In 1969, Wall Street nearly collapsed—not from a market crash, but from paperwork. Trading volume had exploded, and back offices couldn't keep up. Firms had to close on Wednesdays just to process the previous week's trades.
Today, most trades settle in one business day. But the rules governing how trades are documented, what practices are prohibited, and how transactions are reported remain central to the Series 7 exam.
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Section 1: Order Tickets, Prohibited Practices, and Trade Reporting
Order Tickets
To place a customer order in the secondary market, a registered representative fills out an order ticket electronically. The order ticket must specify: buy or sell, security name (ticker), order size, duration (day or GTC), whether discretionary, execution price, solicited/unsolicited, manager approval, and the representative's name.
Regulation SHO
Short sales are subject to SEC Regulation SHO, which requires every sell order be marked as long or short. If short, the securities to be borrowed must be located by the broker before the sale.
Test Tip: Regulators are especially concerned that discretionary accounts might be excessively traded (churned). Making a profit does not absolve the violation.
Prohibited Trading Practices
Best Execution
When executing an order, a firm must obtain the best outcome for the customer, considering price, volatility, liquidity, size and type of transaction, number of markets checked, and accessibility to markets.
Customer Orders Have Priority
The firm cannot give preference to its own orders over customer orders—this is called trading ahead.
Front Running
When a firm receives a large block order, it cannot front-run by placing the firm's orders ahead of the block.
- Pump and dump: Trading pools inflate price, then sell
- Wash trades / Painting the tape: Fictitious trades to create appearance of activity
- Marking the close/open: Trading to affect closing/opening prices
- Spoofing: Placing large orders to mislead, then canceling
Trade Reporting
Trades in listed securities must be reported to the consolidated tape. OTC equity trades must be reported within 10 seconds; bond trades within 15 minutes.
| System | Securities Covered |
|---|---|
| TRACE | Corporate bonds and other OTC debt |
| RTRS | Municipal securities |
| EMMA | Municipal market information access |
| ADF | Alternative Display Facility for OTC listed securities |
| ORF | OTC Reporting Facility for unlisted securities |
| Topic | Key Details |
|---|---|
| Order tickets | Required information, Reg SHO for short sales |
| Prohibited practices | Front running, trading ahead, wash trades, spoofing |
| Trade reporting | TRACE (bonds), RTRS/EMMA (munis), 10-15 sec/min deadlines |
Section 2: Trade Clearing and Settlement
After a trade is executed, it must be cleared and settled. Clearing involves ensuring both parties agree on terms. Settlement is the exchange of cash for securities.
Key Players in Clearing
| Entity | Role |
|---|---|
| DTC | Depository Trust Company - holds securities in book-entry form |
| NSCC | National Securities Clearing Corporation - matches and clears trades |
| OCC | Options Clearing Corporation - clears options trades |
| Clearing firm | Handles settlement, custody, financing |
| Introducing firm | Takes orders, relies on clearing firm for back office |
Settlement Types
| Type | Timeline |
|---|---|
| Regular way (T+1) | Next business day - stocks, bonds, ETFs, options |
| Cash settlement | Same day - trades before 2:30 PM ET |
| Seller's option | Seller needs more time to deliver |
| When issued | New securities not yet available |
Good Delivery Requirements
Physical securities must be endorsed by the registered owner, with a signature guarantee (medallion). Stock certificates must be in round lots of 100 shares or multiples that add to 100.
Buy-Ins and Sell-Outs
If a seller fails to deliver by T+4, the buyer may execute a buy-in (forced purchase in open market). If a buyer fails to pay, the seller may execute a sell-out (forced sale) immediately after settlement date.
Customer Confirmations
Confirmations must include: customer/firm information, security name, size and price, trade and settlement dates, CUSIP number, and whether agency or principal transaction.
Accrued Interest
On bond trades, the buyer pays accrued interest to the seller for the period from the last payment to the day before settlement. Corporate and muni bonds use 30/360 calculation; Treasuries use actual/365.
Test Tip: Bonds trading flat (zero-coupon, defaulted, income bonds) have no accrued interest added.
| Topic | Key Details |
|---|---|
| Clearing entities | DTC, NSCC, OCC, clearing vs. introducing firms |
| Settlement | Regular way T+1, cash same-day |
| Good delivery | Signature guarantee, round lots, DRS |
| Accrued interest | 30/360 (corporate/muni), actual/365 (Treasury) |
Section 3: Distribution Dates
Cash Dividend Dates
| Date | What Happens |
|---|---|
| Declaration date | Board announces dividend |
| Record date | Must own shares by this date to receive dividend |
| Ex-dividend date | First day buyer won't receive dividend (same as record date with T+1) |
| Payment date | Dividend is paid to shareholders of record |
With T+1 settlement, the ex-date and record date are now the same day. To receive the dividend, you must buy the stock at least one business day before the record date.
Test Tip: Be careful with dividend questions. A dividend declared in December 2026 but paid in January 2027 counts as 2027 income for tax purposes.
Due Bills
Due bills are required when a trade takes place before the ex-date but settles after the record date. The seller must forward the dividend to the buyer.
Stock Splits and Stock Dividends
Forward splits increase shares outstanding and decrease price proportionally. Reverse splits decrease shares and increase price. Stock dividends work similarly. No taxable event occurs since no cash is received.
Unlike cash dividends, the ex-date for stock splits is the payable date + 1 business day.
| Topic | Key Details |
|---|---|
| Cash dividends | Declaration, record, ex-date (same as record with T+1), payment |
| Due bills | Required when trade settles after record date |
| Stock splits/dividends | Ex-date is payable date + 1; no tax until sold |
Chapter 8 Key Terms Glossary
| Term | Definition |
|---|---|
| Regulation SHO | SEC rule for short sale marking and share location |
| Best execution | Duty to get best outcome for customer |
| Front running | Trading ahead of large customer orders |
| Wash trades | Fictitious trades with no ownership change |
| Painting the tape | Creating false trading activity |
| Spoofing | Misleading orders that are quickly canceled |
| TRACE | Reporting system for corporate bonds |
| RTRS/EMMA | Reporting and access systems for munis |
| DTC | Depository Trust Company |
| OCC | Options Clearing Corporation |
| Regular way (T+1) | Standard settlement next business day |
| Cash settlement | Same-day settlement |
| Good delivery | Securities meeting transfer requirements |
| Signature guarantee | Medallion authentication for transfers |
| Buy-in | Forced purchase when seller fails to deliver |
| Sell-out | Forced sale when buyer fails to pay |
| Accrued interest | Interest buyer pays seller on bond trades |
| Trading flat | Bonds without accrued interest |
| Ex-dividend date | First day buyer won't receive dividend |
| Due bill | Obligation to forward dividend to buyer |
Chapter 8 covers what happens after a trade is executed. Master trade processing and settlement before moving to Chapter 9: Fundamentals of Options, which introduces derivative securities.