Quick Answer
A firm controls trading through written trader mandates and Reg SHO aggregation units, then makes markets under two-sided continuous quotation standards. Reg SHO governs short-sale marking, locate, and close-out. Regulation NMS and best execution govern routing and protected quotations. The market access rule, Limit Up-Limit Down (LULD), and circuit breakers cap risk; supervisors detect and escalate violations.
The whole trading-desk supervision unit on one sheet: the structural controls, the marketplace rules, the volatility pauses, and the prohibited conduct the exam pairs together.
Structural Controls: Mandates and Aggregation Units
- A trader mandate grants written authority: products, position limits, loss limits, counterparties, trading hours, prohibited strategies; it must be in writing AND enforced.
- An aggregation unit under Regulation SHO nets long/short positions separately at the desk level, not firm-wide, for short-sale marking; the net long call sits at this level: long and short desks in the same security mark independently.
- Independent netting needs four conditions: a written plan identifying each unit, its objectives, and its independence; a net position at each sale; independent strategies; and one unit per trader at a time.
Market Making and Quoting
- Market makers must post two-sided continuous quotations within the Designated Percentage of the National Best Bid/Offer (NBBO) to bar stub quotes, during normal hours (9:30 a.m.-4:00 p.m. ET); intermittent quoting violates the standard.
- An unexcused withdrawal can cost the firm registration in that security; a voluntarily terminated market maker may not re-register for 20 business days (equipment failure excuses it, trading losses don't).
- A passive market maker under Regulation M may match, not exceed, the highest independent bid, capped at the greater of 30% ADTV (average daily trading volume) or 200 shares (2x minimum quotation size). Payments for market making are a bright-line ban: no issuer, promoter, or affiliate may pay for quoting or market making.
The One-Liners That Win Points
- A short sale is marked long, short, or short exempt at order entry: "short exempt" means exempt from the alternative uptick test, though locate/close-out still apply. The locate must be documented before order entry, not before settlement; bona fide market making is exempt.
- The order protection rule bars trade-throughs of automated, top-of-book protected quotations at the NBBO (not manual/depth-of-book quotes). Execution-quality reports are the market center's monthly duty; order-routing reports, the broker-dealer's quarterly duty, disclose payment for order flow.
- The market access rule bars unfiltered (naked) sponsored access: every order clears the broker-dealer's pre-trade controls. The Manning rule bars trading ahead of an unfilled customer order at a fillable price.
Numbers to Lock In
| Item | Value |
|---|---|
| Voluntary-termination bar | 20 business days |
| Passive market maker cap | greater of 30% ADTV or 200 shares |
| Short-sale fail close-out | start of trading, T+1 |
| Long-sale fail close-out | start of trading, T+3 |
| Threshold security | fail-to-deliver 5+ consecutive settlement days, 10,000+ shares AND 0.5%+ shares outstanding |
| Uptick-rule trigger | 10% intraday decline from prior close |
| Uptick-rule duration | rest of trigger day + next trading day |
| Best-execution regular/rigorous review | at least quarterly, security-by-security AND order-type |
| Sub-penny increment | $0.01 at $1.00+; $0.0001 below $1.00 |
| Market access controls | reviewed & CEO-certified annually |
| LULD Tier 1 (S&P 500, Russell 1000) | 5%, doubles to 10% final 25 min, no opening doubling |
| LULD Tier 2 (other NMS) | 10%, no doubling at/above $3.00; only Tier 1 & sub-$3.00 stocks double, final 25 min |
| LULD mechanic | 15-second band breach triggers 5-minute pause |
| Circuit breaker Level 1 | 7% S&P 500 drop, 15-minute halt |
| Circuit breaker Level 2 | 13% S&P 500 drop, 15-minute halt |
| Circuit breaker Level 3 | 20% S&P 500 drop, halt for the day |
| Levels 1/2 cutoff | only before 3:25 p.m. ET |
| OTC piggyback quoting | no gap over 4 business days |
Memory Aid: Below-Market Orders Adjust Down
Memory Aid: Buy limit and Sell stop adjust DOWN for cash dividends; "BLISS" is a false trap. Sell limit and buy stop, above market, don't adjust.
Top Gotchas
- Locate is BEFORE order entry; close-out is AFTER a settlement-date fail. A locate is not a borrow; pre-borrow needs a borrow or a bona fide arrangement to borrow.
- A Level 1/2 circuit breaker at or after 3:25 p.m. ET does NOT halt trading; the close runs. Only Level 3 (20%) halts late, ending trading, not pausing 15 minutes. Percentages use the prior day's closing S&P 500; Levels 1/2 trigger only once per day.
- LULD is single-stock; circuit breakers are market-wide, and LULD's reopening auction runs at the primary listing market. A trader who flips between aggregation units to mark a covered short as long commits a Regulation SHO sham-aggregation violation.
- A failure to escalate is itself a supervisory-system failure, separate from the violation; on manipulation/front-running, the supervisor must freeze trading, preserve records immediately.
One-Breath Recap
A firm constrains trading with written, enforced trader mandates and Regulation SHO aggregation units that net long/short separately at the desk level, making markets with two-sided quotes inside the Designated Percentage, under a 20-business-day withdrawal suspension. Regulation SHO marks every sale long, short, or short exempt; demands a documented locate before order entry; closes out short fails T+1, long T+3; and imposes the alternative uptick rule on a 10% intraday drop. Regulation NMS and best execution govern routing, protected quotations, and market-center/broker-dealer reports. The market access rule blocks naked sponsored access via CEO-certified annual controls; LULD (15-second breach, 5-minute pause) and circuit breakers (7%, 13%, 20%) cap volatility; and the supervisor must detect/escalate prohibited conduct or own the supervisory-system failure.
Need more than the recap? Read the full Order Entry, Routing, and Execution unit.