Byron has over 5 years of experience in banking and investments and is currently a Candidate for the Chartered Financial Analyst (CFA) Institute. He also is registered with FINRA Series 7 and 66 and has his Life & Disability Insurance producers license for WA state. Previous to his career in banking, he spent 2 years in West Africa as a Peace Corps Volunteer and 4 years in China as an English teacher and financial analyst. Byron double majored in Theatre Arts and Business Administration at Western Washington University. In his free time he enjoys hiking, cycling, running, and being in the great outdoors with his family.
NYSE Rule Overview
The New York Stock Exchange (NYSE) has an extensive rulebook guiding the behavior of any investment professional involved in securities trading. While this lesson only provides a high level overview of rules pertaining to these professionals, there are two important takeaways to remember. In general, NYSE rules are designed to:
- Protect customers: This means that making sure the needs of the clients are always the highest priority. In addition, there are rules that prohibit investment professionals from committing any deceiving actions, such as lying about prices or risk, changing trade order forms, or any activity that takes unfair advantage of a customer.
- Prevent market manipulation: This can be defined as activities that falsely inflate the trading volume or price of a security (with the intent of making a profit). The NYSE wants to ensure fair market values and fair business practices and has many detailed rules addressing various actions that a professional may try to use to manipulate the markets.
Some of the key rules as they apply to various professionals are explained in the following sections.
Rules for Exchange Floor-Persons
First, just like investment advisors, any employees working on the NYSE (or other exchange) trading floors need to be registered, meaning have the appropriate licenses and documents filed with the Financial Industry Regulatory Authority (FINRA). All investment professionals are allowed to trade for their own personal accounts (or for their investment firm accounts). However, there are certain actions that employees on the trading floor are prohibited from doing because they are in a position with power to significantly influence market behavior (market manipulation). Note that some of the trading strategies we discuss below are fairly complex; detailed explanations are beyond the scope of this lesson. But again, keep in mind that that the majority of these rules are designed to prevent floor traders from engaging in market manipulation.
A member on the trading floor cannot:
- Buy or sell securities on-stop: The basic idea behind this concept is that the investor is speculating a stock will significantly rise or decline, and this trading method sets limits to stop their losses if the actual prices go in a different direction. If a floor trader has a personal stake and needs prices to go in a certain direction, they have an obvious conflict of interest and may try to manage trading activity to trend toward this desired path.
- Buy or sell securities 'at the close': This refers to buying or selling a security at the close of business hours, then doing a reverse transaction (buy at the open) the following morning. The strategy implies that investors' opinions on the market change overnight, so one could profit from these price changes.
- Buy or sell dividends: Dividends are cash payments made to the shareholders of a company. The right to these dividends or the dividend payments themselves are not allowed to be bought or sold by floor traders.
- Buy or sell privileges: Privileges refer to special access to trade a security (at a special price). Since this has high potential to manipulate markets (and most likely involves bribery, which is another violation), this is not allowed.
- Bet on the course of the market: Floor traders are not allowed to bet on if the market prices are going to go up or down. Since they have special access to the markets and insight into trading activity, betting would give them high incentive to try and change the market direction in their favor.
Rules for Non-Floor Individuals
Rules for non-floor registered individuals (brokers, dealers, advisors) are slightly more lax, but still enforce the same message of protecting customers and market integrity. One key rule to highlight in relation to customer trading is priority. In the case that both a customer and a broker wish to buy Stock ABC, but only one share is available, priority always goes to the customer first. This means that this one share of ABC is allocated to the customer for purchase. Another interpretation of this rule is that if both the customer and the broker both want to purchase Stock ABC and there are enough shares available for both buyers, the customer's order needs to be processed first and at the best price before processing the broker's order. In other words, the needs and best interests of the customer always comes first.
Rules and Guidance for Market Makers
Finally, there is one more special role to discuss called the designated market maker (DMM). This individual (or firm) is a dealer whose main responsibility is to encourage liquidity in the markets. The NYSE does not want too many unfilled orders to stay in the market for too long. So, for example, if a customer is interested in selling Stock XYZ but there are no interested buyers, the DMM may consider buying this stock for their own account and then reselling it at another time. By helping complete this trade, the customer now has the cash back and can use these funds for other investment transactions (keeping the market more fluid). The NYSE encourages DMMs to intervene with unfilled orders especially at the close and open of each day. The goal of this to inspire more market activity, especially when trading is typically slower.
The NYSE has many rules put in place with the two key goals of protecting customers and preventing market manipulation, which are activities that falsely inflate the trading price or volume of a security. Floor traders have special rules prohibiting certain trading activities; the goal of these rules is to prevent these individuals from engaging in positions that present a conflict of interest or incentive to manipulate prices to go in a desired direction.
Non-floor professionals such as dealers, brokers, and advisors also have to follow several rules, the most important of which is that a customer's orders always take highest priority. Designated market makers (DMM) are special dealers that are designed to encourage more liquid markets and trading activity.
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