Quick Answer
A memorandum is required of each brokerage order and any other instruction given or received, executed or unexecuted, except for a security-based swap. It shows, among other things, the order's terms, the account, the times of receipt and entry, the execution price, the responsible associated person, and, to the extent feasible, the time of execution or cancellation.
The order ticket is a firm record: the federal rule requires the member, broker or dealer to make and keep it current, and fixes what it must show, when the times on it are measured, and the situations that change the answer.
What Must an Order Memorandum Show?
A memorandum is required of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security, except for the purchase or sale of a security-based swap, whether executed or unexecuted.
The carve-out moves the record rather than removing it: a separate provision of the same rule requires a parallel memorandum for each security-based swap order, with its own added fields.
The memorandum must show the following.
- The terms and conditions of the order or instructions, and of any modification or cancellation of them.
- The account for which entered.
- The time the order was received.
- The time of entry.
- The price at which executed.
- The identity of each associated person, if any, responsible for the account.
- The identity of any other person who entered or accepted the order on behalf of the customer, or, if a customer entered the order on an electronic system, a notation of that entry.
- To the extent feasible, the time of execution or cancellation.
Four defined points sit inside the same paragraph.
- Electronic system relief. The memorandum need not show the identity of any person, other than the associated person responsible for the account, who may have entered or accepted the order, if the order is entered into an electronic system that generates the memorandum and that system is not capable of receiving an entry of the identity of any person other than the responsible associated person.
- The duty that comes with that relief. In that circumstance, the member, broker or dealer must produce upon request by a representative of a securities regulatory authority a separate record which identifies each other person.
- Discretion. An order entered pursuant to the exercise of discretionary authority by the member, broker or dealer, or an associated person of it, must be so designated.
- Two definitions. The term instruction must include instructions between partners and employees of a member, broker or dealer. The term time of entry means the time when the member, broker or dealer transmits the order or instruction for execution.
Exam Tip: Gotchas
- Time received, time of entry and time of execution are three separate fields. Only the time of execution or cancellation carries the "to the extent feasible" qualifier; the time received and the time of entry do not.
- Time of entry is transmission, not receipt. It means the time the firm transmits the order or instruction for execution, so an order held before routing has two different times on the ticket.
What Must the Firm Record for Its Own Trades?
A separate memorandum covers the firm's own side: a memorandum of each purchase or sale of a security, other than a security-based swap, for the account of the member, broker or dealer, showing the price and, to the extent feasible, the time of execution.
Where the purchase or sale is with a customer other than a broker or dealer, that memorandum also covers each order received, showing five further items.
- The time of receipt.
- The terms and conditions of the order and of any modification of it.
- The account for which it was entered.
- The identity of each associated person, if any, responsible for the account.
- The identity of any other person who entered or accepted the order on behalf of the customer, or, if a customer entered the order on an electronic system, a notation of that entry.
A similar electronic system relief runs here, reaching a person other than the responsible associated person who may have entered the order, with the same condition that the firm produce upon request by a representative of a securities regulatory authority a separate record that identifies each other person.
An order with a customer other than a member, broker or dealer entered pursuant to the exercise of discretionary authority by the firm or an associated person of it must be so designated.
Exam Tip: Gotchas
- The firm's own memorandum is thinner than the customer order memorandum. For a pure proprietary trade it is the price and, to the extent feasible, the time of execution.
- The customer limb has a party test. The extra five items attach where the purchase or sale is with a customer other than a broker or dealer, so a trade with another broker-dealer does not pull them in.
Which Records Cover Confirmations, Options and an Internal System?
Three more records in this family matter to a trading desk.
- Confirmations. With respect to a security other than a security-based swap, copies of confirmations of all purchases and sales of securities, including all repurchase and reverse repurchase agreements, and copies of notices of all other debits and credits for securities, cash and other items for the account of customers and partners of the firm. A security-based swap instead needs copies of its trade acknowledgment and verification.
- Options. A record of all puts, calls, spreads, straddles and other options in which the firm has any direct or indirect interest, or which it has granted or guaranteed, containing at least an identification of the security and the number of units involved.
- An internal broker-dealer system. Three records are required regarding any internal broker-dealer system of which the firm is the sponsor.
The internal broker-dealer system records are these.
| Record | Detail |
|---|---|
| Customer access record | A record of the firm's customers that have access to an internal broker-dealer system it sponsors, identifying any affiliations between those customers and the firm |
| Daily summaries of trading | The securities for which transactions have been executed through use of the system, and transaction volume, stated separately for trading occurring during hours when consolidated trade reporting facilities are and are not in operation. Volume is stated for equity securities in number of trades, number of shares and total U.S. dollar value; for debt securities in total settlement value in U.S. dollars; and for other securities in number of trades, number of units of securities, and dollar value or another appropriate commonly used measure of value |
| Time-sequenced transaction records | Each transaction effected through the system, including date and time executed, price, size, security traded, counterparty identification information, and method of execution, where the system allows alternative means or locations for execution such as routing to another market, matching with limit orders, or executing against the quotations of the sponsoring firm |
An internal broker-dealer system means any facility, other than a national securities exchange, an exchange exempt from registration based on limited volume, or an alternative trading system as defined in Regulation ATS.
The facility must provide a mechanism, automated in full or in part, for collecting, receiving, disseminating or displaying system orders, and for facilitating agreement to the basic terms of a purchase or sale of a security between a customer and the sponsor, or between two customers of the sponsor, through use of the internal broker-dealer system or through the broker or dealer sponsor of that system.
Alternative trading systems are covered in the unit on display, execution and trading systems, which is where this course takes the Regulation ATS definition from.
Exam Tip: Gotchas
- The daily summary splits volume by trading hours. Transaction volume is stated separately for trading during hours when consolidated trade reporting facilities are in operation and for trading when they are not.
- An alternative trading system is excluded from the internal system definition. So is a national securities exchange and a limited-volume exempt exchange, which is why the definition reaches an in-house crossing facility rather than a registered venue.
How Long Must Each Record Be Preserved?
The records retention rule sorts these records into two periods.
| Period | Records |
|---|---|
| Not less than six years, the first two years in an easily accessible place | The blotters or other records of original entry; the ledgers reflecting assets, liabilities, income and expense and capital accounts; the ledger accounts itemized by customer account; and the securities record or ledger |
| Not less than three years, the first two years in an easily accessible place | The seven-category ledgers; the order memoranda; the firm's own purchase and sale memoranda; the confirmation copies; the customer account records; the options record; the trial balances and net capital computations; and the internal broker-dealer system records |
Exam Tip: Gotchas
- The order ticket is a three-year record, not a six-year record. The six-year group includes the blotter, the ledgers, the ledger accounts and the securities record, which are the firm-level books rather than the order-level memoranda.
- Both periods carry the same accessibility condition. The first two years must be in an easily accessible place whether the record's period is three years or six.
What Should You Check on Exam Day?
- On an order memorandum, separate the time received, the time of entry, meaning transmission for execution, and the time of execution or cancellation.
- Look for the discretionary designation on any customer order entered under discretionary authority, and on the proprietary memorandum for an order with a customer other than a member, broker or dealer.
- Check the electronic system relief has its production duty attached: a separate record identifying each other person, produced on regulatory request.
- On the firm's own memorandum, apply the extra five items only where the trade is with a customer other than a broker or dealer.
- Treat all of these as three-year records, with the first two years in an easily accessible place.