OATS

(Order auditing trailing system)

**only NASDAQ stock

**OATS reports must be submitted (transmitted) DAILY to FINRA by brokers/dealers (the same day an order was received or on the day information becomes available to the firm)

**tracking orders from beginning to end, requires time stamping in HMS, contra party, order identifier, terms of order, time in force, execution price (OATS tracks the entire life of an order entered and accepted by a member firm) Kisaca soyle de soylenebilir;
The following can be tracked through OATS;
-the time an order was entered
-the time an order was executed
-the time an order was changed
-the time an order was cancelled

**OATS reports can be made for a single submission or multiple electronic submissions

What is reported in OATS?
-From whom the order was received (customer or other member)                         
-Order identifier
-Date and time of receipt
-How was the order received (manually or electronically)
-Terms of order (buy, sell,long, short, stock,shares,price,order type (market,limit),time in force,special handling request)
-Where order was routed for execution
-How it was routed (manually/electronically)
-Whether the order was modified (cancelled, changed,date,time)
-Execution (price,partial execution,full execution,date,time,capacity (agent,principal,riskless principal),exchange name)
-Whether there is a seperate reporting agent for OATS

What is not reported in OATS?
Orders for listed securities
Market maker quotes for nasdaq securities

FQCS

(Firm quote compliance system)

It deals with member complaints regarding backing away

YK
**FCQS tracks quoting patterns
**Complain must be filed in 5 minutes
**Regulators track complain in real time
**Violation will result in a contemporaneous execution (If order entry firm has an allegation against MM, and it has been proven correct that MM backed away, “the order entry firm is entitled to a contemporaneous execution”)

STEPS;
-Firm feels that a MM failed to honor its quote (firm has committed a backing-away violation)
-the order-entry firm contacts the market maker to try and resolve things directly, if no response then;-firm files a complaint within 5 minutes
-“Market regulation department” enters the complaint into the FQCS.
-FQCS allows FINRA to review the market condition at the time of allegation.
a)if FINRA believes firm failed to honor its quote, it will award the aggrieved party a contemporaneous execution (it will be the price at the time of the allegation)
b) if the aggrieved party fails to file a complaint within 5 minutes, that doesn’t relieve  the firm who allegedly backed away of responsibility. But failing to file within 5 minutes makes the award of a contemporaneous execution less likely.

Exchange-listed securities

**Member firms can direct orders in exchange-listed securities to market makers for automatic execution by using ITS/CAES                        

** ITS/CAES is a computerized link between the exchanges and third-market makers. It enables the best execution for issues listed on more than one market by routing orders to the locations with the best prices.

SelectNet orders can be cancelled after being online for 5 seconds   **SelectNet is an automatic electronic trading system between brokers/ dealers allowing MMs to send orders directly back and forth. Both customer and proprietary accounts are handled.   

**SelectNet can’t be consideres as a linked ECN b/c orders are NOT automatically reflected in Nasdaq  

**Selectnet orders report to ACT  

**Selectnet allows automatic execution and negotiation for trades and handles both customer and proprietary orders (Traders can automate the negotiation and execution of trades in selectnet)  

**Order entry firms has access to selectnet too  
**selectnet operates outside of normal business hours, and is a system used for electronic negotiation. It handles nonliability orders only like preopening, afterhours, negotiation (liability orders are not belonging to here

Consolidated quotation system

operation hours; 9.30 am 6.30 pm”

* A listed stock can be traded in a number of markets. If these markets are linked to each other, there is a better price competition, and the “consolidated quotation system” (CQS) collects quotes for all the markets and reduces this problem. (demek ki CQS heryerden fiyat alir, ve bunlari bir araya getirir). It collects and disseminates, electronically the current bid and asked quotations along with volume, from and to all market centers trading listed stocks. (listed stocks like NYSE, AMEX,NASDAQ, and other exchange listed stocks) Quotes from “exchanges, ECN’s and MM’s” are displayed. Third market refers to over-the-counter trading of exchange-listed securities. There is a restriction on third market! NASD members may not execute third-market transactions in a security that is subject of an initial public offering (IPO) until the security has opened for trading on the primary exchange listing the security! “The opening on the exchange would be indicated by a transaction report by the listing exchange on the consolidated tape”. A broker dealer may wish to simply purchase or sell an exchange-listed security directly with another brokerage firm instead of executing the order on the floor of an exchange by using the third market.

*All third market transactions are reported through ACT/TRF to the consolidated tape for display. MMs who enter quotes for exchange-listed securities must enter their quotes through the CQS (consolidated quotation system)

*CQS market makers may not execute an order for an exchange-listed initial public offering prior to the security’s opening for trading on its primary exchange

*What is quoted on CQS? ; Listed equity securities like ADR, preferred stock, warrant, rights, convertible bonds  (NO CONVERTIBLE BONDS) (burada celiski var, YK convertible bond var diyor, eski kitap yok diyor)

*MM must enter quotes into CQS within how 5 days, or he loses registration

*CQS market maker may execute an order for an exchange-listed security through the ITS system

*A NYSE listed stock displayed on CQS would have;
last sale price
last sale volume
quotes from regional exchanges
quotes from market makers

       It is only a quotation system!!! (Both CQS MM & exchange specialist can mess with it

(computer assisted execution system)

**CAES is known as the nasdaq market center for listed securities.

**It allows CQS market makers to execute orders

**Only CQS market maker enters quotes into CAES

**CAES allows third-market makers to trade with each other. It also allows NASD members who are not third-market makers (order entry firms) to transmit orders into CAES for automatic execution.

**CAES allows exchange members to execute orders with third market makers.

**A CQS market maker may quote an exchange listed IPO as soon as a trade occurs on the exchange

**CAES links the exchanges and the third market to assist in execution and prevent trade troughs

**Who can use CAES? It can be used only by nasdaq market maker and order entry firms, which means ““two third market makers” & “third market maker and an order entry firm”

**CAES may be used to execute an order between two CQS market makers

**what is the system used in trading btw 3^rd market makers?       cvp; CAES

CQS market maker auto quote features;
it is used to reflect an execution that partially decrements that firm’s size
it is used to improve the NBBO
is adds size to the NBBO
it is used to expose a customer’s order

what is reported?
-stock symbol
-# of shares
-price
-whether tra trade is buy,sell or cross
-time of execution
                                                                                               Both quotation & execution system

Automated confirmation transaction)           

(ALTERNATIVE DISPLAY FACILITY)    →      →      reporting to “TRAC”   →      →        Depository Trust Clearing Corporation” (DTCC)

*Electronic quotation system operated by NASD         Hours; 8 am - 6.30 pm

*ADF reports to TRACS and clears through ACT/TRF or TRACS. NO execution or reporting for ADF! Execution services are provided by private connectivity providers. (Orders will be routed in the ADF through “participant provided access lines”)               

*ADF quotes will not be displayed/appear in nasdaq single book (nasdaq market center execution system), but if the quote entered in ADF improves the inside market, the quote will be displayed as part of the inside market.

*quotes displayed in the ADF must be accompanied by electronic access

*ADF orders won’t be executed through nasdaq market center execution system

*Indirect electronic access may be provided to firm quotes

*ADF allows UNLINKED ECN participants to enter quotes, match and report trades.

*ADF participants are required to provide direct or indirect electronic access to its quotes (FINRA Rule 4300 – the order access rule)
Direct electronic access; It allows other market participants to execute an order electronically against the firm’s quote
Indirect electronic access; It allows other marker participants to execute an order against the firm’s quote through the firm’s broker dealer customer.

*Both direct and indirect electronic access requires;
-no voice communication
-equivalent speed, reliability, availability as offered to participants’ customers
-equivalent costs as offered to participant’s customers
-a Two-second turnaround for accepting or declining an order
-a Three-second or less turnaround for communication between market participants

*FINRA rule 4400 A gives FINRA the authority to receive and review complaints against market participants alleging denial of access to their quotations in ADF. Who reviews them? Market Regulation Committee (MRC)

*FINRA requires that participants who enter quotes in multiple market centers to display the same price quote in different centers! But a market participant may display different sizes in different centers. (A firm may post quotes in both ADF and Nasdaq market center execution system, but the quotes for the same security must be at the same prices in both ADF and Nasdaq market center execution system)

*A quote entered through ADF may lock or cross a market

(advanced computerized execution system)

-ACES is a customizable order-routing system

-ACES allows “order entry firms to have direct access to market makers’ internal trading system”.

-The market maker must grant the order entry firm access to their internal trading platform and may add, remove, or restore the access given to one or all firms as it chooses. If a firm turns off access to its ACES system for an order entry firm the market maker may allow the order entry firm access to its quotes through ACES at any time

-The order entry firm which was granted access through ACES pass thru system route their order electronically to the market maker’s internal system for execution. (The market maker determines which firms are granted access to its quotes through the ACES system) After execution, market maker sends an execution report back though Aces to the order-entry firm.

-The market maker receiving the order pays fees for execution orders through ACES pass thru system. The market maker must report the transaction to ACT. (if it says “who pays the fees?”, you can say “the receiving firm pays the fees” as well)

-It can be used by a non market making order entry firm to execute orders

-It will show the firm the depth of the other firms market

ADF are nasdaq global market, nasdaq capital market, and nasdaq convertible debt.
-TRACE reports must include; time of execution, agent or principal, yield to maturity or yield to call, contra party

-It collects trade information for market participants who use the ADF
-These market participants may choose report through either ACT or TRACS system.  The TRACS system works in much the same way as ACT/TRF. However the TRACS system will allow ADF market participants to report a three party trade to assist in the reporting of riskless principal trades.
-The TRACS system reports trades to the “Depository Trust Clearing Corporation” (DTCC)
-the TRACE system replaced the FIPS system
-trades must be reported to TRACS within 15 minutes
-issues with at least 150,000,000 of par value will have information disseminated
-commission, mark up, or mark down must be included in the report

TRACS reporting requirements;
1)btw 2 MM or 2 non-MM, the seller reports
2)btw a MM and customer, or MM and non-MM, the MM reports (yani rutbeye bakiyor, kimin seller olduguna degil)
3)btw 2 MM, the seller reports
4)btw NASD member and customer, the NASD member reports (yani rutbeye bakiyor, kimin seller olduguna degil)
5)btw 2 NASD members, the seller reports

Distribution participants;
-Syndicate member
-selling group member
-other broker-dealer helping

Rule 101 doesn’t want distribution participants from bidding or buying the subject security for the period just prior to the effective date. The restricted period begins as listed below or when the broker dealer becomes a participant whichever occurs later.

Exceptions to 101;
Government and municipal securities
non convertible investment grade bonds preferred stock
registered investment company stock
unsolicited brokerage transaction
unsolicited customer orders may be executed on an agency or principal basis
exercise of an option, warrant, or rights during the restricted period

A syndicate manager may enter a penalty bid that will require the syndicate member, who sells securities back to the syndicate, to return the selling concession it originally received for selling the shares. Penalty bid identifier is “PBID” and syndicate manager must notify regulators if it intends to impose a penalty bid. The prohibition on purchases or bids during the restricted period applies not only to the subject security, but also to any “reference security”.

Reference security is a security into which the subject security can be converted, exchanged, or exercised. For example, if a convertible bond is being distributed, the underlying common stock is a reference security subject to the restriction of rule 101. Together, subject and reference securities are called “covered securities” under regulation M.

While common stock would be a reference security if a derivative, such as a right or warrant, were the subject security, the reverse would not be true. If XYZ company issues common stock, warrants of XYZ common stock are not reference securities.

Soru; XYZ common stock has been trading on nasdaq for over 3 years, and company will issue convertible bonds. According to rule 101 of Regulation M, the common stock is referred to as what? Cevap; “Reference security and covered security”

UW’s are prohibited from inducing others to purchase a covered security. Research reports referring to covered securities can be distributed during the restricted period if they meet the conditions of rules 138 and 139 of the securities act of 1933. SEC expect the recipients of the reports regularly receive the broker-dealer’s research. For example, adding new recipients to the mailing list is permitted if it is intended that they will receive all future research as well. But sending just one report to a potential customer during the restricted period would not qualify for exception.

Broker/dealer who is participating in a distribution may continue to issue research reports under Rule 139 if;
-company is followed by analysts
-the information, opinion, or recommendation appears in a regularly published report

Purpose; Issuer can’t purchase its own security before distribution. Issuers, affiliated purchasers and selling shareholders may not bid for or purchase a covered security during restricted period. (It prohibits issuers and selling security holders (mainly insiders) from supporting or raising the price of a security being distributed)

The issuer in a corporate underwriting is responsible for;
-filing a registration statement with SEC
-registering the securities in the states in which it will be sold (known as blue-sky)
-negotiating the UW’s compensation and obligations to the issuer
(it is NOT the issuers obligation to market the issue, the underwriter does the “marketing”)

What is exempt from Rule 102?
-144 A transaction                 
-conversion of convertible bonds or preferred shares
-odd lot orders                                         
-unsolicited purchases
-transactions in exempt securities

Purpose; Regulating the activity of market makers participating in a distribution. MMs who are participating in a distribution may only act as passive market makers during the restricted period. Passive MMs may not enter a bid or buy the security at a price that exceeds the highest bid enter by an independent party. If the highest independent bid drops below the bid of the passive market maker, the passive MM may remain as the highest bid until they purchase an amount equal to their volume restriction. The volume restriction in this case would be the lesser of two times the passive MM’s displayed size or the balance of its daily limit purchase limit. If there is no independent MMs, passive MM is not allowed.
The syndicate manager must apply for passive market making status on behalf of all syndicate members by filling part of the underwriting activity form no later than one business day prior to the first full trading day of the restricted period. All participants who act as passive MM during the offering will have the identifier “PSSM” next to the MMs Nasdaq symbol. A passive MM’s daily purchase limit; greater of 30% of its ADTV or 200 shares. Once this limit is exceeded he must withdraw for the rest of the day. Only net purchases of a passive MM count towards its daily purchase limit. A sell order, reported within 30 seconds of a purchase will reduce the passive MM’s net purchase. Conclusion; offsetting must be within 30 seconds!!!
Exmp; Daily purchase limit is 10,000 and he purchased 6000 so far.
a) He receives 700 shares sell, 500 shares buy order within 15 seconds,what is his net purchase now? Answ; 6200
b) He receives 500 shares sell, 700 shares buy order within 15 seconds,what is his net purchase now? Answ; 600 (b/c it can’t go down)

Contemporaneous Transactions; If offsetting buy and sell orders are executed and reported within 30 seconds of each other, only the net purchase would affect a passive market maker’s totals. Sayfa 6/8 deki ikinci ornegi oku.

Offsetting orders; If a passive market maker receives a customer buy or sell order, but doesn’t have a matching order(s) with which to offset it,the market maker is allowed 15 minutes to locate an order to fill the other side of transaction. Once the offsetting order is located, the two transactions must be executed and reported within 30 seconds.  When interacting with other MM’s, a passive market maker may hit another dealer’s bid, but may not lift another dealer’s offer.

A complication; SEC’s “order handling rule” might complicate passive market making. Rule may require a market maker to include a customer’s limit order in its quote. But if the customer’s limit price to buy is higher than the higher than the highest independent bid, the rules conflict. According to the SEC, a market maker may reflect in its bid a customer’s order to buy under the order handling rules even if the bid would violate rule 103
Exmp; If highest independent bid is 21.55 and passive MM receive a customer limit order to buy 1000 shares at 21.70, the passive MM can display the 1000 shares at 21.70 eventhough it would be a violation of rule 103.

When we talk about passive market making;
-the syndicate manager will request passive market making status for all syndicate members
-passive market making status must be applied for 1 day prior to the restricted period

Purpose; stabilizing
Stabilizing is a manipulative activity. It is allowed for the purpose of pegging, fixing, or maintaining the price of a security.
The maximum price at which a stabilizing bid may be initiated is the public offering price. (Syndicate member can never enter a stabilizing bid at a price that exceeds the issue’s offering price) No passive market making activity while a stabilizing bid is in effect. Syndicate must notify the market in which it intends to stabilize the issue BEFORE engaging in any activity. Stabilization is the only form of security price manipulation allowed by SEC. Only one stabilizing bid is allowed. Stabilizing bid will be a one-sided quote with no offer (Only ONE stabilizing bid can be entered for the syndicate). “SYND” is the identifier.”Underwriting activity report” (UAR) must be filed no later than the end of the first day they entered stabilizing bid. UAR must include the identity of the security, estimated effective date and pricing date, copy of the cover page of the preliminary or final prospectus, and date when the SYND identifier should appear next to the MM’s ID. There is NO time limit as to how long an issue may be stabilized. Syndicate short covering purchases and the imposition of penalty bids must be notified to SRO.

SEC permits stabilizing outside the US during an offering in the US w/o complying with rule 104 with following conditions;
-there is no stabilizing in US
-stabilization is not conducted above the US offering price
-foreign stabilization occurs in a country with regulations similar to US rules (like UK)
-stabilizing bids may be placed in the currency of the market in which the bid is made
-rule 104 allows adjustments to stabilizing bids to account for fluctuations in exchange rates

Initiating stabilizing when the principal market is open; Stabilizing may be initiated in any market at a price no higher than the last independent transaction price for the security
a) if the security has traded on the day stabilizing is initiated or on the preceding business day
b) if the current ask price in the principal market is equal to or greater than the last independent transaction price.

Initiating stabilizing when the principal market is closed; the price at which stabilizing can be initiated is generally limited to the lower of the price at which stabilizing could have been initiated in the principal market at its previous close, or the last independent transaction or bid in the market on which stabilizing will be initiated.

In order to ensure that a syndicate can enter a stabilizing bid at the highest allowable price, the syndicate should enter the bid “prior to the opening”

About “stabilizing bid” ;
-must be available for all securities of the same class
-market maker must confirm the stabilization in writing by the end of the day when it first stabilized the issue
-the request to stabilize DOES NOT need to be in writing
-only one independent market maker is needed to stabilize an issue

Purpose; Prohibiting the purchase of subject securities to cover short positions. Securities purchased through an offering may not be used to cover short positions established during the restricted period. The restricted period for selling securities short begins 5 days prior to pricing the issue. It the issue is priced within 5 days of the filing of the registration then the restricted period begins with the filing date. Offerings not done on a firm commitment basis and shelf registrations are exempt. Stabilizing is permitted for both exchange-traded and OTC-traded securities.

Syndicate covering transaction (short position);
In an effort to cover a short position created in the syndicate account as a result of over allotments, the syndicate manager may enter a covering bid. The syndicate manager must record information relating to the syndicates short position within 30 days of the issue’s effective date. The syndicate manager must notify regulators if it intends to engage in short covering. If offered, a syndicate may also exercise its “green shoe” option, which will allow the syndicate to purchase up to an additional 15% of the offering from the issuer. The syndicate will purchase the securities from the issuer at the original price to cover over allotments.

Pricing IPOs;
Lead UW is expected to call NASDAQ by 6.45 pm the day the IPO is priced to provide NASDAQ with the IPO’s pricing info. The IPO will automatically be used as the first bid at the start of trading the next market day. If lead UW doesn’t communicate the price of the IPO to NASDAQ, firms may begin to enter orders for the IPO at 7.30 am on the day the IPO is scheduled to begin trading during the quote only period. Once the issue is released, any order received with time priority will create the baseline price for the IPO. The IPO will begin trading through an IPO opening cross.

Broker/dealers that have payment for order flow arrangements must disclose order routing info on their nondirected customer orders.