Regulation of Trading – Series 7 Exam

🧾 Regulation of Trading – Series 7 Exam
📘 Essential Rules You Must Know for the Series 7 Trading Section

The Series 7 exam covers a significant amount of material related to the regulation of trading, focusing on the rules that govern how securities are bought and sold in the U.S. markets. A clear understanding of trading regulations is crucial, because this section tests both conceptual knowledge and practical application under FINRA and SEC rules.

Here’s a clean, focused summary of what you need to know about trading regulations for the Series 7 exam.

🎯 1. Key Regulatory Organizations

🎯 2. Important Trading Rules and Concepts

📍 Best Execution

• Broker-dealers must seek the best execution of customer orders — meaning prompt and most favorable pricing available.

📍 Order Types

• Market Order: Executed immediately at the best available price.
• Limit Order: Executed only at a specific price or better.
• Stop Order: Triggered once the stock reaches a specific price.
• Stop-Limit Order: Triggered at a stop price but executed as a limit order.

📍 Order Display Rules (SEC Rule 604)

• Quotes for customer limit orders must be displayed publicly unless exceptions apply (e.g., small size or customer request for nondisclosure).

🎯 3. Trading Violations to Know

📍 Front-Running

• Prohibited act where a broker-dealer or rep trades based on advance knowledge of a large pending customer order.

📍 Trading Ahead of Research

• A firm may not trade based on information from its own pending research report before it’s public.

📍 Marking the Close

• Buying or selling securities near the market’s close to manipulate the closing price.

📍 Freeriding

• Buying securities without paying for them and selling them before payment is made.
  • Penalty: Account is frozen for 90 days.

🎯 4. Short Sale Regulations

• Short Sale: Selling borrowed securities, anticipating a price decline.
• Regulation SHO:
  • Requires locate requirement before executing a short sale (must reasonably believe the security can be borrowed).
  • Requires close-out of failure-to-deliver positions if they persist beyond certain timelines.

🎯 5. Insider Trading

• Insider Trading and Securities Fraud Enforcement Act of 1988:
  • Prohibits trading based on material non-public information.
  • Penalties: Up to $5 million fine and 20 years in prison (individuals).

🎯 6. Trade Settlement Rules

🎯 7. Trading Reporting Requirements

• ACT (Automated Confirmation Transaction System):
  • Reports trades of NASDAQ and OTC securities.
• OATS (Order Audit Trail System):
  • Tracks every order event (entry, modification, cancellation) in real-time.
• TRACE (Trade Reporting and Compliance Engine):
  • Reports corporate bond trades (investment-grade and high-yield).

🎯 8. Key Definitions for Trading Regulation

🚀 Final Quick Tips for Exam Day

• Know order types and when they are triggered.
• Understand front-running and freeriding violations clearly.
• Memorize settlement timelines (especially T+2 vs T+1 rules).
• Understand how short sales are regulated (Reg SHO).
• Be ready to recognize situations of insider trading or manipulative practices like marking the close.

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