The Trading Process

1. Order Entry
   1. Order ticket details regarding how a trade is to be executed
2. Execution
   1. Occurrence of a trade in a market center
3. Clearing
   1. Executing firms agree to the details of a trade; any unrecognized trades may result in a DK (Don’t Know) notice
4. Settlement
   1. The day on which the customer’s name is placed on or taken off the issuer’s books
5. Custody
   1. Safeguarding of client and firm assets

Settlement Dates

• Unless a specific exception is made, settlement (completion of the transaction between the firms involved) will occur as follows:
  • Corporate and Municipal Securities
    • Two business days after the trade date (T + 2)
  • US Government Securities and Option Trades
    • Next business day after the trade date (T + 1)
  • Cash Settlement for any security
    • Same day as the trade date (both sides must agree)
  • Seller’s Option
    • Negotiated settlement; not earlier than two business days after the trade
      • Will settle some day after 2 days
  • When Issued
    • As determined by the National Uniform Practice Committee
      • When a bond begins to trade but there’s no specific certificate yet

Regulation T Payment Date

• According to the Federal Reserve, Regulation T payment must be obtained for transactions in either cash or margin accounts within two business days of settlement (S + 2 or T + 4)
• Exempt Securities
  • Municipals
  • US Government
    • For both of these securities, payment is generally due on settlement date
• Option trades requires customers to make payment on the fourth business day after the trade (T + 4)

Matching:

• T + 2
  • Settlement date for transactions involving corporate and municipal securities
• T + 1
  • Settlement date for transactions involving US Government securities (treasuries) and options
• Reg. T Payment Date
  • Two business days after regular-way settlement (i.e., S + 2 or T + 4)
• Same Day
  • Settlement for any securities using cash settlement 
• Seller’s Option
  • A negotiated settlement; not earlier than two business days after the trade

Depository Trust & Clearing Corporation

• The DTCC provides clearing, settlement, and information services for depository-eligible securities through its subsidiaries, including:
  • National Securities Clearing Corporation (NSCC) – central counterparty for clearing, settling and guaranteeing US equity trades
  • Depository Trust Company (DTC) – provides custody and safekeeping services for securities
• Transactions among members are completed through computerized bookkeeping entries
  • Referred to as book-entry settlement
  • No physical delivery of securities 

Good Delivery

• A member firm’s transfer agent makes the final determination as to whether a security is in good deliverable form and may be transferred to the new owner 

• Restricted securities are not considered good delivery
  • Because they’re accompanied by special instructions 

Corporate Actions Department

• Responsible for handling the following corporate actions
  • Stock splits
  • Rights offerings
  • Proxies
  • Tender offers
  • Mergers and spinoffs
  • Exchange offers
  • Stock buybacks

Cost Basis and Capital Events

• The Purpose of a Stock Split or Stock Dividend
  • Company’s attempt to improve marketability of its stock
    • No economic gain or loss for holders
    • No change to issuer’s capitalization
    • No change to holder’s percentage of equity ownership 
• The Two Types of Stock Splits
  • Forward (normal) (2:1 or 3:2) – more shares, lower price
  • Reverse (e.g., 1:5) – fewer shares, higher prices
    • Fo both types, dividends per share are adjusted proportionally 
• Tax Treatment
  • Additional shares received are generally not tax as income
  • Investor’s total basis is unchanged,but basis per share is adjusted

Example – Forward Stock Split

• Investor owns 100 shares of XYZ at $180/share. XYZ Company executes a 3:2 split
• Before Split
  • Shares = 100
  • Basis / share = $180
  • Total value = $18,000
• After Split
  • Shares = 150 (100 * 3/2) 
  • Basis / Share = $120 (180 * ⅔)
  • Total value = $18,000

Example – Reverse Stock Split

• Investor owns 1,000 shares of XYZ at $10/share. ABC Corporation executes a 1:4 Split
• Before Split
  • Shares = 1,000
  • Basis / share = $10
  • Total value = $10,000
• After Split
  • Shares = 250 shares (1,000 * ¼) 
  • Basis / share = $40 ($10 * 4/1)
  • Total value = $10,000

Determine whether True/False

• A forward or reverse split changes the total value of securities in the portfolio
  • False
• After a 1 for 5 stock split, an investor who owned 500 shares, will now own 100 shares
  • True
• After a 3 for 2 stock split, an investor who owns 200 shares will now own 300 shares
  • True
• After a 5 for 4 stock split, 100 shares at $50/share will equal 125 shares at $40/share
  • True 

Tender Offers

• A tender offer indicates the intent to buy shares from the owner at a fixed price for a limited period of time
  • The offer may be made by the issuer or a third party
  • The offer is typically made to acquire a company or a controlling position and seat on the board of directors
  • The offer may be for all of the shares or a specific percentage 
• Shares may only be tendered if an investor is long the stock or its equivalent,such as:
  • A convertible security (conversion NOT required)
    A right or warrant (exercise NOT required)
  • A call option (ONLY if exercised)
    • Because it’s not issued by the company unlike the first two options

Other Corporate Actions

• Preemptive Rights
  • Provide existing shareholders with opportunity to purchase additional shares directly from the company
  • The subscription price if set below the current market
• Mergers and Acquisitions
  • Merger – the combination of two companies
  • Acquisition – one company purchasing and assuming control of another
• Spinoffs
  • A company may choose to spinoff a specific business unit to existing shareholders
  • Shareholders receive new shares of the business unit 
• Exchange Offer
  • Where you own one security, they’ll give you a new security for it + cash

Forwarding Official Communications

• If from brokerage form, that’s an OBO

• proxy

Charging for Services

• Charging Issuers
  • Member firms may charge issuers for forwarding materials to beneficial owners
  • Rates are subject to FINRA rules
• Charging Customers
  • Member firms may charge customers reasonable costs/fees, but cannot discriminate between customers
  • Services include:
    • Safekeeping of securities
    • Collection of dividends and interest
    • Exchange or transfer of securities
  • However, charges for forwarding proxies or other financial information is the responsibility of the issuer 

Matching

• A combination of two companies
  • Merger
• An intent to purchase shares of another owner
  • Tender offer
• Shareholders receive new shares of a business unit of a company
  • Spinoff
• One company assumes control of another company
  • Acquisition