Securities Trading: Order Types & Practices

Placing Orders for Securities, Implications of Order Types, Acceptable and Unacceptable Sales and Trading Practices, Settlement and Delivery, Securities Transfer, and Error Handling

• Knowledge of these topics aid in ensuring client satisfaction and loyalty
• Lack of care dealing with these topics can result in regulatory penalties, financial loss, loss of reputation, and termination of employment.

How Securities Are Traded

• Understand the components of a trade and how to place an order
• 3 components of a trade
  • Standard trading unit
  • Settlement period
  • Minimum quotation Spread

Standard Trading Units

• The quantity of a security that makes up a standard trading unit is defined in the Universal Market Integrity Rules (UMIR)
• The Canadian Investment Regulatory Organization (CIRO) rules also specify trading units for debt securities and for unlisted securities
• Orders to buy or sell, that are not in Standard Trading Units are Odd Lots
  • Less than $0.10 per unit has a standard trading unit of 1,000 units putting the odd lot as 1 to 999 units
  • At $0.10 or more per unit and less than $1.00 per unit has a standard trading unit of 500 units putting the odd lot as 1 to 499 units
  • At or more than $1.00 per unit has a standard trading unit of 100 units putting the odd lot as 1 to 99 units
  • An order for 550 shares of a listed equity priced at $5.00 per share includes five standard trading units and an odd lot of 50 shares.
• Prices may not be as good for odd lots vs standard trading units
• Traders are permitted to discount the amount they pay for purchases of odd lots
• Traders obtain a premium for the odd lots they sell
• Customers may pay more or receive less money for odd lots vs standard

Settlement Period

• Transferring securities into the account of a buyer and cash into the seller's account following a trade of stocks, bonds, futures, or other financial assets is known as trade settlement
• The settlement period is the time between the date of a securities transaction and the date on which ownership of the security is transferred
• Length of the period varies depending on the type of security
• Normal settlement periods for different types of securities
  • Government of Canada (GOC) Treasury Bills (T-bills) is T+0 (trade date)
  • Bonds (e.g. Government and corporate) is T+1 (trade date plus one business day)
  • Preferred and common shares is T+1 (trade date plus one business day)
• In 2024, North American capital markets shortened the standard settlement cycle for most trades in securities from two days after the date of the trade (T+2) to one day after the date of the trade (T+1)

Minimum Quotation Spreads

• Clients receive the bid price (highest price any buyer is willing to pay) when selling a security at the market
• Clients pay the ask price (lowest price any seller is willing to sell) when buying a security at the market
• Minimum quotation spread is the minimum acceptable range between bid and ask prices when quotations are given for securities
• Exchanges determine the minimum quotation spread which
  • For securities under $0.50 is $0.005
  • For securities $0.50 and over is $0.01
• If the minimum quotation spread for a stock is one cent, bid and ask prices in a quote must be at least one cent apart; for example, $2.34 (bid) and $2.35 (ask).

Placing an Order

• There have been changes with placement of orders due to computerized trading systems
• Registrants would present written orders to the business location order desk
• They usually enter orders from a computer terminal at their desks now
• Compliance with a firm’s specific procedures and the industry’s rules for submitting orders is essential
• Orders must be correct
• With non-discretionary accounts, the client must confirm that the presented information is accurate
• In accordance with the rules enforced by provincial authorities, exchanges, and CIRO, an order ticket must be completed for each purchase and sale instruction received from a client
• Orders should not be passed to the trading desk without an order ticket
• The order ticket must include specific details:
  • Client’s name or the account number (or both)
  • Quantity and description of the security (most often shown by a symbol)
  • Notation as to the price (e.g., limit, market, or on-stop)
  • Notation as to whether the order is professional (PRO), non-client (N–C), or employee (EMP)
  • Notation as to whether the order is a short sale or discretionary order
• Errors can be expensive so make sure to complete order forms clearly
• Error reduction guidelines:
  • Enter information clearly
  • Repeat each order back to the client
  • Look up the proper stock symbol, or write the name of the security in full if in doubt
• Consider if it is a buy or sell order
• Be sure the correct order form is being used
• Verify the security description is correct
• It is essential that you repeat each order back to the client
• Clear specification of shares being bought or sold is necessary
• Resulting trading losses from errors in completing order tickets might be charged to the responsible party, sales assistants negligence result typically falls to the RR.

Types of Orders

• Generally speaking, order types are categorized by the following characteristics:
  • Duration (How long is the order valid for?)
  • Price restrictions (Have any limits been set on the price?)
  • Special instructions (Are there any special conditions attached to the order?)
  • Other (Are there any changes to the original order or is the client a PRO?)
• At minimum, orders contain basic elements covered under the categories of duration and price

Orders Categorized by Duration

• Day order
  • An order to buy or sell which expires, if not executed, at the end of the trading day on which it was entered
  • Example: buy 100 shares of XYZ for my account at $10 or less.
  • No time limit is specified; therefore, the order is valid until the close of business on that day, or until filled, whichever sooner
• Good till cancelled (GTC) order aka an open order
  • An order to buy or sell that remains in effect until it is either executed or cancelled
  • A GTC order on the TSX expires 90 calendar days after entry
  • Example: "Sell 100 shares of XYZ whenever the price reaches $20 or more.”
  • The order stays open until the price of XYZ reaches $20 or more, at which time it will be filled
• Good till date (GTD) order aka good through date order
  • A GTD order is valid until filled or cancelled, or until the close of business on a specified expiry date
  • This type of order is particularly useful with clients who are hard to reach/leaving on vacation/business trip
  • Example: "Sell 100 shares of XYZ if the price reaches $20 or more on or before March 30.”
  • The order is open until filled at $20 or more, or until the close of business on March 30, whichever is first

Orders Categorized By Price

• Market Order
• An order to buy or sell securities at the prevailing market price., any order without a specific price limit is a market order
• Example: Buy 100 shares of XYZ Inc. at market.
• Will be filled at the current bid or ask price depending on the order being buy or sell
• Limit order
  • An order to buy or sell a security at a specified or better price
  • A limit buy order permits the purchase of shares at the limit price or lower
  • A limit sell order permits the sale of shares at the limit price or higher
  • Example: Buy 100 XYZ Inc. at $20 or less
  • Would be filled if the order could be executed at $20 or less
  • Without an explicit time limit, order is canceled at End Of Day
• On-Stop Sell Order
  • An order specifically used 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 the specified level
  • The purpose is to reduce loss or protect profit when a stock's price declines
  • On the TSX and TSX V all on-stop sell orders must be entered with a limit attached
  • Once an on-stop sell order is triggered, it enters the board lot book at its on-stop (limit) price
  • Example: "Sell my XYZ stock if the price drops to $20.”
  • The order would be triggered as soon as the stock’s price fell to $20 (or lower).
• On-stop buy order:
  • Opposite to a on-Stop sell order
  • Buy shares above a certain price
  • Protect Short position or waiting for clear upward signal
  • NOTE; On the TSX and TSX V all on-stop buy orders must be entered with a limit attached
  • Once an on-stop buy order is triggered, it enters the board lot book at its on-stop (limit) price
  • Example: “Buy 100 XYZ Inc. only if it moves up from $30 to $35.”
  • A limit buy order of $35 would immediately be filled because the trader is obliged to buy the stock at $35 “or better”, and the prevailing market is $30
  • But by entering the order as a stop buy at $35, the order will not be triggered until the stock trades at $35 (or above)

Orders Categorized by Special Instructions

• Dealer members’ automated order systems may or may not accept orders that require special handling
• Determine the proper procedures for such orders at your firm
• Special terms orders are executed on a best-efforts basis: the client has no guarantee of a fill at the posted bid/offer price.
• All-or-none order
  • An AON order is an order for which the entire amount of stock must be bought or sold or no part of the order will be executed
  • Client will not accept partial fills, filled on a best-efforts basis only
  • Restrictions on the stock may trade at or through the order price without the order being executed
  • Example: "Buy 2,500 shares of XYZ at $20 on an all-or-none basis.
  • Client will not accept partial fills
• Fill-or-kill order
  • A FOK order is an order in which as much as possible must be filled immediately, after which the balance of the order is cancelled
  • No differentiation on what is unfilled
  • (In the U.S. a FOK order is filled completely and immediately, or else the order is cancelled)
  • Example: Buy 2,500 XYZ at $20 on a fill-or-kill basis. - Only 1,500 shares of XYZ can be purchased for $20. After the purchase is made, the order is no longer valid, even though only 1,500 of the 2,500 shares ordered were bought.
• Switch order
  • An order for the sequential sale of one security and the use of the proceeds to purchase another
  • Note that the second order cannot be activated until the first order is filled
  • Clarify if partial fills are permitted
  • Example: Sell 100 XYZ and use the proceeds from this sale to buy shares of CDE. - Clarify how many shares of CDE
• Contingent order
  • An order that only takes second place to another which has to complete first
  • This can be used for derivatives
  • A contingent order for two related stocks (i.e., XYZ convertible preferred and XYZ common; XYZ stock and XYZ warrants) at the market or at a certain spread is sometimes referred to as a spread order.
  • Example: Buy 1,000 shares of XYZ at market and sell 10 calls at the current offer price." Waits until 1,000 shares of XYZ are purchased
• Delayed delivery order
  • Special order where date of delivery goes beyond usual
  • Mostly used by institutions
  • Seldom sold at market price and delays might happen"
  • Example: August 31 order to sell 100 shares of ABC at $23 in a 30 day delay gets filled that day making delivery 30 days later on September 30"
• Short Sale Order
  • Order to sell a stock the seller does not own with the expectation of decreasing price
  • The shares are borrowed by the brokerage. If the short fails to cover, the broker makes them
  • RRs must declare this in order.
  • Example: “Sell short 100 XYZ at $20."
  • This is a declaration and the order can proceed
  • If XYZ is being traded through the TSX and the most recent standard trading unit is sold at $25 or less, the sale can be made.

Other types of Orders

• Cancel or change former order * a CFO is used to cancel and amend previously entered orders. * Be careful, an order may have already been changed and client should be so advised
• Often systems will allow for the entering of CFOs
• Professional order
  • Also known as "employee", a PRO is an order entered for a member shareholder or director -Client orders always take priority

Fixed Income Trading

• Primarily in Canada: Bonds typically trade on OTC markets with telephone contact to execute quotes
• Table 7.8 shows standard debt trading units
• Notice and Guidance from rules for trading
• Treat fair
• Give a good valuation

Sales and Trading Conduct

• You must study the rules applicable to a province, while staying up to date with changes
• The most basic rule is to "Know your client" and make suitable recommendations

Client Prioritization

• Prioritize client orders before those from Employees
• Clients that are insiders that are also PRO/EMP may have orders ranked
• Clients over non clients
• In order to trade ahead it has to be directly for the clients benefit

Getting Best Execution

• Achieve reasonable pricing, diligence, and full understanding of the rules
• Client mandates direct us to acquire best price
• Many factors can provide the very best of circumstances
• Volume, trends and spread

GateKeeper Obligations

• RRs have a roll to ensure no omissions can facilitate a breach
• Consequences could be severe
• Redflags indicate a problem exist and inquiries should be made or the issue escalated

Manipulative Trading Practices

• These undermine good markets
• Don't partake in orders that deceive vendors and purchasers
• Don't create a false appearance
• Never use deceptive ways to impact pricing
• Always make a good transaction

Inappropriate Trading

• Can be achieved through many ways, never with hold information
• Watch for high pressures to induce a transaction
• Review KWP requirements and KYC as well
• If you are in control you may not take advantage of customers

Unauthorized Discretionary Trading

• RR's should not do anything out of line
• Don't make trades based on your personal choices, follow all rules

Illegal Insider Trading and Tipping

• Cannot use material information to make judgements or pass it on to the tippee

Reviewing who is "in the know"

• Check through directors, officers, family with authority, insiders etc...

Reviewing the information

• All inside information should be private
• Material information for securities are inside

Prohibitions

• Inside and affiliates of the issuer

Requirements

• Protect information with firewalls that only certain individuals have access to

System for Electronic Disclosure by Insiders

• The SEDI has been developed to enforce
• Insiders have to accurately file information and their securities

Settlements, Transfers, and Corrections

The Clearing System

• CDS clearing provides members where deliveries can happen"

Advantage with Securities Sold

• If a dividend is sold with a security, it must go with it, same with liabilities

Accrued Interest to Seller

• All interest goes to the seller

Trading Ex-dividend Rights

• The date must pass by and the record will matter

Cash Trades

• Settles the transaction within a single day, can be cash if agreed

Rights on Stock

• Differs amongst exchanges

Reducing Outstanding Orders

• The value of the payment rights must be accounted for

Transfer of Securities

• Must follow procedure exactly, can be electronically sent to the agent authorized by the issuing company
• Must ensure the rightful owner receives the certificate
• Can categorize as normal or involving legal documents

Simple Transfers

• Ensures and validates documents from the owners by doing reviews

Involving Legal Documentation

• Must be met and follow the rule

Change in Ownership"

• Requires strict protocol
• Must be tradeable on the marketplaces

Fails

• Listed securities can cause this, security not yet delivered
• The expecting member can demand delivery and, lacking the ability, they have to buy in

Deliveries and Payment

• RR needs to make sure to ensure they are up kept

Errors

• Errors are expensive, but now less frequent
• All accounts matter equally

Before

• Needs to be cancelled

After

• All things need to fall in line with procedure