an odd lot of 50 shares

Settlement Period

• Trade settlement is the process of transferring securities to the buyer's account and cash to the seller's
• The settlement period is the time between the transaction date and the date of ownership transfer.
• Settlement periods vary by security type with most settles one business day after the trade date.
• In 2024, trades settle one day after the trade date (T+1).

Minimum Quotation Spreads

• The bid price is the highest price a buyer is willing to pay
• The ask price is the lowest price a seller is willing to sell
• Exchanges determine the minimum acceptable range between bid and ask prices, known as the minimum quotation spread

Placing an Order

• A Registered Representative(RR) responsibility is to comply with procedures and rules for submitting orders
• Non-discretionary accounts must have the client confirm the order information is accurate and correct
• For each purchase/sale instruction, complete an order ticket following rules enforced by provincial authorities, exchanges, and CIRO
• The order ticket must include details such as:
  • Client's name/account number
  • Security quantity/description (symbol)
  • Price notation (limit, market, or on-stop)
  • Order type (professional, non-client, employee)
  • Short sale or discretionary order

Errors in Order Placement

• Errors in completing order tickets results in trading losses upon correction which are charged to the error-maker, usually the RR
• Guidelines to avoid errors include :
  • clear information entry
  • repeating order back to client
  • double-checking stock symbols/names
  • verifying buy/sell and security descriptions
• Sales assistants must be well-trained and firms are expected to have an efficient order-entry system

Types of Orders

• Order types are categorized by duration, price restrictions, special instructions, and other relevant factors.
• Must contain basic elements (duration, price, or any other terms / or instructions attached)

Duration types for orders

• A day order: An order to buy/sell which expires if unexecuted by the end of the trading day
• A good till cancelled (GTC) order: Is an order that remains until executed or cancelled. If placed on the TSX, GTC orders expire 90 days.
• A good till date (GTD) order: Is valid until a specified expiry date.

Order types Categorized by Price

• Market orders: To buy/sell securities at a prevailing market price
• Limit orders: order to buy/sell securities at a specified (or better) price allowing share purchases at the limit price or lower.
• The opposite of stop-loss orders are on-stop buy orders:
  • To protect a short position when the stock's price is rising
  • To ensure that a stock is purchased while its price is rising.
• All on-stop orders must be entered with a limit attached, being triggered to the board lot book once triggered.

Special Instructions

• Dealer members' automated order systems might not accept all specially handled orders and are executed on a best-efforts basis.
• All-or-none order (AON order): The entire stock amount must be bought/sold (no partial fills) with best efforts only guaranteed
• Fill-or-kill order (FOK order): The order must be filled immediately as much as possible to fill then the balance is cancelled immediately
• Switch order: An order for the sequential sale of one security using the proceeds to purchase another activated when the order has been filled.

Other Order Types

• Contingent order: Placed 2nd to a primary order, which waits til the first has been fulfilled to take effect
• Delayed delivery order: Buying/selling parties agree to delay securities delivery past the usual setpoint
• Short sale is to sell stock that isnt owned , borrowed for sale, expecting price declines

Professional (PRO) orders and Fixed Income Trading

• PRO orders involve accounts of partners, directors, officers or investors for the dealer
• Bonds mostly trade on OTC markets with quote-driven systems. Execution happens over the phone
• CIRO regulations for fixed income trading: fair dealing, fair pricing/valuation, compliance with reporting, and adherence to policies.

Sales and Trading Conduct

• Adhere to key rules and requirements applicable to sales and trading. Stay informed and adhere to regulations. Know Your Client (KYC) and Know Your Produc.

Client Priority

• The client priority rule is that client orders of the same type and amounts must process before the Registered Representatives ones
• Particpants cant enter PRO/NC order if they know the participant will likely execute at a highr priority due to rule 5.3.

Best Execution

• Best execution requirements are found in CIRO's rules with assessment factoring in many conditions
• Must diligently pursue the execution on the most advantageous terms and as quickly as possible under market conditions

Gatekeeper Obligations

• RRs and Investment Representatives(IRS) : Gatekeepers in that they cant facilitate breaches of securities or legislation
• Recognize red flags which are facts, activities, or circumstances that might indicate a problem or breaking rule

Prohibited Activities

• RRs must know rules which helps them act and not be impdeded.
• Designed to lower rates of actions by those that sell unethically

Frontrunning

• Cant trade ahead to take adantage of the clients orders which can lead to an offense.
• Trading in a marketplace can be based on public materials, and the non-public portion can result in violations

Churning

• Churning is when there are carry out multiple transactions in an account solely to increase money earned from RR
• Sales made out of jurisdiction are also illegal, as is selling unauthorized securities
• Registered Representatives(RRs) are subject to penalties or those that are illegals