CPT Trading Platforms & Regulatory Compliance 2 — Questions and Answers
Question 1: Under FINRA Rule 4370, broker-dealers must maintain a Business Continuity Plan (BCP) that addresses which scenario?
- Only natural disasters affecting the firm's headquarters
- Significant business disruptions including both internal and external events (Correct answer)
- Only cybersecurity breaches exceeding $1 million in damages
- Regulatory examinations and audit disruptions
Correct answer: Significant business disruptions including both internal and external events
FINRA Rule 4370 requires BCPs to address significant business disruptions of any kind, covering both internal failures and external events.
Question 2: Which order type on a trading platform guarantees execution but NOT price?
- Limit order
- Stop-limit order
- Market order (Correct answer)
- Good-till-canceled order
Correct answer: Market order
A market order guarantees execution at the best available price but does not guarantee a specific execution price.
Question 3: A trader using Direct Market Access (DMA) bypasses which intermediary?
- The exchange's clearinghouse
- The broker-dealer's order desk (Correct answer)
- The SEC's trade reporting facility
- The depository institution
Correct answer: The broker-dealer's order desk
DMA allows traders to submit orders directly to an exchange's order book, bypassing the broker-dealer's internal order desk.
Question 4: Under SEC Regulation SHO, a trader must locate shares before executing which type of trade?
- Long purchase on margin
- Short sale (Correct answer)
- Options exercise
- Block trade
Correct answer: Short sale
Regulation SHO requires broker-dealers to locate shares available for borrowing before executing a short sale to prevent naked short selling.
Question 5: What is the primary function of a Level 2 quote screen on a trading platform?
- Displaying only the best bid and ask prices
- Showing the full order book depth with market maker quotes (Correct answer)
- Generating automated trade signals based on volume
- Tracking after-hours trading activity exclusively
Correct answer: Showing the full order book depth with market maker quotes
Level 2 quotes display the full depth of the order book, showing all bids and asks from various market makers and ECNs.
Question 6: Which regulatory body oversees the National Futures Association (NFA)?
- SEC
- FINRA
- CFTC (Correct answer)
- OCC
Correct answer: CFTC
The Commodity Futures Trading Commission (CFTC) is the federal regulator that oversees the NFA, which is the self-regulatory organization for the US derivatives industry.
Question 7: A 'fat finger' error on a trading platform most commonly refers to which scenario?
- A system crash caused by excessive order volume
- An unintentional trade entry due to keystroke or input mistakes (Correct answer)
- A delay in order routing caused by network latency
- A margin call triggered by rapid price movement
Correct answer: An unintentional trade entry due to keystroke or input mistakes
A fat finger error is an unintended trade caused by incorrectly entering order details, such as wrong quantity or price, due to human input mistakes.
CPT Trading Platforms & Regulatory Compliance 2
Under FINRA Rule 4370, broker-dealers must maintain a Business Continuity Plan (BCP) that addresses which scenario?