Securities Trading

How Securities are Traded

• Placement of orders must be efficient and correct to ensure client satisfaction
• RRs are considered gatekeepers who must not facilitate breaches of securities laws
• Components of a trade:
  • Standard trading unit
  • Settlement period
  • Minimum quotation spread
• A standard trading unit refers to a quantity of security, as defined by the Universal Market Integrity Rules (UMIR)
• Canadian Investment Regulatory Organization (CIRO) rules specify trading units for debt, and unlisted securities
• Orders not in multiples of standard trading units are called odd lots
• In filling odd lot orders, traders can discount purchases and obtain a premium for sales

Settlement Period

• The settlement period refers to procedure of transferring securities to the buyer, and payment to the seller after a trade
• The trade settlement is the time between transaction date, to date of ownership transfer
• Most securities settle as of the trade date plus one business day
• North American capital markets shortened the standard settlement cycle for most trades in securities from two days after (T+2) to one day after the date of the trade (T+1) in 2024

Minimum Quotation Spreads

• Clients selling at the market receive the bid price
• Clients buying at the market pay the ask price (or offer price)
• Minimum quotation spread is the acceptable range between bid and ask prices
• Exchanges determine the acceptable range

Placing an Order

• Methods of placing orders have become varied due to computerized systems
• RRs must ensure compliance with procedures and industry rules when submitting orders
• With non-discretionary accounts, clients must confirm accuracy of presented information
• For each purchase and sale instruction, RRs must complete an order ticket
• Order ticket details:
  • Client’s name or account number
  • Quantity and description of security
  • Price notation
  • Order notation
  • Short sale or discretionary order notation
• RRs need clarity and accuracy to prevent order form mistakes
• Order-placing guidelines:
  • Enter information clearly
  • Repeat each order back to the client
  • In case of doubt, look up the proper stock symbol, or write the name in full
  • Ensure it is a buy or sell order
    • Be sure the correct order form is used
  • Verity that the security description is correct
• Repeating each order back to the client is essential in preventing disputes
• RRs need to specify the security being bought or sold
• Losses from errors in completed order tickets are typically charged to the person who made the error

Types of Orders

• Generally, order types are categorized by the characteristics of duration, price, and special instructions
• Order must contain basic elements within the categories of duration and price
• Categorized by Duration:
  • Day order: Expires at the end of the trading day unless filled
  • Good till cancelled (GTC) order: Remains in effect until executed or cancelled - On the TSX, GTC orders expire 90 days after entry
  • Good till date (GTD) order: Valid until a specified expiry date
• Categorized by Price:
  • Market order: To buy or sell securities at the existing market price - Any order that is missing a specific price limit defines a market order
  • Limit order: To buy or sell at a specified or better price - Limit buy order: Shares can be purchased at limit price or lower - Limit sell order: Shares can be sold at the limit price or higher
  • On-stop sell order: In connection with a sell order where the limit price is below the existing market price - The order is triggered when the stock drops to specified level - Seeks to reduce the amount of loss - All on-stop sell orders on the TSX and TSX V must be entered with a limit attached - Once triggered, it enters its on-stop (limit) price into the board lot book - For stocks, it is also referred to as a stop-loss order
  • On-stop buy order: Opposite of an on-stop sell order - Used to protect a short position when the stock’s price is rising. - It also ensures that a stock is purchased while its price is rising
    • Requires a limit attached
      • Once triggered, the order enters its on-stop (limit) price into the board lot book
• Categorized by Special Instructions:
  • All-or-none order (AON): The entire amount of stock must be bought or sold; no partial fills - Filled on a best-efforts basis only - The stock may trade at or through the order price without the order being executed
  • Fill-or-kill order (FOK): As much as possible must be filled immediately, after which the balance is cancelled
  • Switch order: Sequential sale of one security and use of the proceeds to purchase another
    • The second order cannot be activated until the first, is filled
  • Contingent order: Takes second place to a primary order and becomes effective only once the primary one is filled
    • For example: Sell 10 calls at the current offer price"
      • To be used as the contingent order for the buy of XYZ shares cover the client's option position
  • Delayed delivery order: Agreements between the buying and selling parties to delay the term delivery of securities to a date beyond the usual settlement period
  • Short sale order: To sell stock that the seller does not currently own - Seller borrows the stock from a dealer member - High risk that the stock may actually increase in price
  • Cancel or change former order (CFO): Cancellation and amendment to a previously entered order
• Requires caution when clients want to change orders, especially in fast market
  • Professional (PRO) order: For the account of a partner, director, officer, shareholder, investment advisor, or other employee of a dealer member
    • Such orders rank behind client orders
    • Be marked PRO, EMP, or N-C

Fixed Income Trading

• In Canada, bonds trade primarily on over-the-counter (OTC) markets
• Occurs either directly between dealer members or using intermediary dealer member trading platforms
• Trading occurs mostly on quote-driven systems and execution is over the phone
• CIRO has rules and guidance on trading in debt markets
• Debt markets deal fairly with customers, provide fair pricing and valuation and comply with reporting requirements
• Maintain policies and procedures

Sales and Trading Conduct

• Study the rules of your province and conform to all requirements, and be informed of regulatory changes
• Know Your Client (KYC), Know Your Product (KYP), and make suitable recommendations

Client Priority

• Orders for PRO, EMP, N-C, rank behind any client order
• A trader cannot intentionally trade ahead of a client order or tradeable limit order without client consent
• UMIR Policy 5.3 provides that, subject to certain exceptions.

Best Execution

• Requirements are set out by CIRO’s IDPC rules
• Not limited to price and should be viewed as a process than an outcome for each trade
• Dealers must diligently pursue execution of each client order on advantageous terms
• Factors for best execution:
  • Price
  • Speed/certainty when it happens
  • Total transaction cost
• Consider prices, volumes, direction of the market, the posted size, size of spread and liquidity of security

Gatekeeper Obligations

• RRs and IRs must not facilitate breaches of securities laws
• They may also be responsible for breaches by colleagues
• Red flags indicate a problem or breach of securities laws
• Report the issue to a supervisor/compliance personnel

Frontrunning

• Taking advantage of a client’s order by trading ahead of it
• Trading on non-specific information, does not constitute frontrunning
• Trading on material non-public information is insider trading and is prohibited
• An RR with knowledge of a pending client order must refrain from:
  • Trading security or related security
  • Soliciting an order
  • Give information to any other person

Churning

• Carrying out multiple transactions to increase RR, remuneration
• Is a is a failure to deal fairly
• Only Quebec contains an express prohibition against it

Sales Outside A Jurisdiction

• If you were to fill an order to someone in another jurisdiction, there can be legal consequences if that is not where your license is for

Sale Of Unqualified Securities

• It is illegal for RRs to trade in most securities that were not qualified for the client in their province

Illegal Representations To Effect A Trade

Manipulative Trading Practices

The following practices must be avoided:

• Trying to deceive the purchaser about the price
• Creating false appearances
• Any scheme or arrangement to sell and repurchase a security to manipulate the market
• Misleading CIRO The following needs identifying in fixed income trading:
• Artificially increasing trading volumes
• Rumours
• Conspiracy

Engage in trading that takes unfair advantage such as:

• Acting when specifically known
• Executing trades of clients without their knowledge
• Using proprietary to affect the value from the client Abuse market procedures that are unfair. Consummating trade where the price is wrong

Unauthorized Discretionary Practices

Rules: Don’t use any if you lack permission. Get specifics from the client. Supervisor must approve the temporary discretion.

Managed accounts are another platform, with qualified managers only.

Disciplinary measure must be severe of this act.

Illegal insider trading and tipping

Insiders include: Directors Officers Ownership that exceeds %10 of rights and securities In order for the acts, certain person in companies must have a defined time period for how long the insider is with the issuer. This can be up to 6 months before the event.

Inside Information

Information that is only known to the public for the securities. Ontario Material information is information about the material change that either has occurred or is likely.

The above can apply to mutual funds

The prohibition against against trading applies when a third party has a connection with the reported issuer. Underwriters, accountants may be associated with this.

If a company is related to a spouse or other person, then it can be seen that the companies associated

Firewalls

The way to isolate people, by isolating the people to affect those specific decisions,

Employees MUST BE educated, Containment with records or who becomes privy to information Restriction of transaction

To not trade you have to use restricted lists or limit transaction

The company may add to Grey or watch list to add securities

Insider Reporting Requirements

Insiders must tell administrators It is limited to specific factors to persons. CEO CFO/COO Any other insider who has access System for Electronic by Insiders Harmonizes the deadlines for what has to occur in CSA jurisdictions Type of security Transaction dates Buy or sell Currency

Reporting Issuers Have to report with SEDI

Settlement Transfers and Corrections

Trade settlement, securities and processing The Canadian depository for services, operates for members of the dealer or banks. Participants are delivered with what certificates or electronic to what partners for receival

Cash balance will have a credit for the dealer to make the payment from their balance, and tells them what securities they balance with.

Securities that are sold has dividends are passed to the new owner

There can be legal obligations passed on

Accrued goes to seller on any bonds

Closing transfer books are ex-rights, when talking what rights they’re able to perform

Cash Trades

If it’s before the record date, the trade is before the dividend, and if settlement is after the record date, it is ex-dividend.

Rights on Stock

Understand procedures that must be known Follow procedures and see what is happening.

Reducing Outstanding Orders when Shares Trade EX

When a security will be quoted, must reduce the outstanding orders Open Buy orders Open STOP-LOSS sell orders

Following types are not required

• Open Stop Buy
• Open Sell

Transfer of Securities

When you are required to move stocks, then there are following procedures:

• Simple and Involving documentation

Simple Transfer

When you transfer the certificate, it should follow all rules

Transfer with legal Documentation

Transfer is if it’s more of a partnership for what will occur

• DO NOT do in the name of deceased*

Changes in Ownership

Under UMIR it must be known economic power and who is with beneficial Trades should do what marketplace wants Not for marketplace transaction.

Fail to deliver

They may get bought in

Failures when it comes to securities

###Deliveries and Payments

You must pay/registrations/orders Make sure of financial risk Reviewing certificates

Deliveries are important

Errors

They will happen especially if time passes.

Before And After

After there should’ve happened: Security and it happened right Quantity or is not right, then it must be corrected.