This chapter covers about 19 of the 50 scored items (38% of the exam, a CertFuel planning estimate). Market making status, order types, market access, clearly erroneous transactions, display and trading systems, prohibited trading activities, and the quotation and trading-halt rules.
What You'll Learn
| Unit | Topic | Lessons |
|---|---|---|
| 1 | Achieving Market Making Status | The Role of the Floor Broker; The Use of Market Participant Identifiers (MPIDs); Responsibilities of a Qualified Block Positioner; What Counts as a Market Maker; Registration as an ADF Market Maker or ADF ECN; Withdrawal of Quotations and Voluntary Termination of Registration; Payments for Market Making; Net Capital Requirements |
| 2 | Understanding Order Types | The Three Order-Type Rules and Their Vocabulary; Market Orders and Limit Orders; Stop Orders and Stop Limit Orders; Market-on-Open, Market-on-Close and the Auction-Only Orders; Contingency and Stipulation Orders; Reserve Orders and Other Undisplayed Interest; Pegged Orders; Equity Order Types and Modifiers; Options Order Types and Their Routing Rules |
| 3 | Market Access | What Market Access Is and Which Firms It Binds; Requirements for Direct Market Access and Sponsored Access; The Purpose of Credit and Capital Limits; Identifying Pre-Trade Risk Controls; Direct and Exclusive Control and Its One Exception; Reviewing the Controls and Certifying Them Annually |
| 4 | Identifying and Handling Clearly Erroneous Transactions | Minimum Criteria Necessary for a Transaction to Qualify as Clearly Erroneous; Nullifying an Exchange-Listed Transaction; Reviewability and the Two Price Yardsticks; Multi-day Events, Trading Halts and Exchange Coordination; Clearly Erroneous Transactions in OTC Equity Securities; Appealing a Nullification to the Uniform Practice Code Committee |
| 5 | Display, Execution and Trading Systems | Understanding Order Entry Parameters; Trading Rotations; Opening a Series in a Rotation; After the Opening Rotation; Fast Markets and Emergency Conditions; The Use of the Alternative Display Facility; Quote and Order Access Requirements; Minimum Performance Standards and System Outages; Normal Business Hours and Locked or Crossed Quotations; Review of Direct or Indirect Access Complaints; The Role of Alternative Trading Systems; The Regulation ATS Definitions; Requirements for Alternative Trading Systems; Display, Fair Access and Systems Capacity Duties; Recordkeeping and Record Preservation |
| 6 | Identifying and Avoiding Prohibited Activities | Trading Ahead of Research Reports; Front Running of Block Transactions; Use of Material Nonpublic Information for Insider Trading; Manipulation of Security Prices; Use of Trading Schemes; Engaging in Conduct That Influences or Intimidates Other Market Participants; Payments Involving Publications That Influence the Market Price of a Security; Order Entry and Execution Practices |
| 7 | Disseminating Quotes and Trade Advertisements | Dissemination of and Access to Quotations; Character of Quotations on the Alternative Display Facility; Market-Wide Circuit Breakers; OTC Equity Halts and Quotation Suspension; Halt and Imbalance Crosses; Trade Volume Advertising; Publishing Indications of Interest During Trading Halts; Volatility Trading Pauses; Offers at Stated Prices |
Why This Chapter Matters
Function 1 of the exam, Trading Activities, is 41 of the 50 scored items, and this chapter holds seven of its fourteen subsections.
Every later unit assumes the vocabulary and the plumbing taught here: who counts as a market maker, what each order type does, which firm answers for an order entered under its identifier, when a bad print can be unwound, where an off-exchange quotation may be displayed, what conduct is off limits, and when a quotation may be published at all.
Exam Strategy
FINRA publishes weights by function only, so the per-unit figures in each introduction are planning estimates. Focus on:
- Order types are the vocabulary. Market, limit, stop, stop limit, market-on-open and market-on-close, contingency, reserve and pegged orders appear inside questions on every other unit, so learn what each does before it is tested on its own.
- The market access rule binds the firm whose identifier the order carries. Read every scenario for who provided the access, and expect the pre-trade financial and regulatory controls, the direct-and-exclusive-control standard and the annual certification.
- Clearly erroneous review has gateways and yardsticks. Know the numerical guidelines, the Limit Up-Limit Down percentage parameters, the officer's own-motion review and the appeal route.
- Prohibited activities are read against the rule's own actor and scope. Front running of block transactions, trading ahead of research reports, anti-intimidation and the manipulation statute each name who is bound and what ends the prohibition.
- Quotations carry duties. A published quotation must be one the member believes is bona fide, and it is firm; a trading halt takes it off the screen, except as the Limit Up-Limit Down Plan permits, and a market-wide circuit breaker or a volatility trading pause has its own clock.