Series 57 rewards “workflow thinking”: pick the answer that protects market integrity, follows controls, and creates a clean audit trail.
Exam map (quick priorities)
- F1 (82%): market making + order types + market access controls + prohibited practices + short sales + Reg NMS
- F2 (18%): trade reporting + audit trails (CAT/COATS) + confirmations + settlement
“Best answer” checklist (Series 57 style)
- What is the order/instruction and is it clear (time-in-force, price, size, modifiers)?
- Are we in regular hours or extended hours (and were risks disclosed)?
- Is there any restricted activity (halt, Reg SHO restriction, offering/Reg M constraints)?
- Are we following controls (market access risk controls, supervisory review, no bypass)?
- Will this create a clean audit trail (order ticket, timestamps, trade report, CAT fields)?
Market making and MPIDs
- MPIDs identify quoting/trading participants in OTC equity contexts; firms may use multiple MPIDs with controls.
- Market maker status affects quoting behavior and obligations (fact pattern will signal).
- “Red flag” answers often involve: inappropriate payments for market making, improper quote behavior, or not following withdrawal/termination process.
Order types (high-yield differences)
| Type | Trigger/behavior | Main trap |
|---|
| Market | executes now at best price | price not guaranteed |
| Limit | executes at price or better | may not fill |
| Stop (market) | becomes market when triggered | gaps/slippage |
| Stop-limit | becomes limit when triggered | may not fill |
| MOO/MOC | executed at open/close | timing sensitivity |
| Day/GTC | time-in-force | stale instructions |
| Reserve/Peg | display/price logic | venue-specific rules |
Market access controls (SEC Rule 15c3-5)
Core idea: firms must have risk controls for DMA/sponsored access (credit, capital, and pre-trade controls). The “best answer” is rarely “override the control.”
flowchart TD
A["Order routed via market access"] --> B{Pre-trade controls pass?}
B -->|"No"| C["Reject/hold; escalate per firm procedure"]
B -->|"Yes"| D["Route to venue/ATS"]
D --> E["Execution + reporting + records"]
Clearly erroneous trades (obvious errors)
- Know the concept: certain trades can be reviewed and potentially busted (nullified) or adjusted.
- Correct answers usually involve timely escalation, following the venue/FINRA process, and documenting the outcome.
Trading halts, volatility pauses, and IOIs
- During halts/pauses, quoting and certain publications can be restricted.
- Be careful with IOIs and trade advertisements around halts (fact pattern driven).
IPOs, secondary offerings, and Regulation M (high level)
- Around distributions, some trading activity is restricted to prevent manipulation/conditioning.
- Stabilizing/penalty bid/passive market making concepts show up as “what is permitted?” questions.
Penny stocks and OTC quoting (high-yield concepts)
- Penny stocks are higher risk and have special disclosure themes (including compensation disclosures).
- Rule 15c2-11 / Form 211 concepts appear as “can you initiate/resume quotations without required information?”
Options trading reminders (Series 57 level)
- Know exercise/assignment conceptually; writers face assignment risk.
- Position and exercise limits: firms must monitor and report/escalate limit issues.
Short sales (Reg SHO in one page)
- Locate/borrow before shorting (process-based; fact pattern will signal).
- Marking: long / short / short exempt.
- Price test/circuit breaker: restrictions can apply when triggered.
- Close-outs: fails-to-deliver can require prompt action.
Reg NMS (high yield)
- Order protection / trade-through: protect displayed quotes (high level).
- Limit order display: customer limit orders may need to be displayed in certain contexts.
- Sub-penny: minimum price increment rules; don’t quote where prohibited.
Trade reporting and audit trails (F2 core)
Trade reporting (concept)
- Report to the correct facility for the security/context.
- Use correct modifiers and meet timing/acceptance requirements.
CAT / COATS / Large Trader (concept)
- CAT: order lifecycle fields and timestamps matter; clock synchronization supports audit trails.
- COATS: options audit trail concepts (high level).
- Large Trader: identify/report Large Trade ID where required (high level).
Clearance, settlement, and confirmations (concept)
- Confirmations must contain key trade details.
- Settlement cycle concepts under Rule 15c6-1 are tested as “what is regular way?” and “what do you disclose/do next?”
- Options: OCC exercise/assignment affects delivery and payment obligations.
Glossary (fast definitions)
- ADF: Alternative Display Facility (FINRA).
- ATS: alternative trading system.
- CAT: Consolidated Audit Trail.
- COATS: Consolidated Options Audit Trail System.
- DMA: direct market access.
- IOI: indication of interest.
- LTID: Large Trader ID.
- MOO/MOC: market-on-open / market-on-close.
- MPID: market participant identifier.
- MNPI: material nonpublic information.
- OCC: Options Clearing Corporation.
- Reg M: SEC regulation restricting certain activities during distributions.
- Reg NMS: SEC regulation for the national market system.
- Reg SHO: SEC short sale regulation (marking, locate, close-outs).