Definitions and Cross-Cutting Concepts

These are the building-block definitions you have to know to work the rest of the trade-reporting framework. Each one is short, but the exam tests them as pure recall items, so they are worth memorizing.

Statutory and Regulatory Definitions

A firm that participates in trade reporting will encounter all four of these definitions:

• Clearing agency matters because the Reg SHO close-out rule operates on clearing-agency participants
• Market maker matters because the payments-for-market-making prohibition and the Reg SHO market-maker locate exception both turn on whether the firm meets the definition
• "Listed" matters because off-exchange reports of NMS stocks go to the TRF; the security must in fact be NMS, which traces back to whether it is "listed" or otherwise an NMS-eligible security under Reg NMS

Keep the tests separate. Qualified dealer status serves Regulation U; Regulation SHO's locate exception requires applicable market-maker status and bona fide market-making activity. A designation alone does not exempt every proprietary short sale.

Exam Tip: Gotchas

• The statutory alternatives have distinct conditions. The ordinary dealer holding-out route requires willingness to buy and sell on a regular or continuous basis. The definition separately includes specified specialists and block positioners.
• Clearing functions require an exclusions analysis. Ordinary broker-dealer or transfer-agent activity does not automatically create a separate clearing agency. Conversely, lack of registration does not itself prove an entity falls outside the definition.
• Nasdaq is a national securities exchange. Listed status concerns full exchange admission; NMS status concerns an effective transaction-reporting plan. NMS security includes listed options; NMS stock excludes options.
• Qualified-dealer designations are specific to OTC and third-market dealers. A firm cannot self-declare itself a "qualified third market maker" without meeting the criteria; the designation is what gives access to the favorable margin / capital treatment.

SEC Regulation ATS

SEC Regulation ATS defines and regulates Alternative Trading Systems: venues that match buy and sell orders without registering as an exchange. ATSs include dark pools (matching that occurs without pre-trade quote display) and certain ECNs (electronic communication networks).

Trade reports from an ATS execution flow to the appropriate FINRA facility:

• NMS-stock trades on an ATS go to a TRF
• OTC-equity trades on an ATS go to the ORF

By default, the ATS itself is the executing party for trades between its subscribers, so the ATS reports them. The ATS reporting exemption lets FINRA staff relieve a member ATS of that duty, but only if every criterion is met, starting with the requirement that both subscribers are FINRA members.

When the exemption applies, the trade is reported instead by whichever member subscriber is the executing party, not by the ATS.

Exam Tip: Gotchas

• An ATS is regulated under SEC Reg ATS, not as an exchange. An ATS could in principle apply to register as an exchange, but until it does, it operates under the ATS framework.
• Trade reports from an ATS go to TRF (NMS) or ORF (OTC equity), depending on the security. The ATS itself does not have its own trade-reporting facility; it routes its reports through the FINRA facilities.
• The ATS reporting exemption relieves the ATS of reporting; it does not create an exemption for a non-member subscriber. The exemption is available only when both subscribers to the trade are FINRA members. When it applies, the executing-party member subscriber reports the trade, not the ATS.

How These Definitions Connect to Reporting

The trade-reporting framework runs on top of these definitions:

Exam Tip: Gotchas

• The exam will test definition recall and definition application in the same unit. Knowing the words is necessary but not sufficient; you have to be able to map a fact pattern to the right definition. A firm "providing facilities for delivery and payment" is a clearing agency; a firm "willing to buy and sell on a regular basis" is a market maker.
• Read the actual test and its exclusions. Clearing-agency functions, regular-or-continuous dealer holding out, full exchange admission, and qualified Regulation U categories are distinct concepts.

What Should You Check on Exam Day?

• Can you state the statutory definition of a market maker, including the requirement to buy and sell on a regular or continuous basis?
• Do you know why a firm cannot self-declare itself a qualified third market maker without meeting specific criteria?
• Can you name the three major clearing agencies, and state what a clearing agency does under the statutory definition?
• Do you know that an Alternative Trading System operates under SEC Regulation ATS rather than as a registered exchange, unless it applies to become one?