Securities Trader Representative (Series 57) Practice Exam

Under what condition may a member firm trade ahead of a held limit order?

1. If the order is from a retail investor with an account

2. If the order is for 11,000 shares at $8.00

3. If another trading desk has knowledge of the order

4. If another trading desk has no knowledge of the order

The correct answer is: If another trading desk has no knowledge of the order

A member firm may trade ahead of a held limit order under specific circumstances that prioritize the execution of the limit order. This practice is generally prohibited as it can lead to conflicts of interest and unfair trading advantages. However, if another trading desk has no knowledge of the held limit order, the firm may execute its trade without violating the rules regarding priority. When a trading desk is unaware of an existing limit order, it acts independently, meaning there is no intentional advantage taken at the expense of the order's holder. The concept of trading ahead becomes murky when other desks within the same firm are involved; knowledge of such orders could create a scenario where the firm is seen as manipulating the market or undermining the order’s intended priority. The reason the other choices do not support the ability to trade ahead lies in the implications of the retail investor relationship, the specifics of the order size, and the sharing of information within the firm. Each of these factors could contribute to a perceived or real conflict of interest that would preclude a member firm from executing a trade before a held limit order. Thus, the core condition that allows for trading ahead is the unawareness of the held limit order by any other trading desk in the firm, which maintains the integrity of order