Trading a New Listing

Two FINRA prohibitions and one statutory prohibition operate on the first minutes of a new listing. They stop at different moments and reach different acts, so a scenario that trips one may leave the others untouched.

When May a Member Trade a New Listing Off-Exchange?

The IPO-related transactions rule bars a member or person associated with a member from executing or causing to be executed, directly or indirectly, a transaction otherwise than on an exchange in a security subject to an initial public offering until such security has first opened for trading on the national securities exchange listing the security.

The rule names the evidence of that opening: it is indicated by the dissemination of an opening transaction in the security by the listing exchange. Nothing else releases the prohibition.

Exam Tip: Gotchas

• The release event is the listing exchange's own opening transaction. A quotation, an indication, or an opening print from another market does not open the security for this purpose.
• "Causing to be executed, directly or indirectly" reaches routing. A member that sends an order elsewhere for off-exchange execution is inside the prohibition even though another firm prints the trade.

What Orders May a Member Not Accept Before Trading Begins?

The new issue allocation rule adds a separate prohibition: no member may accept a market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market.

Four limits are written into that sentence. It reaches the acceptance of the order rather than its execution, it reaches market orders rather than every order type, it reaches orders to purchase rather than orders to sell, and it runs only until trading of the shares commences in the secondary market.

Exam Tip: Gotchas

• A limit order is not covered by this prohibition. The rule names a market order, so accepting a limit order to buy before trading commences does not violate it.
• The violation is complete on acceptance. A member that takes the market order and then holds it until trading begins has already breached the rule.

What Does the Exchange Registration Requirement Prohibit?

The exchange registration requirement makes it unlawful for any broker, dealer, or exchange, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce for the purpose of using any facility of an exchange within or subject to the jurisdiction of the United States to effect any transaction in a security, or to report any such transaction.

That prohibition lifts only where the exchange meets one of two conditions:

• The exchange is registered as a national securities exchange under the Exchange Act's exchange registration provisions.
• The exchange is exempted from that registration upon its own application, because in the opinion of the Commission, by reason of the limited volume of transactions effected on the exchange, registration is not practicable and not necessary or appropriate in the public interest or for the protection of investors.

Exam Tip: Gotchas

• Reporting a transaction is prohibited on the same terms as effecting one. The statute names both acts, so using an unregistered exchange's facility only to report a trade is inside the prohibition.
• Two different statutes each have a section numbered five, and they do different work. The exchange registration requirement above sits in the Exchange Act; the Securities Act registration requirement is the registration provision that Regulation D exempts transactions from.
• The volume exemption is granted on application, not automatically. It also depends on the Commission's own opinion that registration is not practicable and not necessary or appropriate in the public interest or for the protection of investors.

What Should You Check on Exam Day?

• Ask whether the listing exchange has disseminated an opening transaction before allowing any off-exchange execution in the security.
• Check the order type: the pre-trading ban reaches a market order to purchase, not a limit order and not a sell order.
• Treat routing an order for off-exchange execution as causing a transaction to be executed.
• On an unregistered-exchange question, check whether the firm effected or reported the transaction; both are prohibited.
• Confirm which statute's registration provision the stem means before answering: the exchange registration requirement or the Securities Act registration requirement.