Trading, Settlement, and Prohibited Activities

Trading, Settlement and Prohibited Activities

• Securities order placement mechanisms, order type implications, and sales and trading practices are vital
• Functions like settlement and delivery, securities transfer, and error handling are essential

Key Terms

• Key terms are defined in the Glossary and appear in bold text in the chapter
• all-or-none order
• ask price
• best-efforts basis
• bid price
• churning
• client priority rule
• day order
• fails
• insider trading
• limit order
• market order
• material information
• minimum quotation spread
• odd lot
• restricted list
• fill-or-kill order
• firewall
• frontrunning
• gatekeeper
• grey or watch list
• inside information
• short sale
• standard trading unit
• stop-loss
• suspicious transaction
• settlement
• tipping
• wash trade

Introduction

• Correct order placement ensures client satisfaction and loyalty
• Requires knowledge of order types, settlement, delivery, and error correction
• Registered Representatives (RRs) must act as gatekeepers
• Gatekeepers should prevent violations of securities laws and regulations by clients and colleagues
• Failure to act as a gatekeeper can lead to regulatory penalties, financial loss, reputational damages, and termination
• Knowledge helps RRs handle orders and fulfill gatekeeper obligations

How Securities are Traded

• Three main components when trading securities:
  • Standard trading unit
  • Settlement period
  • Minimum quotation spread

Standard Trading Units

• Defined by the Universal Market Integrity Rules (UMIR)
• Canadian Investment Regulatory Organization (CIRO) specifies trading units for debt and unlisted securities
• Table 7.1 lists security price ranges and standard trading units for listed securities
• Orders not in multiples of standard trading units are odd lots
• Odd lots may have less favorable pricing
• Traders may discount odd lot purchases and premium odd lot sales
• Clients may receive less/pay more for odd lots

Settlement Periods

• Trade settlement transfers securities to the buyer's account and cash to the seller's account
• The period varies by security type.
• Most securities settle one business day after the trade date

Minimum Quotation Spreads

• Clients selling at market receive the bid price (highest buyer price)
• Clients buying at market pay the ask price (lowest seller price).
• The minimum quotation spread is the minimum range between bid and ask prices
• Exchanges determine range (Table 7.3)

Placing an Order

• Order placement has changed with computerized trading systems
• RRs must ensure firm procedures and industry rules
• Orders must be correct; clients must confirm accuracy (non-discretionary accounts)
• An order ticket must be completed for each client instruction, following rules enforced by provincial authorities, exchanges, and CIRO
• Order tickets should not be passed to the trading desk without an order ticket.
• Order tickets must include:
  • Client name/account number
  • Security quantity and description
  • Price notation (e.g., limit, market)
  • Designation (professional, non-client, employee)
  • Short sale or discretionary order notation

Avoiding Errors

• Enter information clearly
• Repeat order to the client
• Look up stock symbol/write security name fully
• Before trading desk: clarify buy/sell, use correct form, verify the security description
• Crucial to reiterate each order; disputes may arise from simple misunderstandings
• Clearly stipulate security type
• Errors completing tickets may cause trading losses; consult firm policy
• Assistants also expected to understand order entry systems

Types of Orders

• Order types vary by duration, price restrictions, special instructions, and client type
• Characteristics include:
  • Duration (how long is the order valid)
  • Price restrictions (limits on the price)
  • Special instructions (conditions attached)
  • Other (changes/client status)
• Orders must include:
  • Duration
  • Price
  • Special terms

Orders Categorized by Duration

• Orders categorized by duration are shown in Table 7.4
• Day order: Valid until the end of the trading day it was entered
• Good till Cancelled (GTC): Remains active until executed/cancelled
• Good till Date (GTD): Valid until specified expiry date

Orders Categorized By Price

• Orders categorized by price are shown in Table 7.5
• Market order: Executed at the prevailing market price
• Limit order: Executed at a specified/better price.
• On-stop sell order (stop-loss order): A sell order with a limit price below the existing market price. Reducing potential losses or protecting gains when a stock's price declines.
• On-stop buy order: An order to buy a stock at or above a certain price.
• On TSX and TSX V, on-stop orders need a limit, are entered into board lot book at the on-stop (limit) price after being triggered

Orders Categorized By Special Instructions

• Displayed in Table 7.6 with special instructions
• Orders that need handling may/may not be accepted by dealer members' systems, meaning RRs must determine proper procedures
• Best-efforts basis
• All-or-none order (AON): Entire amount or none is executed (no partial fills)
• Fill-or-kill order (FOK): As much as possible filled immediately; balance cancelled
• Switch order: Sequential sale and purchase using proceeds (may accept partial fills)
• Contingent order: Takes second place to the primary order, becomes effective only after the order, is entered into at an exact price/at a specified distance
• Delayed delivery order: Delivery beyond usual settlement (institutional accounts), orders at a discount, and reaching an agreement with the buyer on delivery

Order Types

• Short sale order:
  • Selling borrowed stock, expecting a price decrease
  • Risks include price increase and the dealer member requiring stock return.
  • Requires clear indication that a short order (required by UMIR Rule 62).
• Cancel or change former order(CFO): An an amendment to a past order
• Professional, or Employee and Non-Client, orders: Entered for partners, directors, and officers, and employees at a dealer, must be marked correctly for priority by the brokerage

Fixed Income Trading

• Bonds trade primarily on OTC in Canada
• Traded directly between members or dealer member platform
• Execution is over the phone/quote-driven systems
• Debt security/unlisted securities standard trading units are in Table 7.8
• CIRO's rules and guidance:
  • Deal fairly
  • Fair pricing and valuation

Sales and Trading Conduct

• RRs must know, study, and apply rules in their provinces and conform to all requirements while remaining informed/complying with regulatory changes
• Industry rules have basic requirements for KYC, KYP, and proper recommendations.

Client Priority

• Client priority rule is that, orders for individuals linked to a dealer, the PRO, EMP or NC must be behind any client order of the same dealer for the exact financial instrument
• All non-client orders should be labeled as PRO, EMP, or N-C to make sure that client orders are prioritized; seek advice when there is doubt about which account to use
• Particpants are unable to put in principal or N-C order on a market with the knowledge to execute in priority that a client order that has already been received and the UMIR provides a number of exceptions
• Withholding of this order can involve putting terms for order so client ranks behind pricipal for execution of a client order in these processes

Best Execution

• Set out in CIRO's IDPC rules and does not have a simple objective definition
• Relevant factors to see what best execution is must be included and diligently done so on the terms by market conditions
• Client orders must consider the price, speed, a certainty of execution and total transaction cost with the volumes of past and present sales, and direction of stock

Gatekeeper Obligations

• Registrants must follow in roles to prevent breaches, may be responsible for colleagues and include red flags for recognizing a negative
• Supervision must be followed and reported as required within internal laws

Prohibited Activities

• Frontrunning: Trading using a client's order ahead or any non specific rumours that constitute frontrunning and is a serious offence, but there is material non-public information to the affairs that can be illegal- trading on it

Additional Prohibited Activities

• Churning is activity for remuneration of the RR and not in good faith that can contain a number of trades, depending on a number of investment skills to follow and should be in keeping with investment principles if aware of excessive trading
• Sales outside of jurisdiction can have restrictions for attempting illegals to sell in US or US authorities, along any province if not legal
• Trading for most of province is generally not qualified to sale in the clients area on the prospect of prospectuses to make legal

Illegal Representations

• Registered represenatives can get penalties for any false way stated during a material transaction
• There can be actions with high pressure, ignorance, KYP with rules and that if RR knows he cannot reduce commission on it
• Any statute that is applicable is the sales one

Manipulative Trading

• Ciro trading practices for avoiding transparency in following any transaction, entering any scheme that would be in effect
• All should have a good supervision program which creates artificial price and market manipulation as well of those to the ones of a Rumour

Unauthorized Discretionary Trading and Insider Trading

• RR's need permission in terms of timing, pricing for securities
• They must not only obtain specifics from the client but also the supervisor of a dealer
• Insiders are people for the act of the public when buying

Who are Insiders

• The officers with directors and those excluding underwriters beneficially own with voting rights of how to make a lot, and for this reason they are illegal for one party to send over on their trading and may mean fines with a bit of jail time

Systemic Disclosure

• As issuers with insiders they have to electronically file any electronic info with SEDI that allows issuers to file with CSA
• With the transaction to list a number of values and currencies on a business event

Settlements and Corrections

• Trade settlements are essential and it contains what happened behind the scenes with transfer ownership and corrections
• The Canadian Depository in the system offers bank members a way for delivery and the like
• If one fails to secure balances, securities can pass their time with dividend, unless in advance for security and bonds with a purchase of course

Rights on Stock & Legal Documentation

• Exchanges come with a lot of the payments, security for having certain amounts on different type of days if that security trades
• Normal conditions often come with bonds that may not follow the same regulations if not obtained with proper legal documentation at time