The Securities Exchange Act of 1934

The Securities Exchange Act, like the 3 other acts that are part of the first big 4 securities acts, has a name that tells you what it does. The Securities Exchange Act, is the act that regulates the securities exchanges, or the exchanging (trading) of securities. It is also known as the people act, as it primarily deals with the people helping trade issued securities, along with the places they do that trading.

The Securities Exchange Act of 1934 created the SEC, and gave Reg T to the Federal Reserve Board. It defines and deals with brokers and dealers, along with the registration requirements of representatives working for them.

Brokers and Dealers

Broker-dealers are corporate persons that are “in the business of executing transactions for themselves for others”. When they are acting for others, they are acting in an agency capacity and are generally referred to as acting as a broker in the trade. Brokers are paid a commission and introduce buyers and sellers. There is minimal risk in being a broker, as there is no real cost to them that might be lost. When they are acting for themselves, they are acting in a principal capacity, and are generally referred to as acting as a dealer in the trade. Dealers are paid markups and markdowns, and buy and sell from their own inventory. There is much more risk, as a security they purchase could drop in value. For a broker dealer to transact interstate trades, they must be registered with the SEC under The Securities Exchange Act of 1934. Broker dealers would register with SEC, along with any other SRO they seek membership with. These applications would be updated and amended in the event of any reportable event, and being an SEC registered firm requires regular reports on financial and operations of the firm. As always, this registration, may not be implied as approval.

Firm quotes

Market makers are member firms that promise to “always be willing to make a market”. What that means is they will always provide a quote, a price they are willing to buy the security for, a price they are willing to sell the security for, along with the quantity they are willing to buy and sell at those prices. Failing to honor a firm quote is referred to as backing away, and short of any actual criminal act, is basically the worst thing a market maker can do. They will lose their status for a time, potentially never getting it back, and costing them a lot. Market makers will honor their quotes, even if they are wrong.

A firm quote is the most common type of quote we see and think of. It is firm, it is binding, and violating it, refusing to transact at that price, is backing away.

A workout quote is a non-firm quote for illiquid securities. The terms, such as settlement, price, etc, need to be negotiated, or “worked out”, between the 2 parties, before the transaction can commence.

A subject quote is a non-firm price indication, which means the firm is not obligated to trade at that price until it is confirmed.

A nominal quote is a non-firm price indication for informational purposes only. Basically, another way of saying a subject quote, could also be called a “around” or “looks like” quotes.

Example Quote

Market Marker bid 35 ask 36 size (3x7), which could be written as 35-36 (3x7)

The bid is the price the market maker is willing to pay for the security; it is what we, the retail investor, would be able to sell the security for. In this case, we could sell the security for $35.

The ask is the price the market maker is willing to sell the security for, and it is what we, the retail investor, would be able to buy the security for. In this case, we could purchase the security for $36.

The size is the number of lots, 100 share increments, that the market maker is willing to buy and sell at. In this case, the market maker is willing to pay $35 for up to 300 shares, and is willing to sell for $36 up to 700 shares.

Rule 10b-18—Purchases of Certain Equity Securities by the Issuer and Others

An affiliated purchaser is a person acting in concert with the issuer, or is an affiliate with some form of control relationship with the issuer. A control relationship could be that they are in control of the issuer, they are controlled by the issuer, or they are in common control with the issuer.

• Transactions must be effected from or through only one broker or dealer on any single day.
• Regarding the time of purchases, they must not be;
  • The opening, through regular way, purchase reported in the consolidated system.
  • Effected during the 10 minutes before the scheduled close in the market it is trading or being effected in if it has an Average Daily Trading Volume (ADTV) of $1million or more and public float value of $150m or more or effected 30 minutes prior for all other securities.
• Regarding the price of purchases, they must be at a price that;
  • Doesn’t exceed the highest independent bid or last independent transaction price, whichever is higher. That data will be reported in the consolidated system, if not reported in the consolidated system then disseminated through any national securities exchange; finally if not on a national securities exchange, 3 independent dealers.
• Regarding the volume, the total volume of the purchases effected by or for the issuer and any affiliated purchasers in any one day must not exceed 25% of the ADTV for the security. Once a week, instead of purchasing under 25% ADTV limit, the issuer or affiliated purchaser may effect one block purchase if no other 10b-18 purchases are effected that day and the block purchase is not included when calculating the security’s 4-week ADTV.

Definitions

Block of stock means a quantity of stock that;

1. Has a purchase price of at least $200,000, or
2. Is at least 5,000 shares with a purchase price of at least $50,000, or
3. Is at least 20 round lots (2,000 shares), and totals 150% or more of the trading volume for that security, or if volume is unavailable, totals at least 1 tenth of 1% of the outstanding shares, not including shares owned by affiliates.

10b-18 safe harbor conditions

If the following conditions are met, then the purchases associated with Rule 10b-18 will not be deemed to have violated the anti-manipulation provisions.

• One broker or dealer - Purchases under this rule must be effected from or through only one broker or dealer in a single day, provided that “One broker or dealer” condition doesn’t effect purchases that are unsolicited by the issuer or affiliated purchasers, and when multiple affiliated purchasers of the issuer want to purchase on the same day, all affiliated purchasers must use the same broker or dealer.
• Time of purchases - Rule 10b-18 purchases must not be;
  • Opening purchase reported in the consolidated system
  • Effected during the 10 minutes before the scheduled close of primary trading in the principal market or in the market where the purchase is effected, provided the security has an ADTV of $1m or more, and a public float value of $150m or more.
  • Effected during the 30 minutes before the close of less actively traded securities.
• Price of purchases - Purchases under this rule must be effected at a price that;
  • Doesn’t exceed the highest independent bid or the last independent transaction price, whichever is higher.
  • For securities that have quotes reported in the consolidated system, the price may not exceed the highest independent bid or last independent transaction price, whichever is higher.
  • For other securities, provided they display at least 2 quotes in the consolidated system or another inter-dealer quotation system, the price may not exceed the highest independent bid or last independent transaction price, whichever is higher, in those at least 2 systems.
  • For all other securities, the price may not be higher than the highest independent bid from three independent dealers.
• Volume of purchases -
  • The total volume of securities purchased under this rule by the issuer and any affiliated purchasers in a single day may not exceed 25% of the ADTV of that security. Once a week, however, the issuer or an affiliated person, instead of purchasing under the 25% of ADTV limit rule, they can affect one block purchase if no other 10b-18 purchases are effected that day and the block is not included when calculating the security’s 4-week ADTV under this section.