Securities Trader Representative (Series 57) Practice Exam

For orders priced below $1.00, which statement regarding minimum price-improvement is TRUE?

1. There is no minimum price-improvement requirement for orders that are priced at less than $1.00

2. A broker-dealer is not permitted to buy for its own account at any price while holding a customer limit order

3. The broker-dealer is always required to buy at a price at least $.01 above the customer's limit price

4. The minimum price-improvement is the lesser of 1/2 the inside market spread, or a fixed amount, depending on the price of the limit order

The correct answer is: The minimum price-improvement is the lesser of 1/2 the inside market spread, or a fixed amount, depending on the price of the limit order

The statement that the minimum price-improvement is the lesser of half the inside market spread or a fixed amount, depending on the price of the limit order, reflects a nuanced understanding of how price improvement regulations function for orders priced below $1.00. It recognizes that there are specific requirements designed to protect investors and provide a fair trading environment. In the context of trading, minimum price-improvement rules ensure that when a broker-dealer executes an order for a customer at a price below $1.00, they must do so in a manner that values the customer's order appropriately in relation to the current market conditions. The half the inside market spread clause accounts for the variability of the market; it allows for adjustments based on the prevailing pricing environment while also providing a degree of price improvement. Additionally, linking the minimum price to a fixed amount provides a safety net to ensure that consumers receive a reasonable execution price. This approach ultimately aims to enhance the trading experience by ensuring that customers receive better prices than they might otherwise get when executing orders below $1.00. Thus, it promotes fairness and transparency in the execution of trades. The detailed structure behind the minimum price-improvement requirement serves to foster trust and accountability in the trading process.