Quick Answer
Three customer markings change how an order is handled: "Do Not Reduce" blocks the cash-dividend price reduction, "Do Not Increase" blocks the stock-dividend size increase, and "not held" takes a stop or stop limit order outside the stop orders rule. Every sell order in an equity security must also be marked long, short, or short exempt.
A marking is an instruction that travels with the order, and each of the ones below switches a rule on or off. Capturing one wrongly is not a clerical slip; it changes the price, the size, or the rule that governs the fill.
Which Customer Markings Change How an Order Is Handled?
| Marking | What it does |
|---|---|
| "Do Not Reduce" | Suppresses the price reduction the adjustment of orders rule otherwise makes to an open order on a cash dividend |
| "Do Not Increase" | Suppresses the size increase that rule otherwise makes on a stock dividend or stock split |
| "Not held" | Takes a stop or stop limit order outside the stop orders rule entirely, because that rule states it does not apply to a not held stop or stop limit order |
Exam Tip: Gotchas
- The two dividend markings are not interchangeable. One blocks a price change and the other blocks a size change, so neither one does the other's job.
- Neither dividend marking reaches the stock-split price adjustment. The price side of a stock dividend or split has no marking that stops it; only the size increase carries a condition.
- "Not held" removes a rule rather than modifying it. The stop orders rule, including its definitions and its routing duty, does not apply to that order.
Why Does a Marking Belong to Best Execution?
One of the listed reasonable diligence factors in the best execution rule is the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
A marking is part of those terms. An instruction captured wrongly, or lost between the desk that took it and the desk that filled it, is therefore a best execution question as well as a handling error.
Exam Tip: Gotchas
- The factor is measured as communicated. It reaches the terms and conditions as they reached the member and its associated persons, which puts the internal handoff inside the diligence analysis.
What May a Member Not Call a Stop Order, and What Must It Document?
Two labeling and documentation duties sit close to order marking:
- The label ban. An order type that activates as a market or limit order using an event other than a transaction at the stop price as its trigger cannot be labeled a "stop order" or a "stop limit order" and must be clearly distinguishable from both.
- Order-by-order documentation. A member relying on oral disclosure and consent from an institutional customer for a net transaction must document, on an order-by-order basis, the customer's understanding of the terms and conditions of the order and the customer's consent.
Exam Tip: Gotchas
- The label ban is about the name, not the product. A firm may offer a quote-triggered order; it may not call the result a stop order or a stop limit order, and the order must be clearly distinguishable from both.
- The oral consent route still needs a record. The member must document, order by order, the customer's understanding of the terms and conditions and the customer's consent.
How Must a Sell Order Be Marked?
Under Regulation SHO's definition and order marking rule, a broker or dealer must mark all sell orders of any equity security as "long," "short," or "short exempt."
The conditions for each marking, and how a firm determines whether it is deemed to own the security, are covered in the unit on handling and executing short sales. The content of the order memorandum, and the reporting fields the consolidated audit trail (CAT) requires, are covered in the unit on creating, retaining and reporting required records of orders and transactions.
Exam Tip: Gotchas
- Three markings, not two. Long, short, and short exempt, and the requirement reaches all sell orders in any equity security rather than short sales alone.
What Should You Check on Exam Day?
- Read the marking before doing the arithmetic. "Do Not Reduce" switches off the price reduction for a cash dividend; "Do Not Increase" switches off the size increase for a stock dividend or split.
- On a stop or stop limit order fact pattern, look for a "not held" instruction that removes the stop orders rule from the analysis.
- Treat a mishandled instruction as a best execution issue as well, since the order's terms as communicated are a diligence factor.
- On any quote-triggered order type, confirm it is not labeled or presented as a stop or stop limit order, is clearly distinguishable from both, and was described to the customer, trigger included, before being placed.
- Confirm every equity sell order carries one of the three markings: long, short, or short exempt.