Meeting Obligations to Customers Regarding Orders

The desk's duties to a customer order, from the session it trades in to the price the customer pays.

Which One-Liners Win Points?

• Best execution binds the member and its associated persons, as agent and as principal, and is distinct from mark-up fairness. Its five factors are an open list: character of the market, size and type, markets checked, accessibility of the quotation, and the order's terms as communicated.
• Interpositioning violates the rule only where inconsistent with reasonable diligence; thin staffing and reciprocal routing are no excuse.
• A fill against the member's own quote attaches no duty to another broker-dealer's customer; an order routed in for handling and execution does.
• An unsolicited routing instruction removes the determination beyond that instruction; prompt processing on the order's terms is still owed.
• The 5% Policy is a guide, not a rule. A pattern of 5% or even less may be unfair, and disclosure is a factor, not a cure.
• Net transaction: principal, market maker, equity security. A non-institutional customer's own consent is written and order by order; an institutional customer may also use a negative consent letter or documented oral consent.
• Extended hours: a member may not permit the trading until it has furnished the customer, individually, in paper or electronic form, a risk disclosure statement.

Which Numbers Matter Most?

How Is a Resting Order Adjusted on the Ex Day?

• Cash dividend: price reduced by the dividend, then rounded down to the next lower minimum quotation variation, unless marked "Do Not Reduce" or the dividend is less than one cent.
• Stock dividend or split: value rounded up to the next higher variation, then subtracted from the price, with no marking to stop it. Size rises by the ratio, rounded to the next lowest share, unless marked "Do Not Increase."
• Indeterminate value: no adjustment or execution without reconfirming the order with the customer.
• Reverse split: the order, buy or sell, is cancelled.
• Excluded: open stop orders to buy, sell orders other than open stop orders to sell, exchange-governed orders, and orders in securities whose issuer has not reported a dividend, payment or distribution under the untimely dividend announcement rule.

Which Gotchas Trip Students Up?

• A material difference in execution quality means modifying routing or justifying why not.
• The Mark-Up Policy carve-out is conjunctive: a required prospectus and a sale at the public offering price. It switches off the policy, not the fair price rule.
• "Not held" takes a stop or stop limit order outside the stop orders rule.
• A quote-triggered order may not be labeled a stop order, must be clearly distinguishable, and needs a disclosure naming its trigger before the customer places it.
• Every equity sell order is marked long, short, or short exempt.
• A joint account in a national market system stock is permitted once promptly reported to the Financial Industry Regulatory Authority.

One-Breath Recap

A member owes a customer, as agent or as principal, reasonable diligence to find the best market so the price is as favorable as possible under prevailing market conditions, and a fair price or fair commission. Resting orders are adjusted for a dividend or split on the ex day, subject to the rule's exceptions and markings, and a reverse split cancels them. A net transaction needs disclosure and consent before execution, and a non-institutional customer's own consent must be written and order by order. A stop order is triggered only by a transaction at or through the stop price, and extended hours trading needs an individually furnished risk disclosure first.

Need more than the recap? Read the full Meeting Obligations to Customers Regarding Orders unit.