Chapter 1: Overview of Market Participants and Market Structure

Intro:

● 75 multiple choices questions plus 10 unscored items ● 1 hour and 45 minutes exam ● ABCD option ● Passing Score 70%

● Concepts and Chapter Locations:

○ Section 1: Knowledge of Capital Markets (12/75)

■ Covered in Chp 1,2,11,19

○ S2: Understanding Products and their risks (33/75)

■ Chp 3,4,5,7,8,9,10,20 ○ S3: Understanding Trading, Customer Accounts, and Prohibited Activities (23/75)

■ 6,12,13,14,15,16

○ S4: Overview of the Regulatory Framework (7/75)

■ 17,18

Chapter 1: Overview of Market Participants and Market Structure

● Types of Issuers ○ Issuers are legal entities that raise capital by issuing securities ■ Examples include Corporations, U.S Treasury, State and local governments, Banks, and Foreign governments ○ Equity Securities are used by corporations ○ Debt securities represents an issuers promise to pay ○ When issuers raise capital, they can issue either publicly or privately ● How Broker-Dealers function (Broker) (ABC) ○ Firm acts as a conduit or agent ○ Finds another party willing to take the other side of the trade ○ Collects commission for the service ○ No risk to firm ● Dealer (PDM) ○ Firm acts as a principal ○ Firm takes the other side of the trade ○ Entitled to markup/down ○ Inventory/risk ● Information Barriers ○ Certain information should not be discussed in other areas of the firm ● Market Maker and Its Quote ○ A market maker is a broker-dealer that chooses to display quotes to buy or sell a specific amount of securities at specific prices ■ Quotes are firm for atleast 100 shares ■ A roundlot is 100 share units (5 roundlots=500 shares) ■ Oddlot is buying in any other quantity ○ Bid represents a clients selling price ○ Ask or offer represents a clients purchase price ○ The differential between the two is the Spread ■ The wider the spread, the more a MM makes, and vice versa Downloaded by Lindiwe Faleni (lindiwefaleni03@gmail.com) lOMoARcPSD|12185403

● Investment Adviser ○ An IA is a firm that charges customers a fee for managing their securities portfolios ■ Advise, Business, Compensation ■ The fee is based on the assets under management (AUM) ■ An IA is considered a large or institutional customer of a broker-dealer ● Municipal Advisor ○ An MA is a person or firm who advises municipalities on bond offerings and must be registered with the SEC ■ Typically advise issuers

● Matching game:

○ Broker: Receives a commission

○ Debt: Issuer is borrowing money

○ IA: Charges a fee

○ Market Maker: Maintains an inventory of securities

○ Equity: Represents ownership in a corporation

● Institutional and Retail Investors

○ Institutional: Customers with a large amount of assets

■ Banks, insurance, investment comp., hedge funds, etc.

○ Retail: Individual investors who arent defined as institutional investors

● Accredited Investors and QIBs ○ Accredited investors are institutional investors as well as individuals who have met a financial test ■ Net worth 1 mill excluding residence or annual income of 200k in each of the last two years ○ Qualified Institutional Buyers ■ Buyer must own and invest a minimum of 100 mill in securities ■ Cannot be a natural person ● The Primary Market ○ Issuer->Underwriter->Investor

■ Issuer: Needs capital, hires underwriter

■ Underwriter: Facilitates distribution, Assumes liability, Signs Underwriting Agreement with Issuer ● Underwrite means buying and reselling securities from issuer ■ IPO vs Follow-On ● Only applies to Equity Securites ● IPO is the first offering, every one after that is the follow-on ● Secondary Markets ○ Trading markets that facilitate the exchange of existing financial instruments among investors ○ NYSE and other traditional centralized exchanges ■ Provide specific location for trade execution ■ Trading is normally monitored by a designated market maker ○ Dealer-to-Dealer Markets Downloaded by Lindiwe Faleni (lindiwefaleni03@gmail.com) lOMoARcPSD|12185403

■ NASDAQ

● Non-physical phone and computer network ■ Negotiated Market ■ Unlimited number of registered “market makers” ■ Classified as a securites exchange ● Over the counter market (OTC) ○ Often low price and thinly traded ○ 2 system which offer real-time quotations ■ OTC Bulletin Board, OTC Pink Markets ● OTCBB must be reporting companies ● These are not exchanges ● Traders ○ Execute trades for their firm or their firms clients ○ Do not maintain an inventory ● Other SM Terms ○ Third Market ■ Listed securities traded OTC ■ Trades included in NYSE volume totals ○ Fourth Market ■ Transactions between institutions ■ Most are internal crosses set up by money managers ○ Dark Pools ■ Provides liquidity for large institutional investors and high-frequency traders ■ Quotes are not disseminated to the public ■ Limits impact on the market ■ Its anonymous (key) ● Activity ○ Market makers stand ready to buy or sell securities at their quoted prices, while traders execute traders for the firm or the firms clients ● Clearing and Settlement ○ DTCC->NSCC and FICC->Clearing Firms->Introducing Correspondent Firms ■ Omnibus ■ Fully Disclosed

○ Street-Name: Bought in the names of brokerage firms, not individual people

○ Fully Disclosed Accounts:

■ Specific info about each individual client is given to the clearing firm

■ Clearing firm is responsible for:

● Maintaining client assets ● Establishing a separate account for each client ● Sending confirmations, statements, and checks ○ Omnibus Accounts ■ A single account is set up at the clearing firm ■ Specific client information is maintained by the introducing firm Downloaded by Lindiwe Faleni (lindiwefaleni03@gmail.com) lOMoARcPSD|12185403

■ Recordkeeping responsibilities rest with the introducing firm ● DTCC and the OTC

○ DTCC:

■ Provides clearing, settlement, and information services for its members ■ Guarantees Settlement ■ Removes counterparty risk ■ Primarily stocks and bonds

○ OCC

■ Issues and guarantees option contracts ■ Regulates exchange-traded options ■ Deals directly with broker-dealers, not customers ● Prime Brokerage Accounts ○ Can do Equity trades, Bond Trades, Derivative Trades ○ Prime broker consolidates all that information and sends that info back to the prime brokerage clients ○ All trades settle and clear through the prime broker ● Activity ○ The clearing firm must maintain all client info for a fully disclosed account: T

○ Specific client info is held by the clearing firm in an omnibus account: F

○ The executing firms are subject to counterparty risk when clearing trades through

the DTCC: F

○ The OCC only works with broker-dealers: T

○ The buyer for all sellers and the seller for all buyers: OCC

○ Trades from multiple firms clear and settle through one firm: Prime Broker

● Book Notes:

○ Investment Banking is the area that works directly with the issuers to arrange and structure their securities offerings. May advise an issuer that intends to raise funds through an issuance of stocks, bonds, or a combination of both.Remember, investment bankers are often referred to as the underwriters of securities.○ Research: The analysts in a firm’s research department study both the markets and individual issuers in order to issue recommendations.

○ Sales: Financial professionals who work in the sales area typically market

individual stocks or bonds, but also packaged products (e.g., mutual funds) to both retail investors and institutions. for the SIE Examination, these salespersons will likely be referred to as registered representatives (RRs) or investment adviser representatives (IARs).○ Trading: Trading professionals handle the execution of trades for both the firm’s clients and the firm’s own (proprietary) account.○ Operations: The operations area ensures that all of the paperwork, funds, and securities transfers that are associated with a trade (or processing) are handled efficiently and according to specific industry standards.

○ Custodians: Holds customers securities for safekeeping

○ Registrars and Transfer Agents Downloaded by Lindiwe Faleni (lindiwefaleni03@gmail.com) lOMoARcPSD|12185403