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NYSE Rules Related to Customer Quotes & Orders

Instructor: Byron Yee

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.

This lesson provides a high level overview of the NYSE rules as they apply to customer quotes and orders. Examples are used throughout the lesson for further understanding and context.

An Unethical Broker

Jerry is a broker for the New York Stock Exchange (NYSE). For the past 6 months, he has been altering the buy orders for an elderly client to make the targeted stock look more attractive. Then, he sells his own personal shares in this stock later for a high profit. Do you see a problem with this?

In this lesson, we highlight some of the key ways the NYSE tries to protect its customers and also prevent individuals like Jerry from profiting on securities fraud.

Customer Orders: General Rules

An order is the request made to buy or sell a security. If, for example, a customer places an order to buy a security, their broker then goes into the market to locate an interested seller. Sometimes there may only be one seller, so a price is directly negotiated between the two parties. More often, there are multiple sellers quoting different prices. If this is the case, the NYSE requires a broker to complete the trade at the 'best price', which is the lowest price for a buyer and the highest price for a seller.

Related to this is a concept called crossing orders when a buyer and seller are both using and conducting the trade through the same broker. While this may be more efficient and cheaper (less broker fees), this does not necessarily ensure that is the best price available. The NYSE prohibits this practice, meaning that all orders must first be placed on the open market. If the opposite party with the best price happens to be with the same broker, this trade is still allowable.

Another key concept to understand is market manipulation, which is using deceiving or unethical methods to artificially change the price or trading volume of a security (for profit). For example, investors and brokers might buy cheaply priced stock in large volumes. This makes the stock appear very attractive to others, which increases the price. Once the price hits a target point, these original investors will immediately sell their entire position for a quick profit.

This strategy (called pump and dump) is one of many market manipulation activities prohibited by the NYSE as well as by the Securities Exchange Commission (SEC) and the Financial Industry Regulator Authority (FINRA). In relation to trade orders, the NYSE does not allow a broker to change the price or size (number of shares) of a customer order. This ensures that orders to buy or sell are real and therefore do not falsely inflate any trading activities.

Sometimes errors do occur when processing an order, which is usually entering the wrong price, quantity, or actual security being traded. Note that errors are based on unintentional actions (intentionally altering an order is not allowed and could be considered market manipulation). In the case that order errors do occur, they must be corrected and the order must be executed at the originally agreed upon price and quantity.

Automatic Order and Trading Systems

The digital age has made trading faster and cheaper now that computers can handle a majority of this processing. The NYSE allows for any orders less than 1 million shares to be processed by automated execution systems, which are computers that can submit, execute, and process settlement of various security trades. Any order larger than 1 million shares still requires a human for review and processing. This is because the size of the order may have strong effects on the security's price and it will most likely require multiple buyers or sellers to fulfill this order. Just like human traders, the NYSE requires automated execution of trades to be processed immediately and the system cannot discriminate or prioritize orders based on size. This also means that the 'best price' rule still applies to automated systems.

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