Trading Platforms & Regulatory Compliance Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Trading Platforms & Regulatory Compliance flashcards as text
Under Regulation NMS Rule 611 (the 'Order Protection Rule'), broker-dealers are prohibited from:
Answer: Trading through a protected quote at a better price on another exchange
Rule 611 prohibits trade-throughs, meaning executing a trade at a worse price when a better protected quote is available on another exchange.
What is the purpose of a 'kill switch' in an algorithmic trading system?
Answer: To immediately halt all trading activity and cancel open orders in an emergency
A kill switch is a critical risk control that allows traders or risk managers to immediately stop all algorithmic trading and cancel outstanding orders to prevent catastrophic losses.
Which document does FINRA require member firms to provide clients that explains best execution practices?
Answer: SEC Rule 606 Disclosure Report
SEC Rule 606 requires broker-dealers to publish quarterly reports disclosing order routing practices and any payment for order flow arrangements.
A trader enters a 'bracket order' on their platform. This means they have simultaneously placed:
Answer: An entry order, a stop-loss order, and a take-profit order
A bracket order places an entry order along with a simultaneous stop-loss and take-profit order, 'bracketing' the trade to automatically manage both risk and reward.
Which type of trading platform order executes only at the specified price or better and will never be filled at a worse price?
Answer: Limit order
A limit order specifies the maximum price to pay for a buy or minimum price to accept for a sell, guaranteeing price but not execution.
Under SEC Regulation Best Interest (Reg BI), broker-dealers must act in the best interest of retail customers when:
Answer: Making a recommendation of any securities transaction or investment strategy
Reg BI requires broker-dealers to act in a retail customer's best interest when making recommendations, going beyond the prior suitability standard.
What does 'payment for order flow' (PFOF) mean in the context of trading platform operations?
Answer: Compensation a broker receives from a market maker for routing customer orders to them
PFOF is compensation that broker-dealers receive from market makers or exchanges in exchange for routing customer orders to them, creating potential conflicts of interest.