Lawrence R. Gelber, Securities Arbitration and Litigation Attorney.
Lawrence R. Gelber, Litigation & Securities Arbitration Attorney


An Encyclopedic Dictionary of the Securities Industry

The GelberLaw Glossary, An Encyclopedic Dictionary of the securities industry ©, strives to provide simple, clear, accurate, in depth definitions and explanations of words, expressions and terminology commonly used by lawyers and securities industry

Some terms are subject to interpretation, so please consult your own lawyer (or accountant or securities industry professional) if a definition is important to your particular circumstance.  Some terms may have multiple meanings, not all of which are examined. (Look up the word “set” in an unabridged dictionary.) Please check back frequently, since this page is updated, revised and expanded on a regular basis.

Account – is basically a contractual relationship between a customer and a broker.  The relationship enables the broker to buy and sell securities on the approval of and for the account of the customer and to tend to all the administrative functions involved in such transactions, such as maintaining balances, holding the securities, issuing confirmations of transactions, issuing account statements among other functions.

Account Executive – another name for the broker who takes customer calls, offers advice to and follows customer instructions to buy or sell securities in your account.  Some brokerage firms call their brokers registered representatives. This reflects the registration that all brokers are required to have after passing certain tests and obtaining the approval of NASD (and perhaps the New York Stock Exchange) and various state securities regulators. In other words, brokers must be licensed.

Account Statement – a piece of paper that lists all the transactions that took place in an account as well as the holdings, interest and dividends paid and cash available or due. They usually issue once a month, but if an account is inactive, they may only issue once every three months. An account statement is an official record of the status and balance of an account on the date it is issued. It is important to review it and to challenge any error, preferably in writing and preferably immediately.

Accredited Investor – this is a class of investor specifically defined in the federal securities laws. The official definition says that an accredited investor is one who either has a net worth of at least $1 million dollars (can be joint with a spouse) or must have earned at least $200,000 in each of the two most recent years or had joint income with a spouse of more than $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.  Some types of investments, such as certain private placements or certain limited partnerships, among others, require that investors meet this standard under certain circumstances.

Accrual Bonds – these bonds do not provide periodic interest payments. They accrue the interest until the bonds mature. They provide a way to lock in interest rates. See Zero Coupon Bonds.

Active Account – an account that engages in many transactions.  Each brokerage firm may have its own benchmark. Active accounts are likely to receive monthly account statements, possible commission discounts, or other benefits such as access to free streaming quotes. Accounts that have no activity for years may face problems, such as the imposition of inactive fees, or even be viewed as abandoned and the proceeds sent to the state.

Adjustable Rate Preferred Stock – less volatile prices than fixed rate preferred stock, ARPS is a type of preferred stock with an adjustable dividend. The dividend often adjusts quarterly based on changes in some money market rate, like a Treasury bill rate. These are also called floating rate or variable rate preferred.

Adjusted Basis – Capital gains and losses are measured from the difference between the price paid on purchase and the price received on sale. The purchase price is called the basis. Basis gets adjusted to account for commissions and stock splits.  See “Basis”. Consult your accountant.

Advance – simply meaning a rise in price, as “the market advanced 100 points today.”

Affidavit – a declared voluntary written (printed) statement of facts sworn to by the person making the declaration, under oath taken in front of a person authorized to administer oaths, such as a notary public. In some circumstances (but not in all circumstances) an affidavit may be admitted into evidence in a securities arbitration case.

Affiliate – companies are deemed affiliated when (a) both are subsidiaries of a common parent company or (b) when one owns less than a majority of the voting stock of the other. Each state has its own laws relating to corporations and the definition of affiliate may be a matter of statute that differs from state to state. Various statutes, such as The Investment Company Act of 1940, the Federal Reserve Act and others, have specific definitions and usages of the term.

Afghanis – the units of currency of Afghanistan.

After-Hours Trading – securities can trade after (or before) the regular trading hours of organized exchanges. Dramatic news, positive or negative, often triggers a high volume of such trading.

Aftermarket – After a security is originally issued, such as a stock in an initial public offering (IPO), the securities trade on the various exchanges based on perceived pluses and minuses affecting the issuer of the securities. This trading is called aftermarket, or secondary market, trading. So, if XYZ Corporation raises money in the primary market by selling its stock to the public for the first time in an IPO, after the IPO, XYZ stock then trades in the secondary, or aftermarket based on principles of supply and demand, which are affected by good news and bad news about XYZ Corporation. In other words, most stock transactions are aftermarket transactions.

Against the Box - The act of short selling securities you already own. This results in a neutral position where your gains in a stock are equal to the losses. For example, if you own 1000 shares of XYZ and you tell your broker to sell short 1000 shares of XYZ, you have shorted against the box. Alternatively, you can achieve the same effect by buying a put option on the stock, which may or may not be less expensive than "shorting against the box".  The primary rationale for shorting against the box is to delay a taxable event. Let's say that you have a big gain on your XYZ shares, and believe XYZ has peaked for the foreseeable future and you want to sell. However, the tax on the gain this year may leave you under-withheld for the year and perhaps subject to penalties. Or you are projecting lower personal income next year, putting you in a lower bracket and it would be beneficial to take the gain next year. The “box” is where the securities are located physically for safekeeping. Always consult your accountant for changes in tax laws that relate to such strategies.

Agency transaction – transactions at a brokerage firm are either agency transactions or principal transactions. In an agency transaction, the broker acts as a middleman between the buyer and seller, and takes a commission for the service. The broker takes no financial risk is such a transaction, all such risk being for the account of the client.

Aggregate Exercise Price - The strike price of an option (either a put or a call) times the number of underlying securities in the option contract (usually 100 shares per contract). When calculating the aggregate exercise price, the price, called the “premium”, paid or received on contracts (at 100 shares per option contract, equating to 1000 shares) of XYZ at $50 would have an aggregate exercise price of $50,000 if exercised before the option contract expires. In common parlance the phrase “option contract” is shortened to either option or contract. (“I bought ten call contracts” is the same as saying “I bought ten call options.”)

Air Pocket Stock – a stock that has an abrupt drop in price following the announcement of bad news or poor earnings results. Shareholders rush to sell and few buyers can be found. Likened to an airplane dropping in an air pocket.

Alligator Spread – When a broker arranges a position consisting of a combination of put options and call options that collectively create commissions so high that it is almost impossible to turn a profit for the client regardless of which direction the underlying security moves. The term originates from the idea of the spread "eating the investor alive." This is related to the concept of “churning”.

All or None – An instruction to a broker. For example, if you want to buy 1,000 shares of XYZ Corporation at a limit price of $50.00 per share, and you give an “all or none” instruction, no part of the order will be filled unless it can all be filled. Without an all or none instruction, the order can be filled piecemeal - every time the price reaches $50 or below, shares will be purchased until the whole order is filled.

American Arbitration Association (AAA)– Founded in 1926, the AAA is a private company offering a wide range of alternate dispute resolution services, including education and training, publications and mediation, arbitration, elections and other out-of-court settlement techniques. The AAA  - with 34 offices in the United States and Europe and 59 cooperative agreements with arbitral institutions in 41 countries - provides a forum for the hearing of disputes, case administration, tested rules and procedures, and a roster of neutrals to hear and resolve cases.

Securities arbitrations are conducted pursuant to the AAA’s Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes) and its Supplementary Procedures for Securities Arbitration.

Brokerage firms in the past used to include a AAA forum option in the arbitration agreement clauses of their customer agreements, but in recent years this option has largely been eliminated, and most securities arbitrations are held at NASD. While the fees charged by NASD for arbitration are high, with member firms being charged a surcharge, fees at AAA can be very high because, in addition to filing fees, it imposes a maintenance fee related to the length of time the case is pending.

Arbitrage –also know as riskless arbitrage, describes the simultaneous purchase and sale of a security trading on different markets or exchanges in order to take advantage of small price differentials / discrepancies that may exist as a result of certain market inefficiencies. Inefficiencies can result from untimely reporting of transactions or exchange rates, if the two markets are in different countries. For example, an investor buys a stock in the United States and sells (or shorts) it in Europe, when the price has not adjusted for foreign exchange.  While distinct from “Risk Arbitrage” and “Index Arbitrage”, all forms of arbitrage involve taking advantage of small, rather evanescent price discrepancies.

Arbitration – is an alternative to suing in court when you have a dispute, usually over money. NASD administers most securities arbitration in the United States. Whether you are bringing a claim or defending a claim, NASD will charge fees for their services. You can be represented by a lawyer and each side gets to present its side of the story to an arbitration panel, which can award money or deny claims by issuing an arbitration award. Arbitration is available for disputes between customers and brokers, and also between or among brokers and brokerage firms. NASD Arbitration is governed by a set of rules called the Code of Arbitration Procedure.

Ask – the lowest round lot price at which a dealer or market maker will sell a security. The ask price (also known as the "offer" [or “offering”] price) will almost always be higher than the bid price. If the bid and the ask are identical, the market is said to “locked” for that brief moment. Market makers make money on the difference between the bid price and the ask price. That difference is called the "spread". The term is flexible in that it can be expressed as the “asked price” or the “asking price” or the “ask price” or simply the “ask.” If XYZ Corp. is currently trading, an inquiry to a broker about a quote could generate a statement like: “$49.78 by $49.84, last $49.79,” meaning the bid is $49.78, the ask is $49.84 and the last trade was $49.79 per share.

Ask yield - The return an investor would receive on a United States Treasury security if he or she paid the ask price.

Auction Rate Preferred Stock – ARPS is a type of  floating or adjustable-rate preferred security whose dividend yield is determined in a Dutch auction process, held in short term regular intervals, typically every seven or 28 days, by corporate or institutional bidders. The rate thus established is fixed until it is reset at the next auction.  ARPS is issued by closed end mutual funds to create leverage and thereby boost yield.  A Dutch auction is where one seller offers a product at a high price, which is reduced by the bids of many buyers until a price attractive to enough buyers is reached.  (The U.S. Department of the Treasury uses this system to sell its debt obligations.) If no bidders emerge, the auction is said to “fail”. This failure is not, however a default on the security being auctioned.  The majority of closed-end fund ARPS carries a AAA credit rating due to asset coverage and other maintenance requirements imposed by credit rating agencies, with which a closed-end fund must comply in order to maintain a favorable credit rating for its ARPS. Under the Investment Company Act of 1940, closed-end funds are subject to additional restrictions, including a requirement that the market value of the assets of the underlying closed-end fund exceed the amount of ARPS outstanding by at least two times.

Average Daily Volume – is exactly what the term suggests: the cumulative number of shares traded in a given time period, divided by the number of trading sessions in that period. One million shares traded over a ten-day period is an average daily volume of one hundred thousand shares. Time periods used for calculating average daily volume vary, although monthly and annual average daily volume figures are fairly common. Technical analysts compare current daily volume to average daily volume in an effort to glean useful patterns. Stocks tend to trade at greater than average daily volume in sessions preceding known future events, such as earnings announcements and dividend declarations. In the absence of known future corporate actions, strong average daily volume can be interpreted to mean that an unforeseen event is imminent. Large companies tend to trade at higher average daily volume than smaller companies. If volume is too low, it may be difficult (or impossible) to close out a long position.

Award – Unlike courtroom litigation, which can result in a judgment, securities industry arbitrations result in an “Award”.  The Award, signed by members of the Panel of Arbitrators (or the sole Arbitrator in a “small claim” arbitration) has no strictly legal enforceability. If the Award is against a brokerage industry member firm (or person associated with a member), the enforceability is derived from the threat of license revocation for failure to comply with the Award within 30 days.  The arbitration statutes of most states, as well as the Federal Arbitration Act, have provisions to permit certain efforts to “vacate” an Award. The ability to vacate an Award is limited to very narrow circumstances, and hence most such efforts fail. Once a court confirms an Award, it becomes an enforceable judgment.

Baby Bells– In 1984 the American Telephone & Telegraph Co., commonly known as AT&T, was broken up into seven regional telephone companies, which became known as the Baby Bells: NYNEX, Bell Atlantic, BellSouth, Southwestern Bell Corp. (SBC), Ameritech, U.S. West and Pacific Telesis.

Basis – Purchase price, including commissions and other necessary expenses, used to determine capital gains and capital losses for tax purposes. There are several ways to determine basis. For a purchased investment, the basis is cost. If inherited, the basis is the value on the date of the original owner’s death (called date-of-death value). If received as a gift, the basis is the amount that was originally paid for the investment, unless the market value of the investment on the date the gift was given was lower.  Also called cost basis or tax basis.  Check changing IRS regulations from time to time. In connection with bonds, the term “basis” refers to the yield to maturity. In other words, a 10% bond selling at 100 has a 10% basis. In connection with commodities, “basis” refers to the difference between the cash price and the futures price of a given commodity. See “Adjusted Basis”. Consult with your accountant.

Basis Point – A basis point is one one-hundredth of one percent. One percent equals 100 basis points. It is the smallest measure used in quoting the yield on bonds, bills and notes. If a yield rises from 5% to 5.25%, is has risen 25 basis points. It can be represented as 0.01% (1/100th of a percent) or 0.0001 in decimal form. Ten thousand basis points equal one hundred percent.

BATS Exchange – As of early 2009, the BATS Exchange (BZX) grew to be the third largest stock exchange in the world (by volume) behind the New York Stock Exchange and NASDAQ. “BATS” stands for “Better Alternative Trading System” and was originally founded in 2005 as an ECN. It is headquartered in Kansas, and has operations in New York and London. BATS also operates the BATS 1000 Index, which it launched in 2009, measuring the performance of 1,000 U.S. listed securities in 10 equally weighted sectors. In 2010 BATS launched a second exchange called the BATS Y-Exchange (BYX), and also launched a platform for U.S. equity options.

Bear – A pessimist. A stock market bear believes that prices of securities will fall. A Bear Market is one that reflects, for a prolonged period, such pessimism in the form of falling stock prices and decreased market volume. One of the hallmarks is that the prices fall faster than historical averages. A bear market in bonds is usually caused by rising interest rates. The opposite of a bear is a bull.

Beta coefficient – Generally called simply “beta”, it is a measure of the expected return on a particular security relative to the average expected return on all other securities in the market. That is, it measures the risk of a particular stock relative to the market, exclusive of idiosyncratic risks. The beta coefficient links the return on the security and the average market return. The average market risk of all securities is said to have a beta of 1. Thus a stock with a beta of 1 tracks overall market risk.  That is, if XYZ typically moves 10% when the market average moves 10%, XYZ would have a beta of 1. If it moved 20% against the market’s movement of 10%, it would have a beta of 2, demonstrating greater risk/volatility than that of the overall market. If XYZ only moved 5% against a market move of 10% it would have a beta of 0.5, demonstrative of less risk / volatility then the overall market.

Bid – the highest round lot price at which a dealer or market maker or prospective purchaser will purchase a security. The bid price will almost always be lower than the ask price. If the bid and the ask are identical, the market is said to “locked” for that brief moment. Taken together, the bid and the ask comprise the “quote” or “quotation” for the security. Market makers make money on the difference between the bid price and the ask price. That difference is called the "spread". If XYZ Corp. is currently trading, an inquiry to a broker about a quote could generate a statement like: “$49.78 by $49.84, last $49.79,” meaning the bid is $49.78, the ask is $49.84 and the last trade was $49.79 per share.

Black–Scholes - a term applied to a mathematical model of price variation over time (and to formulas derived from the model) used to value certain investment instruments, such as derivatives and options, most commonly used to determine the price of European style call options. The model was first described by Fischer Black and Myron Scholes in their 1973 paper, "The Pricing of Options and Corporate Liabilities." The model assumes that the price of heavily traded stocks or options follows a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry. The formulas derived from the model use differential equations. Courts have found that there is no SEC rule requiring the use of the Black-Scholes valuation model in proxy disclosures for corporate stock option programs. Seinfeld v. Bartz, 322 F. 3d 693 (9th Cir. 2003)

Blue Sky Laws – A colorful phrase referring to anti-securities fraud statutes, usually of the states. Blue Sky laws generally require offerors of securities, as well as brokers, to meet certain registration requirements. They also establish penalties for non-compliance. The term is sometimes used as a verb, as in “to blue sky” an offering, which means to determine if a proposed securities offering passes muster with each particular state in which the securities are to be sold.

The origins of the term “blue sky” as it applies to securities are fairly clear, not cloudy or overcast. The earliest relevant written reference, made in the context of fraudulent sales of coinage metals, uncovered by the GelberLaw Glossary, appears on June 5, 1895 at page 3 of the Castle Rock Journal (Castle Rock, Douglas County), a Colorado newspaper, in an article:  “The Honest Dollar – It Contains 412 1-2 Grains of Standard Silver”:

“A sound dollar should represent a certain amount of labor and be capable of ready transformations into any product of labor. The rule is the world over that what costs little labor to get is worth little. Blue sky may be quite desirable, but as a product entirely of natural conditions and not of labor, it is not counted as having material value. Wh5en a promoter by artful persuasions succeeds in getting money for something which has no valueexcept in the mind of the credulous purchaser he is said to have been selling ‘ blue sky ’."

This article was reprinted more or less word for word over the next two or three days in other Colorado newspapers, such as:

The Akron Weekly Pioneer Press (Akron, Washington County), June 7, 1895 (p.4); Pagosa Springs News (Pagosa Springs, Archuleta County, June 7, 1895 (p. 3); and New Castle News (New Castle, Garfield County)(p.3) June 8, 1895./p>

The first literary reference specifically connected to “securities” uncovered by the GelberLaw Glossary appears in a 1906 book: “The Grafters of America: Who They Are and How They Work” (Monarch Book Company, Chicago), by Clifton Rodman Wooldridge. At page 47, Wooldridge heads a chapter "Stand on ‘Blue Sky’ and ‘Hot Air’”. In that chapter, Wooldridge recounts the trial testimony of one “Cowell” of the prosecuted firm of Lowell & Cowell. Referring to bogus insurance policies, Cowell purportedly testified: “They were what I would term ‘blue sky and hot air’ securities. …I would hand them a few hundred thousand dollars’ worth of blue sky and hot air paper, and while they held it in their hands they would sign affidavits to the effect that they were worth half a million or a million dollars.” Id. at 48.  Wooldridge was a former Chicago police detective who, though not without his own problems, was known as the “American Sherlock Holmes.”

Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Kansas was the first, in 1911, to enact a "comprehensive" securities law requiring registration of both securities and their salesmen.  “Blue Sky” was used by then Kansas Bank Commissioner Joseph Norman Dolley in connection with the statute, and by those reporting on it. See  “Joe Dolley Is After the Blue Sky Merchants”, Topeka Capital-Journal, December 22, 1910.

J. N. Dolley complained about the ”enormous amount of money the Kansas people are being swindled out of by these fakers and 'blue-sky' merchants.' ": Letter from J. N. Dolley Dec. 16, 1910 reprinted in Brief for Appellees at 33, Merrick v. N. W- Halsey & Co., 242 US. 568 (1917) (No. 413), cited in J.R- Macey and G.P. Miller, "Origin of the Blue Sky Law", (1991) 70 Tex.L.Rev. 347 at 360 n. 59.

The Kansas law was a response to salesmen duping unwitting investors by selling worthless interests in fly-by-night companies and gold mines along the back roads of Kansas. It was reportedly said that no assets backed up those securities--nothing but the blue skies of Kansas.

Newspapers from coast to coast reported regularly on the blue-sky laws. The New York Times reported on the statute,see, e.g.,  “Kansas’s ‘Blue Sky’ Law” Friday, October 13, 1911. Subsequent articles were published in the New York Times: “Bankers To Take Up The 'Blue Sky Law'; Investment Men Here for Convention Will Work for Uniform Laws for Sound Securities”, (Friday, November 22, 1912): followed by “Expect to Improve ‘Blue Sky’ Law” (Saturday, November 23, 1912).

As a result of other states enacting blue-sky laws, the term came into widespread and common usage (see New York Times, Tuesday, March 18, 1913, “New York’s ‘Blue Sky’ Law.”)

As the states started to pass what they each specifically referred to as their own blue-sky laws, constitutional and other objections arose, spurring litigation. Among the first judicial refererences was William R. Compton Co., et al v. Allen et al., 216 Fed. 537 (S.D. Iowa, Central Division July 6, 1914.) In a per curiam opinion, the court acknowledged that the case was brought to restrain enforcement of an Iowa law “commonly termed the ‘Blue Sky Law’ of that state”. Without going into the origin of the term, the court noted that the purpose of the Iowa Blue Sky Law (which it found to be unconstitutional) was to:

Protect the humble, honest citizens of the state, unlearned in the intricacy of business affairs as conducted at this day from being plundered and despoiled of their small earnings and property, acquired through years of patient toil, by the alluring machinations and the deceptive, misleading, and fraudulent devices which the unscrupulous, cunning and deceitful ‘ Get-Rich-Quick-Wallingfords’ of our day practice….”

The first United States Supreme Court reference was in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917), relating to the constitutionality of Ohio state securities regulations. Justice Joseph McKenna wrote:

The name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, " speculative schemes which have no more basis than so many feet of 'blue sky'"; or, as stated by counsel in another case, "to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations."

McKenna did not identify the ”cited case”. Explanations about the term focus on the idea that fraudulent corporations have nothing behind them but "blue sky" (as in the Kansas situation, above) or that brokers were attempting to sell pieces of the blue sky, or unethical promoters “would sell building lots in the blue sky.”  Blue Sky laws differ from state to state. New York’s Blue Sky laws are known as The Martin Act.

In an article about the Kansas statute dated December 2, 1911, The Saturday Evening Post (Vol. 184 No. 23) wrote: “The legislature took up the subject at its last session and in March passed the Blue Sky Law – so nicknamed because it is designed to prevent the swindling of people through sales of "securities" that are based mostly upon atmosphere.”

Blue-Sky Memorandum – A memorandum typically prepared by underwriter’s counsel describing the treatment of a particular new issue of municipal securities under the blue-sky laws of the various states. Municipal securities are generally exempt from state securities registration requirements, although broker-dealers selling them are subject to many states’ registration and regulatory requirements.

Bond – A bond is a debt security, similar to an IOU. Bonds can be issued by a government, municipality, corporation, federal agency or other entity, all such entities known as the issuer. Essentially the issuer is borrowing money from the investor. Conversely, the investor is lending money to the issuer. In return for the loan, the issuer promises to pay the investor a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due.

Unlike ownership in shares of a company, a bondholder has no corporate ownership privileges or benefits.

Depending on the credit-worthiness of the issuer, the bond can be rated according to risk. The risk in any bond investment is the risk that the issuer will default on either the interest or principal payments.

Bonds are available in a range of styles, types and flavors, each carrying particular features that will address the suitability needs, as well as risk tolerance, of different investors.

Bowie Bonds – In 1997, knowing that a bond can be secured by any dependable stream of income, Wall Street financier David Pullman developed a bond securitized by David Bowie’s music catalogue, more specifically the current and future revenues of 25 albums (287 songs) that David Bowie recorded before 1990. The bonds had ten year maturities and the entire issue was purchased by Prudential Insurance Company. They yielded 7.9%. Bowie realized $55 million immediately from the sale of such bonds, sacrificing ten years of royalties. The bonds, which matured in 2007, are not available. However, other artists followed suit and this particular type of asset backed security (backed by intellectual property) are also sometimes known as Pullman Bonds.

Bucket Shop – historically a type of illegal brokerage firm, where, in the old days, one could buy and sell stock. Bucket shops were typically small store front operations that catered to the small investor prior to the stock market crash of 1929. Bucket shops generally no longer exist. When a customer placed an order it was written on a slip of paper and literally tossed into a bucket instead of being immediately transmitted to the floor of a stock exchange. The bucket shop would later match up buys and sells to increase its own profit. Since a customer had little way to know the actual price at any particular moment, the bucket shop could match a buy at $10 with a sell at $9 and pocket the $1 difference. As long as the bucket shop reported prices within the day's high / low range, the customer had no way of detecting the fraud. The bucket shop could shift its recommendations to correct any imbalance in the buy-sell orders in its own bucket. Today's instant price quotes and executions have made bucket shops impossible. The term is still in use, however, to refer to what are more accurately (though metaphorically) called “bolier rooms.”

Bull – An optimist. A stock market bull believes that prices of securities will rise. A Bull Market is one that reflects, for a prolonged period, such optimism in the form of rising stock prices and increased market volume. One of the hallmarks is that the prices rise faster than historical averages. The opposite of a bull is a bear.

Burn Rate –The rate at which a company spends net cash over a certain period, usually a month. Often used by venture capitalists, underwriters and risk tolerant investors in new businesses to measure how much time a startup company has to reach positive cash flow before it runs out of money or requires additional funding.

Butterfly spread –this is a name of one of many “winged spreads”, option strategies, which when graphed, resemble winged creatures (butterflies, condors). The “basic” butterfly spread is a neutral strategy that combines a bull spread with a bear spread, and provides both limited risk and limited profit. The butterfly spread can be built with either calls or puts. If calls and puts are mixed, the name changes. So, for example, using calls, a typical butterfly spread construction, called a “long call butterfly spread” would involve the simultaneous (i) purchase of one in the money call (ii) sale of two at the money calls and (iii) purchase of one out of the money call. For example, XYZ is trading at $40 per share in June. Constructing a long call butterfly spread involves buying a July 30 call for $1100, writing two July 40 calls for $400 each and buying a July 50 call for $100. The net debit taken to enter the position is $400, which defines the maximum possible loss.

On expiration in July, XYZ is still trading at $40 per share. The July 40 calls and the July 50 call expire worthless while the July 30 call still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is the maximum profit attainable. (Maximum profit is equal to the strike price of the short call minus the strike price of the lower strike long call minus the net premium paid minus commissions, and is achieved when the price of the underlying security equals the strike price of the short calls.)

Maximum loss results when the stock is trading below $30 or above $50 in our example. At $30, all the options expire worthless. Above $50, any "profit" from the two long calls will be neutralized by the "loss" from the two short calls. In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade. The maximum loss and the maximum profit are increased or decreased respectively by the commissions incurred. The strategy is useful if there is no volatility in the underlying security, which assures the profit. (The maximum loss equals the net premiums paid plus the commissions, and occurs when the price of the underlying security is less than or equal to the strike price of the lower strike long call or when the strike price of the underlying security is greater than or equal to the strike price of the higher strike long call.)

Breakeven points exist as upper breakeven (equal to the strike price of the higher strike long call minus the net premium paid) or lower breakeven (equal to the strike price of the lower strike long call plus the net premium paid.)

Doing the same thing with puts instead of calls results in a long put butterfly spread.

Butterfly spreads can be placed in a variety of securities, including commodities. Brokers recommending such strategies need to be aware of regulatory exposure (commission motive). See In re Techno Trading, Inc., et al., CFTC Docket No. 95-8 (Jan. 8, 1998), and In re FSI Futures, Inc., et al., CFTC Docket No. 95-9, (Jan. 8, 1998).

Traders should also be aware of tax issues relating to gains and losses, as well as margin and Regulation T issues. The term is defined at NYSE Rule 431(f)2) as follows: “an aggregation of positions in three series of either puts or calls, structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price, all of which have the same contract size, underlying component or index and time of expiration, are and based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in ascending order.”

CAC-40 Index - the benchmark broad-based tracking index of common stocks on the Paris Bourse. Started in December of 1987, the index is comprised of the 40 largest and most liquid stocks trading on the exchange. The CAC-40 is a float-weighted index, meaning that the weightings of each index component are determined by the value of shares available to the public. This prevents a large company that only issues a small amount of its shares from having disproportionate influence on the index’s value. Analogous to how the S&P 500 is a subset of the S&P 3000, the CAC-40 is a subset of the larger SBF (Societe des Bourse Francais) 250. The CAC-40 is comparable to the Dow Jones Industrial Average.

CFTC – shorthand for the United States Commodities Futures Trading Commission. The CFTC was created in 1974 with the enactment of the Commodity Futures Trading Commission Act, (88 Stat. 1389; 7 U.S.C.A. 4a, approved October 23, 1974) to replace the U.S. Department of Agriculture’s Commodity Exchange Authority, as the independent federal agency responsible for regulating the futures trading industry. The CFTC’s mandate was updated and renewed by the the Commodity Futures Modernization Act of 2000 (CFMA).

The CFTC consists of five commissioners who are appointed by the president with the advice and consent of the Senate. The commissioners serve staggered five-year terms and by law no more than three commissioners can belong to the same political party. One commissioner is designated by the president to serve as chairperson. The chair's staff includes the Office of the Inspector General and the Office of International Affairs.

In order to comply with the requirements of the CFMA, the CFTC underwent a restructuring in 2002. It now consists of six major operating units: the Division of Clearing and Intermediary Oversight, the Division of Market Oversight, the Division of Enforcement, the Office of the Chief Economist, the Office of the General Counsel, and the Office of the Executive Director.

The CFTC and the SEC have joint jurisdiction over futures on single stocks, but the CFTC has exclusive jurisdiction over futures on broad based indices.

Churn and Burn – See discussion of churning, below. This phrase refers to the effect of churning on an account – it burns through it. An account that ‘s churned and burned is an account that has been so overtraded the commissions charged eroded the value of the account, often to zero. Boiler rooms that pump and dump often churn and burn. Live and learn.

Churning – Classically, the excessive, repeated purchase and sale of securities for no evident valid economic purpose, which in turn generates commissions for the broker, resulting in erosion of the value of the account. In the context of litigation or securities arbitration, a complaint of churning requires proof of three elements in order to be sustained:

1) the broker exercised control over the account;

2) the trading in the account was excessive in light of the customer's investment objectives; and

3) the broker acted with an intent to defraud or willful or reckless disregard of the customer's interest.

Smith v. Petrou, 705 F. Supp.183 (S.D.N.Y. 1989); Franks v. Cavanaugh, 711 F. Supp. 1186 (S.D.N.Y. 1989).

The courts view churning as a violation of the federal securities laws through excessive trading where a broker disregards a client’s interests in favor of his own. Miley v. Oppenheimer, 637 F.2d 318,324 (5th Cir. 1981); Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361 (7th Cir. 1983). Armstrong v. McAlpin, 699 F.2d 79 (2d Cir. 1983), states that churning "is a synonym for overtrading” and it can “refer to the excessive rate of turnover in a controlled account for the purpose of increasing the amount of commissions." 

Rules 401 and 435 of the NYSE prohibit churning. It is of course also prohibited by the NASD Rules of Fair Practice, IM-2310-2 (b)(2), (formerly Article III, Section 15[a]), which adds its somewhat vague definition as follows: 

"Excessive activity in a customer’s account, often referred to as “churning” or “overtrading. There are no specific standards to measure excessiveness of activity in customer accounts because this must be related to the objectives and financial situation of the customer involved.”

There are various tests to evaluate whether or not the excessive trading component of a churning claim has been met, generally centered on a concept called turnover ratio. If the turnover ratio exceeds six, there is a presumption (rebuttable) of churning. A client who expressly directs active trading or day trading, will not likely be able to sustain a churning claim, regardless of turnover ratio.

Claimant – In all legal disputes, the party making the complaint is distinguished from the party defending against the complaint. In the courtroom, the party complaining is called a “plaintiff” and the party defending is called a “defendant”. In securities arbitration, the nomenclature is different - the party complaining is called the “claimant” and the party defending is called the “respondent.” The complaint is called a "statement of claim."

Collar – An options strategy that keeps an investor from losing his or her whole shirt. To establish a collar an investor simultaneously buys a put option and sells (writes) a call option on the underlying stock already held by the investor. The strike price for the call must be higher than the strike price for the put, with both having the same expiration. The return on the strategy will fall between the strike price on the call (potential profit), and the strike price on the put (potential loss), thus bringing potential gains and losses within a preset limit. Essentially, the trade off is the limitations of downside risk to a fixed amount in exchange for sacrificing a degree of upside potential.

For example, assume an investor owns 100 shares of stock in XYZ Corporation with a current price of $50. Calls on the stock are traded with a strike price of $55 and puts for the same expirations are traded with a strike price of $45. An investor could construct a collar where the gain on the stock will be no higher than $5 and the loss will be no worse than $5, by buying 1 put and writing 1 call at the indicated strikes. The cost of the collar is essentially free, since the premium received for writing the call pays for the premium expended in purchasing the put.

Collateralized Debt Obligation (CDO) - A type of asset-backed investment grade security or structured finance product backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or 'slices'. The tranches can be designated “senior”, “mezzanine” or “subordinated.” Each tranche has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. There are multiple types and varieties of CDO, and the world of CDOs has its own language. One subspecies of CDO is called a synthetic collateralized debt obligation, which is an artificial collateralized debt obligation backed by a pool of credit derivatives. Instead of the traditional pools of backing assets such as bonds and loans, the pools of credit derivatives backing synthetic CDOs include instruments such as credit default swaps, forward contracts and options.

CDOs generally have a sponsoring organization, which establishes a special purpose vehicle to hold collateral and issue securities. Sponsors can include banks, other financial institutions or investment managers. Expenses associated with running the special purpose vehicle are subtracted from cash flows to investors. Often, the sponsoring organization retains the most subordinate equity tranche of a CDO.

Commodity – The term is defined at Section 1a(4) of the Commodity Exchange Act, 7 U.S.C. § 1, et seq., as follows:

“wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions as provided in Public Law 85–839 (7 U.S.C. 13–1), and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.”

Public Law 85-839 was a 1958 law that banned futures trading in onions.

Commodity Pool Operator – Known as CPO, a commodity pool operator is an individual or organization that operates a commodity pool or solicit funds for it. According to the National Futures Association, that means an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts, options on futures, or retail off-exchange forex contracts, or to invest in another commodity pool. In general, registration is required unless the CPO qualifies for one of the exemptions from registration outlined in CFTC Regulations 4.5 or 4.13. “A commodity pool is the commodity-futures equivalent of a mutual fund.” Rosenthal & Co. v. Commodity Futures Trading Com'n, 802 F. 2d 963 (7th Cir. 1986).

Commodity Trading Advisor – Commonly referred to as “CTA”, is defined at § 1a(6)(A) of the CEA, 7 U.S.C. § 1a(6)(A). It means, any person who:

(i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in —

(I) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market or derivatives transaction execution facility;

(II) any commodity option authorized under section 6c of this title; or

(III) any leverage transaction authorized under section 23 of this title; or

(ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i).

Exclusions are set forth in Section 1a(6)(B). Registration for CTAs is required for any individual or firm profiting from the advice they give, unless they have not provided more than 15 persons with advice over the last year and they do not advertise themselves as a CTA. There is also no required registration if the individual or firm is a registered investment advisor with the SEC and only provides options and futures advice incidentally. Applications for exemptions are made through the National Futures Association. It has been long observed that the CFTC staff has interpreted this provision liberally. See e.g., CFTC v. Savage 611 F.2d 270 (9th Cir. 1979).

Contango – a hot dance between the price of a non-perishable commodity at spot and the price for the future delivery of that commodity. Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price is higher than a nearer future delivery price. The opposite market condition to contango is known as backwardation.

Contango describes an upward sloping forward curve (as in the normal yield curve). Such a forward curve is said to be "in contango" (or sometimes "contangoed"). See, Dewees v. Comm. of Internal Revenue, 870 F. 2d 21 (1st Cir. 1989). The term not only refers to a market condition, it also refers to certain fees charged. A contango is normal for a non-perishable commodity which has a cost of carrying the commodity, such as warehousing fees and interest forgone on money tied up, less income from leasing out the commodity if possible (e.g. gold). For perishable commodities, price differences between near and far delivery are not a contango. Different delivery dates are in effect entirely different commodities, since fresh eggs today will not still be fresh in 6 months' time, 90-day treasury bills will have matured, and so on.

Contango fees are often charged to take into account commissions and storage fees. See Asturiana De Zinc Market. v. LaSalle Rolling Mills, 20 F. Supp. 2d 670 (S.D.N.Y.1998); Pepper's Steel & Alloys, Inc. v. Lissner Minerals, 494 F. Supp. 487 (S.D.N.Y. 1979)(which asserts, without citation, that “contango” is a word of cockney origin).

Credit Default Swap - A credit default swap is the most straightforward type of a credit derivative. It is an agreement between two counterparties that allows one to be “long” a third-party credit risk, and the other to be “short” the same credit risk. Explained another way, one party is selling insurance and the other is buying insurance against the default of the third party. Suppose that two parties, a market maker and an investor, enter into a two-year credit default swap. They specify the reference asset, which is a particular credit risky bond issued by a third-party. Suppose the bond has two years’ remaining maturity and is currently trading at par. The market maker agrees to make regular fixed payments (with the same frequency as the reference asset) for two years to the investor. In exchange, the market maker has the right, if the third party defaults at any time within those two years, to put the bond to the investor in exchange for the bond’s par value plus interest. The credit default swap is thus a contingent put – the third party must default before the put is activated. Courts have defined it as a bilateral financial contract in which ‘[a] protection buyer makes[ ] periodic payments . . . to a protection seller, in return for a contingent payment if a predefined credit event occurs in the reference credit,’ i.e., the obligation on which the contract is written.” Eternity Global, 375 F.3d at 172 (citation omitted). Protection buyers may use credit default swaps “to manage particular market exposures and return-on investments,” while protection sellers may use them “to earn income and diversify their own investment portfolios.” Id.

Cross-trade – A practice in which a buy and sell order for the same stock at the same price is placed, and the broker subsequently makes a simultaneous trade between two separate customers. The trade is not reported to, and therefore not recorded by, the exchange, creating an environment for manipulation. In general, a cross-trade is legal only if the broker first offers the securities publicly at a price higher than the bid. Specific exchanges have particular rules governing the circumstances under which, and by whom, cross-trades are permissible.

Mutual funds, under certain conditions, can engage in cross-trades, pursuant to Section 17a-7 of the Investment Company Act of 1940.

The Employees Retirement Income and Savings Act of 1974 (“ERISA”) prohibits cross trading - all accounts subject to ERISA must not participate in cross trading. Industry professionals have lobbied for changes to permit cross trading in ERISA accounts, largely because of perceived cost saving benefits, with proper safeguards.

Cross trading exists in commodities markets and may be permitted under specific provisions of the Commodity Exchange Act, or regulations of the CFTC (Commodities Futures Trading Commission).

Cross-trades are also known as a put through, cross on the board, contra order, or an upstairs trade (takes place on the “upstairs market”).

Cruzeiro – Unit of currency of Brazil.

CUSIP – is the acronym for Committee on Uniform Securities Identification Procedures. A CUSIP number is used to identify securities such as stocks of all registered United States and Canadian companies as well as United States and various municipal government bonds. (There is also a CUSIP International Numbering System for the identification of foreign securities).

The CUSIP numbering system was developed over the years, starting in around 1962, when the New York Clearing House Association established a Securities Procedures Committee to investigate a standard means to identify securities. The Clearing House approached The American Bankers Association’s Department of Automation to develop the system. In July 1964, the ABA’s Committee on Uniform Security Identification Procedures (CUSIP) was created. 

A CUSIP number has nine characters - letters and numbers - to uniquely identify an issuer and the type of security. The CUSIP Service Bureau, operated by Standard & Poor’s, assigns the numbers. An issuer can contact CUSIP to request a CUSIP number for a new offering.

Daily Trading Limit - The highest and lowest prices that a commodity or option is permitted to reach in one day. Once reached, no trading occurs in that commodity or option until the following session. If a security reaches its limit early and stays there all day, it is said to be having an up-limit day or a down-limit day. Limits are posted by exchanges such as the Chicago Board of Trade.

Dark Pool – (also dark liquidity pool), sometimes called the upstairs market, this term refers to off-exchange trading by big fish. It can be thought of as an external crossing network, which creates an opaque market, thereby allowing large players to trade without disclosing their hands. Dark pools range from completely opaque to semi-transparent, and their order flow can range from transient to stationary, although the majority of dark pools tend to be completely dark. They either match order flow periodically (these are call markets such as Posit, Instinet or the Nasdaq Cross) or continuously as orders flow to traditional exchanges. ITG's Posit Now, its continuous crossing network, and NYFIX Millennium leverage this transient matching model.

Because the percentage of both buy-side and sell-side flow from these external networks has increased dramatically, the price discovery process of traditional markets is being affected. Also, because the profits from these dark pools are unavailable to traditional markets, Nasdaq has recently taken an interest in participating.

Day Order - Unless a broker is given specific instructions to the contrary, orders to buy or sell a stock are "day orders," meaning they are good only during that trading day. Orders that have been placed but not executed during regular trading hours will not automatically carry over into after-hours trading or the next regular trading day. Similarly, day orders placed during after-hours trading can only be executed during that after-hours session. If an order is not executed during a trading session, a new order needs to be placed in the next trading session. A day order to buy or sell securities that is not filled or cancelled automatically expires at the close of the session.

Dead Cat Bounce – No animals were harmed in the development of this entry. The term comes from the belief (observation?) that even a dead cat will bounce if it is dropped off the roof of a building. (Please do not try this). The term applies to a brief technical recovery, after a pronounced fall-off, in the price of a given stock or the market as a whole. Wikipedia attributes the earliest use of the phrase to 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. Journalist Christopher Sherwell of the Financial Times reported a stock broker as saying the market rise was a "dead cat bounce". The GelberLaw Glossary has no opinion as to whether a dead cat bounce is related to the dogs of the Dow.

Delta – In derivatives options trading, Delta is one of a number of ratios expressed by letters known as “the Greeks”. Delta is used to describe the ratio between a change in the price of an option to a positive change in the price of the underlier. Expressed another way, it is a measure of option price sensitivity to changes in the price of the underlier. So, for example, a delta of .50 (usually expressed as “fifty”) means that for every increase of one dollar in the price of the underlier, the option price increases by fifty cents.

Delta Hedge - Ordinarily, the basic “routine” an options market maker would employ is a strategy called a Delta hedge. The market maker would express a willingness to buy an option for some bid price less than the price dictated by its pricing model (or buy at some ask price greater than its model price). The model price would simply be some theoretical value produced by applying some formula or method, such as Black-Scholes. This difference between the bid price and the model price (or ask price and the model price) is referred to as the “edge”. By way of example, a counterparty appears and takes the market maker up on its ask (offer) price and buys the option. The market maker now has a position in the option, having “written” the contract. In order to protect itself, the market maker would engage in Delta hedging, by attempting to establish and maintain a Delta neutral hedge position in the underlier (for example, natural gas). On a correctly placed Delta hedge, the market maker would profit from the edge when the positions are closed out. If there are too many open positions, Delta hedging becomes more difficult, and in all events does little to ameliorate the risks associated with volatility.

See, Caiola v. Citibank, NA, New York, 295 F. 3d 312, 317 (2nd Cir. 2002)(“[e]ffective delta hedging is a sophisticated trading activity that involves the continuous realignment of the hedge's portfolio. Because the delta changes with movements in the price of the underlying asset, the size of the delta core position also constantly changes.” Delta measures sensitivity of the price of the derivative to the change in the price of the underlying asset. Id.

Derivatives - are financial instruments that are dependent upon some other thing of value. In other words, the value of a derivative is derived from the value of an underlying asset (or index or something else). They can be simple, such as stock options, or more complex such as commodity futures contracts. Derivatives can be based on an underlying asset such as stocks, bonds, commodities, loans, or real estate. They can also be based upon an index, such as the Dow Jones or other stock or bond market indices, or interest rate indices or exchange rate indices and so forth. The most common types of derivatives are options, swaps, forward contracts and future contracts. Derivatives are useful in hedging against loss or leveraging for greater profit.

Because the value of a derivative is contingent on the value of the underlying asset, the notional value of derivatives is recorded off the balance sheet of an institution, while the actual market value of derivatives is recorded on the balance sheet.

Dogs of the Dow - A pet name for a particular contrarian investment strategy. The Dow Jones Industrials represent thirty well-known, mature companies that have strong balance sheets with sufficient financial strength to ride out rough times, usually dividend paying companies. Periodically, some companies are dropped and new ones are added. By investing in these thirty companies, the theory is that the investor is making a quality investment. The idea behind the "Dogs of the Dow" strategy is to buy those DJI companies with the lowest P/E ratios and highest dividend yields. These Dow stocks are “cheapest” relative to their peers. Essentially the strategy requires an investor, at the beginning of the year, to buy equal dollar amounts of the 10 DJI stocks with the highest dividend yields, for a one-year holding period. At the end of the year, adjust the portfolio to have just the current "Dogs of the Dow." The idea is to buy good companies when they are out of favor and their stock prices are low. Different studies have suggested that this strategy produces comparatively better returns than most mutual funds, or the various averages. In defining or describing various investment strategies, the GelberLaw Glossary does not endorse any of them.

Dollars – the units of currency of Australia, Bahamas, Barbados, Bermuda, Canada, Hong Kong, Jamaica, New Zealand, Singapore, Taiwan, Trinidad and Tobago, and the United States.

Early Withdrawal Penalty – Some types of investments, such as certificates of deposit and annuities, among others, are for a fixed period of time. If the principal is withdrawn prior to the termination date of the investment, a penalty for early withdrawal can be imposed, often in the form of interest forfeiture or rate reduction, sometimes by the charge of a flat fee.

Economic Indicators - Governmental statistics released on a regular basis that indicate the growth and health of a country. Economic indicators often affect or influence the value of a country’s currency. Key indicators can include the trade deficit, the gross national product (GNP), industrial production, the unemployment rate, the inflation rate, factory utilization rate, balance of trade and business inventories are examples of economic indicators.

Eddie Murphy Rule – Yes, really. CFTC chairman Gary Gensler, in public statements made in early 2010, spoke of a proposed rule to limit a type of commodities trading depicted in an Eddie Murphy film: “In real life, using such misappropriated government information actually is not illegal under our statute.” Gensler was contrasting “real life” to the movie “Trading Places.” In the movie, a character played by Eddie Murphy profits in commodities trading, specifically frozen concentrated orange juice futures contracts, by intercepting a Department of Agriculture orange crop report. While the theft of the report may have been illegal, trading on the purloined information was not. The CFTC has now promulgated a rule that would essentially limit insider trading in commodities, in an effort to harmonize CFTC rules with SEC rules on insider trading. Gensler said: “To protect our markets, we have recommended what we call the “Eddie Murphy” rule to ban insider trading using nonpublic information misappropriated from a government source.”

ETF - Exchange-traded fund - An ETF is an index fund that can be traded like a stock. ETFs bundle the securities that are in an index together. ETFs do not track actively managed mutual fund portfolios. Unlike mutual funds, ETFs, which are traded on stock exchanges, can be traded intra-day, and in general can be treated for trading purposes as stock. For example, ETFs can be sold short. Since ETFs are purchased from brokers, commissions are incurred, but sales loads are not. Prices fluctuate throughout the day. ETFs may have tax advantages over ordinary mutual funds. They also have very low operating and transaction costs associated with them. The first ETF created was the Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider") in 1993. SPDRs are popular because they provide an easy way to track the S&P 500 without buying an index fund.

Euro – Unit of currency of twelve European Union countries, Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. Starting January 1, 2007, the Euro will also be the currency of Slovenia. Euro banknotes and coins entered circulation on January 1, 2002.

Exempt Commercial Market (ECM) – The Commodity Futures Modernization Act of 2000 (“CFMA''), Pub. L. 106-554, created an exemption from the CFTC’S jurisdiction for transactions conducted on certain electronic commercial markets, and these became designated as exempt commercial markets. In the commodities markets, pursuant to Section 2(h)(3) of the Commodity Exchange Act (the “Act”), an exempt commercial market is an electronic trading facility that trades exempt commodities on a principal-to-principal basis solely between persons that are eligible commercial entities. Eligible commercial entities are contract participants or other entities approved by the CFTC that have demonstrable abilities to make or take delivery of the underlying commodity of a contract; incur risks related to the commodity; or are dealers that regularly provide risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities.

Section 2(h)(3) of the Act provides that, except to the extent provided in Section 2(h)(4), nothing in the Act shall apply to a transaction in an exempt commodity that is: (a) Entered into on a principal-to-principal basis solely between persons that are eligible commercial entities at the time the persons enter into the agreement, contract, or transaction; and (b) executed or traded on an electronic trading facility. Section 2(h)(4) provides that a transaction described in Section 2(h)(3) shall be subject to certain specified provisions of the Act, such as the Act's antimanipulation and antifraud provisions, and furthermore, that such transactions shall be subject to price dissemination rules if the electronic trading facility serves a significant price discovery function for the underlying cash market. Section 2(h)(5) requires an electronic trading facility relying on the exemption in Section 2(h)(3) to provide the CFTC with certain information and to comply with information access provisions set out in Section 2(h)(5)(B)(i).

F-Cubed - short for “foreign cubed” is a descriptive term for securities litigation brought in an American court by a foreign plaintiff against a foreign issuer based on a stock purchase on a foreign exchange. See, e.g., Morrison v. National Australia Bank Ltd v., 547 F.3d 167 (2d Cir. 2008).

Fifth Amendment – “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

Note that the Fifth Amendment says nothing about “self-incrimination”. A person can refuse to answer questions even if the answers would be exculpatory. Under NASD rules, if a broker subject to an NASD inquiry declines to cooperate in reliance on the Fifth Amendment, NASD will ordinarily revoke the broker’s license. In contrast, a broker can rely on the Fifth Amendment and decline to answer questions in an SEC inquiry without that refusal becoming a ground to revoke a license. This is because SEC is viewed as a governmental agency and NASD, though it benefits from certain immunities, is generally deemed not to be a governmental agency.

Relying on the Fifth Amendment has advantages and disadvantages relative to the particular circumstances of the matter. Any broker called to testify by any regulator should consult with competent counsel about how to best proceed, about whether or not to rely upon the Fifth Amendment, and about what the advantages and disadvantages of doing so would be.

Fill Or Kill Order – FOK. This is a type of day order (actually a much shorter time) entered most often for a large quantity of stock or a large number of option contracts that must be immediately filled in full or cancelled in full. In a way it is the opposite of a GTC (good ‘til cancelled) order. So for example, an investor places a cash order to buy 1,000 shares of XYZ at $10.27 per share.  If the investor designates it FOK, the entire order must be filled immediately. If the market is demanding $10.29 at that moment, the entire order is automatically cancelled. In a GTC day order situation, the $10.27 order to buy hangs out all day and can get filled in increments (or in full) whenever the market agrees to part with XYZ for the buyer’s bid.

FinCEN – Financial Crimes Enforcement Network. FinCEN is a sort of CIA of finance, set up to police and report financial crimes such as money laundering. FinCEN's powers and duties are codified at 31 U.S.C. § 310. FinCEN operates under the aegis of the Department of the Treasury. FinCEN promulgates regulations to enforce the Bank Secrecy Act. Among other things, banks are required to establish procedures to comply with FinCEN regulations. McLemore v. Regions Bank, (M.D. Tenn. 2010).

FINRA – The Financial Industry Regulatory Authority - was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange. FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA oversees nearly 5,100 brokerage firms, about 173,000 branch offices and more than 665,000 registered securities representatives. It maintains a web site at

Five Percent Rule – This term applies to two different matters. First, it is a reference to SEC Rule 13d requiring disclosures by anyone acquiring beneficial ownership of 5% or more of any equity security registered with the SEC.

Second, it is a term erroneously used to refer to NASD guidelines regarding commissions. NASD Conduct Rule 2440 and Interpretive Material (IM) 2440 discuss commissions in terms of a “5% Policy” which is expressly stated to be “a guide, not a rule”. It attempts to set forth guidelines for fair “mark-ups” and expressly prohibits “unfair” commissions. The issue of excessive commissions frequently arises in securities arbitration and Conduct Rule 2440 comes into play, and may be the subject of expert testimony.

Florin – Unit of currency of Aruba. In 1986 it replaced the Netherlands Antilles Gulden, which evidently did not cut the mustard.

Footsie (or FTSE) – A cute and popularly used way to pronounce FTSE, The Financial Times Stock Exchange 100 stock index, a market value (by capitalization) weighted index of 100 blue chip stocks traded on the London Stock Exchange. Similar to the S&P 500 in the United States.

Free Riding - “Free riding” describes the situation where a security is purchased and sold with the idea that the sales proceeds cover the purchase price. Accordingly, free riding occurs when a purchaser (a) buys a particular security (b) without cash in the account (c) with the intention of using the proceeds of the sale to pay for the specific security purchased. The term is described in NYSE Rule 431(f)(9). Because free riding involves issues of credit, free riding violations are governed in part by the Federal Reserve. See 12 C.F.R. §220.8. Free riding is unlawful and may result in the imposition of a “90 day restriction” on trading which obligates the trader to have money in the account before placing any purchase orders, depriving the trader of the ordinary three day settlement period to pay for the trade.

Front running – In essence, this term describes a form of illegal trading on inside information. In its classic form, a broker / dealer front runs his own customer’s order. For example, if the customer of ABC brokerage places an order to sell one million shares of XYZ Corp., the broker can front run the trade by selling XYZ Corp short before placing the customer’s order, knowing the price will drop. The term also describes the actions of a broker who places a trade for stock or options based on information not yet provided to the customers of the firm, such as the brokerage firm’s own impending (but not yet released) research report, or awareness of impending block trades from institutional customers.

The SEC treats front running as fraudulent. Front running is a violation of NASD IM-2110-3, which prohibits a broker from buying or selling a security or an option on a security while in possession of material, non-public information concerning an imminent block transaction in the security or option on the security. NASD distinguishes between front running and “trading ahead” (NASD IM-2110-3).

Similarly, Rule 17(j) –1 of the Investment Company Act of 1940 has been interpreted to make it illegal for portfolio managers to front-run their clients. Front-running occurs when portfolio managers buy securities in their personal accounts prior to buying the same securities for their clients, or when the managers sell securities out of their personal accounts prior to selling the same securities for their clients.

Gap Up (or Down) – If a stock price opens at a significant difference from its previous day’s close, it is said to gap, either up or down, depending on direction. For example, XYZ stock closed on Wednesday at $42.50 per share. On Wednesday night an announcement comes out that QRS Corp is making a tender offer for all the shares of XYZ at $48.00 per share. On Thursday morning XYZ opens at $47.50, or five dollars above its previous close. It gapped up. Conversely, on Wednesday night, the chairman of XYZ announced that there was a typo in the financial reports, and XYZ did not earn ten dollars per share, but rather ten cents per share. On Thursday morning XYZ opens (some hours late after a trading halt) at $4.00 per share, $38.50 below its previous close. It gapped down. (It actually crashed). Five minutes after this happens, a federal class action is filed, and holders of XYZ Corp. become “class members”.

Garbatrage – (Do not confuse with Garbitrage, not securities related). Rising Stock prices and increased market activity in an entire sector swept upward by the psychology stemming from a major takeover involving companies in the particular sector. Speculators feel other takeovers are likely in the sector based solely on the fact that one has taken place. Also called Rumortrage.

Ginnie Mae – nickname and registered mark of Government National Mortgage Association (GNMA). The term applies to securities issued by GNMA. Ginnie Mae guarantees investors the timely payment of principal and interest on mortgage backed securities (MBS) backed by federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture's Rural Housing Service (RHS) and the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH). Ginnie Mae securities are the only MBS to carry the full faith and credit guaranty of the United States government, suggesting suitability for risk averse investors.

Good-Till-Canceled Order (GTC Order) – Probably the most common type of time limit order. Unlike day orders, a GTC order is an order to buy or sell a security at a specific or limit price that stays is effect until the order is filled or canceled. A GTC order will not be executed until the limit price has been reached, regardless of how many days or weeks it might take. Some brokerage firms will require the re-confirmation of such order if a long time passes and the order remains outstanding. Investors often use GTC orders to set a limit price that is far away from the current market price. Some brokerage firms may limit the time a GTC order can remain in effect and may charge more for executing this type of order.

Gourde – Unit of currency in Haiti.

Greeks - In addition to cradling civilization, the term refers to certain letters of the Greek alphabet used to represent the sensitivities of derivatives to changes in a variety of underlying parameters or factors. For example, Delta is used to measure the change in the value of an option relative to the price of the underlying asset. Gamma measures the rate of change in Delta relative to the underlying price. Theta is used to measure the change in value relative to the passage of time. Volatility is measured by Vega (not an actual Greek letter). Collectively, these and certain other valuation measures expressed by Greek letters are called “the Greeks.” The values derived from the application of such ratios can be plugged in to various models, such as Black-Scholes, or various other formulas or equations to enable a trader with a large book of derivatives to determine value at risk (VaR) through a “mark-to-model’ approach when actual mark-to-market valuations are not available.

Hang Seng Index (HIS) - is a capitalization-weighted major indicator of stock market performace on the Hong Kong Stock Exchange. It consists of 33 companies. It is used to record and monitor daily changes of the largest companies, which represent about 70% of capitalization of the Hong Kong Stock Exchange. HSI was started on November 24, 1969.

Hedge Fund – "Hedge funds are notoriously difficult to define. The term appears nowhere in the federal securities laws." Goldstein v. SEC, 451 F. 3d 873 (DC Cir. 2006). The term is commonly used as a catch-all for "any pooled investment vehicle that is privately organized, administered by professional investment managers, and not widely available to the public" or "an entity that holds a pool of securities and perhaps other assets, whose interests are not sold in a registered public offering and which is not registered as an investment company under the Investment Company Act". Goldstein, quoting from various government reports. In the view of the GelberLaw Glossary, a hedge fund is essentially an investment partnership that either has 100 or fewer investors or whose investors are high net worth, or accredited, investors capable of withstanding the high risk of loss.

This structure takes the hedge fund outside the scope of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. Because they are usually set up as private limited partnerships, they have no board of directors and are thus distinct from mutual funds.

Hedge funds, (the name derives from hedging transactions - taking both long and short positions on debt and equity securities to reduce risk ) are generally free to engage in any type of investment strategy, hedged or unhedged that it sees fit. In other words, there is no requirement that a hedge fund engage in hedging.

Henry Hub – located in Erath, Louisiana (Vermilion Parish) and owned by the Sabine Pipe Line LLC, the Henry Hub is the centralized point for natural gas futures trading in the United States. Natural gas futures contracts began trading on April 3, 1990 on NYMEX, and currently trade 18 months into the future. The Henry Hub offers shippers access to pipelines that have markets in the Midwest, Northeast, Southeast and Gulf Coast regions of the United States. It interconnects with nine interstate and four intrastate pipelines including: Acadian, Columbia Gulf, Gulf South Pipeline, Bridgeline, NGPL, Sea Robin, Southern, Texas Gas, Transco, Trunkline, Jefferson Island, and Sabine's mainline. NYMEX deliveries at the Henry Hub are treated the same as cash-market transportation. According to Wikipedia, North American unregulated wellhead and burnertip natural gas prices are closely correlated to those set at Henry Hub. A natural gas industry newspaper, published by a subsidiary of Atlantic Basin Publications Ltd., a British company, is also called The Henry Hub.

Heteroskedastic – (sometimes heteroscedastic) a statistical term meaning “differing variance”, the opposite of which, constant variance, is call homoskedastic. In statistics, heteroskedasticity arises when the standard deviations of a variable, monitored over a specific amount of time, are non-constant. Heteroskedasticity often arises in two forms, conditional and unconditional. Conditional heteroskedasticity identifies non-constant volatility when future periods of high and low volatility cannot be identified. Unconditional heteroskedasticity is used when futures periods of high and low volatility can be identified. The term arises in connection with establishing the values and volatilities of securities over time, particularly in connection with derivatives.

Heteroskedacity comes in many flavors, such as AutoRegressive Conditional Heteroskedasticity (ARCH), Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) and other equally bizarre constructions, all of which are essentially names for various statistical models used by financial institutions to estimate the volatility of, for example, stock returns. Attempts to use these terms in normal conversation are subject to steep penalties.

Hit the Bid - The bid price represents the highest price an investor is willing to pay for a security. A seller who “hits the bid” agrees to sell at the buyer’s best bid. By telling a broker/trader to hit the bid one is instructing them to sell at that best price. A dealer who agrees to sell at the bid price quoted by another dealer is said to hit that bid. To accept the highest price offered for a stock. For instance, if XYZ’s current ask price is $50.25 and its current bid price is $50, a seller hits the bid by accepting $50 a share.

Indemnification Clause – A contract provision often included in employment agreements between brokerage firms and their registered representatives, pursuant to which the broker agrees to reimburse (“indemnify”) or “hold harmless” the employing brokerage firm for all costs, including legal expenses, created by some act of the registered representative. For example, if a customer brings a claim against the registered representative and the brokerage firm for some alleged act of wrongdoing by the broker, the brokerage firm will look to recover all the costs of defense, including any awards, even if assessed against the firm, from the broker. Such clauses also appear in certain types of limited partnership agreements and other contracts related to the securities industry.

Insider Trading – Even though with modern technology this can be done outside, it is still insider trading if you trade securities based upon undisclosed material non-public information. Insider trading comes in multiple flavors and each flavor is deemed a violation of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934. "Under traditional insider trading theory, section 10(b) is violated when a corporate insider, such as an officer of the corporation, 'trades in the securities of his corporation on the basis of material, non-public information.'" U.S. v. Falcone, 257 F. 3d 226, 229 (2nd Cir. 2001), citing United States v. O'Hagan, 521 U.S. 642, 117 S. Ct. 2199, 138 L.Ed.2d 724 (1997).

"Such trading constitutes deception under section 10(b) because 'a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation,' and this relationship gives rise to 'a duty to disclose [or to abstain from trading] because of the necessity of preventing a corporate insider from ... tak[ing] unfair advantage of ... uninformed ... stockholders.' O'Hagen. at 652, 117 S.Ct. 2199.). Falcone at 229. There is also a self-evident requirement that the conduct be "in connection with" the purchase or sale of a security.

In addition to the "traditional" concept, the Second Circuit was first to recognize a "misappropriation theory", where "a person violates Rule 10b-5 when he misappropriates material nonpublic information in breach of a fiduciary duty or similar relationship of trust and confidence and uses that information in a securities transaction. In contrast to [the traditional theory], the misappropriation theory does not require that the buyer or seller of securities be defrauded." United States v. Chestman, 947 F..2d 551, 566-67 (2d Cir.1991) (en banc).

Through various machinations of legal logic derring-do, a person who receives a tip, called a tippee, can be held to violate insider trading principles, because the tippee can be deemed to "acquire" (along with the information) the duty discussed in Falcone that would then make the tippee liable for failing to disclose the information. The case law in this area is constantly evolving. Research should start with a review of the old case Chiarella v. United States, 445 U.S 222 (1980), and it is worthwhile to look at the more recent SEC v. Suman, 684 F. Supp.2d 378 (S.D.N.Y. 2010).

Internal Revenue Service (IRS) – An agency of the U.S. Treasury Department that collects almost all federal taxes, personal and corporate established by Title 26 of the United States Code. It also administers the Treasury Department’s rules and regulations, and also investigates and prosecutes tax matters. The IRS was established in 1862, when the US was too distracted by the Civil War for anyone to notice.

International Swaps and Derivatives Association (ISDA) – ISDA, chartered in 1985, represents participants in the privately negotiated derivatives industry. It is the largest global financial trade association, by number of member firms, with over 750 member institutions from 52 countries on six continents, comprised of major institutions that deal in privately negotiated derivatives. Members also include many businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage the financial market risks inherent in their core economic activities. ISDA is legally active and often submits amicus curiae legal briefs, which are posted on ISDA’s web site, in certain types of litigations involving different types of derivative products.

iShares – developed by Barclays Global Investors and sold to BlackRock in 2009, iShares is a brand of exchange-traded funds with portfolios based on a series of stock indexes including the S&P indexes, the Dow Jones indexes, and the Russell indexes. iShares are also available for MSCI foreign indexes. Shares of each fund represent proportional ownership of individual stocks that make up the index on which the fund is based. Investors thus can invest in the funds, and therefore own shares of each company represented in the index. iShares effectively, therefore are index funds that trade like stocks on stock markets.

January Effect – A stock market rally phenomenon that is generally attributed to investors buying stocks that have dropped in price following a sell-off at the end of December by investors seeking to create tax losses to offset any capital gains. Because the sell off in December has little to do with the actual worth of the stocks, the depressed prices create an opportunity in January for bargain hunters.

The January effect is said to affect small-caps more than mid/large caps. This historical trend, however, has been less pronounced in recent years because markets have adjusted for the effect. Also, the widespread use of tax-sheltered retirement plans has minimized the need for year-end tax selling, and has thus contributed to a smaller January Effect.

Joint Account – An account set up in two or more names. Accounts can be held jointly in a number of ways, including Joint Tenancy, Tenancy in Common, and Tenancy by the Entireties. Each of the forms of joint ownership carries different legal rights and liabilities for the parties to the account.

Judgment – An enforceable authentic and official decision by a court of justice about the respective claims, rights and liabilities of the parties to a suit litigated and submitted to the court for its determination. Most brokerage firm customer disputes are decided in arbitration. The resulting decision of the panel of arbitrators is an arbitration award, not a judgment. Though failure to pay an arbitration award will have licensing consequences for a registered representative or brokerage firm, it is essentially unenforceable unless converted into a judgment. To do so, the beneficiary of a monetary arbitration award must make a motion to confirm that award in a court of competent jurisdiction. Once a court confirms the arbitration award, it is converted into a judgment of the court and is enforceable. In New York, the process usually involves a legal maneuver called an order to show cause, submitted in accordance with the applicable provisions of New York’s Civil Practice Law and Rules. An arbitration award can be confirmed either in state court or in federal court. There are particular rules about the timing of such proceedings, and they should always be commenced by an experienced attorney.

Kansas City Board of Trade (KCBT) - The Kansas City Board of Trade was founded in 1856 by a group of Kansas City merchants. It served a function similar to a Chamber of Commerce. It was formally chartered in 1876. KCBT is a futures exchange dealing primarily in wheat futures and options and Value Line futures and options. The Commodity Futures Trading Commission oversees KCBT regulation and KCBT itself operates pursuant to its own Kansas City Board of Trade Clearing Corporation Rule Book and the Kansas City Board of Trade Rule Book.

Know Your Customer Rule – Traditionally, Rule 405 of the New York Stock Exchange, but NASD has Rule 2310 of the Conduct Rules, and the Municipal Securities Rulemaking Board has Rule G19. The essence of the rule is that a stockbroker cannot sell anything to a customer until the broker learns the customer’s financial status, investment objectives, risk tolerance and prior investment experience. Accordingly, this information is usually required on a New Account Form. The rule comes into play in disputes about the suitability of a certain investment for a particular customer.

Kwanza – Unit of currency of Angola

Lapsed Option - Option that expires without being exercised and is therefore worthless.

Lat – Unit of curency of Latvia.

Lei – Unit of currency of Moldava.

Lempira – Unit of currency of Honduras.

Leone – Unit of currency of Sierra Leone.

Lettered Stock - Stock, usually issued in unregistered private placements that has limited transferability. Also called legend or restricted stock.

Commonly, lettered stock restrictions arise under Rule 144 (adopted in 1972) of the Securities and Exchange Act of 1934. Rule 144 permits persons who hold such securities to publicly sell them without registration and without being deemed underwriters, if certain conditions are satisfied. The most common restriction is the prevention of sale for a period of time.

The SEC amended rule 144 on February 18, 1997 to permit resale of limited amounts of restricted securities by any person after a one-year holding period, not the previous two-year holding period. U.S. Securities and Exchange Commission, Final and Prepared Amendments to Securities Act Rule 144, February 18, 1997; 17 C.F.R. Parts 230 and 239; 15 U.S.C. 77a et. seq.

Leu – Unit of currency of Romania.

Lev – Unit of currency of Bulgaria.

Limit Order - A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. If a buyer places a limit order to buy 100 shares of XYZ Corp. at $49.00, the order will only be filled if (a) the stock drops to $49.00 and (b) enough shares are available at that price. If the stock goes no lower than $49.01, the buy limit order will not get filled. Conversely, if a seller places a limit order to sell 100 shares of XYZ Corp. at $49.00, the order will only be filled if (a) the stock rises to $49.00 and (b) enough shares are being sought at that price. If the stock goes no higher than $48.99, the sell limit order will not be filled.

A limit order is a useful tool to avoid being caught by a runaway or volatile market, as can happen with a market order. A hot IPO is offered at $12.00 per share. A buyer wants in but does not want to risk a market order if the stock runs. A limit order to buy at $15.00 would assure that the purchase does not exceed that price. Some brokerage firms may charge higher commissions for executing a limit order than a market order.

London Interbank Offered Rate (LIBOR) – LIBOR is the interest rate a which London banks lend funds to other prime banks in London, using Eurodollars. This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years It is thus used as a basis for determining the rate of interest payable in Eurodollars and other Eurocurrency loans. Less credit worthy corporate borrowers will ordinarily be charged some rate based on LIBOR such as LIBOR plus 1%. Some adjustable rate mortgages in the United States use LIBOR as a benchmark.

Long – Outright ownership of a security. A person who is long a stock or bond, for example, owns it outright and has the right to sell it, transfer it as a gift, pledge it as collateral, and also has the right to receive income generated by the security, and also bears the rights and obligations attending price increases and decreases in the value of the security. If an investor is long 500 shares of XYZ, for example, that investor owns the shares and either possesses the certificate or has it on deposit in a brokerage account. Long is the opposite of short.

Madoff – Yiddish for Ponzi.

Maloney Act of 1938 - 52 Stat. 1070, as amended, 15 U.S.C. 78o-3, amended the Securities Exchange Act of 1934 by adding Section 15A, and is thus also called the Maloney Amendment. It provides for the regulation of over-the-counter securities markets through national associations registered with the Securities and Exchange Commission. NASD is the only association ever to register under the Maloney Act. NASD (formerly known as National Association of Securities Dealers) thus has a quasi-governmental status, which renders it largely immune from suit while simultaneously allowing it to assert that it is not a “state actor” for Fifth Amendment purposes. What this means is that if the regulatory division of NASD seeks to question a broker, the broker will be barred from the securities industry if he or she asserts a Fifth Amendment right. Curiously, the broker can safely assert a Fifth Amendment right not to answer questions in a SEC inquiry. The Maloney Act subjects NASD to the supervision and oversight of SEC.

Margin - "Margin" is borrowing money from a broker to buy stock, using the investment as collateral. The loan incurs margin interest, payable to the broker, at what is called the "broker call rate" or "call money rate". The use of margin enables investors to increase their purchasing power, and creates leverage, which on the positive side increases the percentage rate of return on the investment. On the negative side , it increases the percentage rate of loss.

For example, if an investor buys 100 shares of XYZ in a cash account at $50 per share, the purchase will cost $5,000 plus commissions. If XYZ rises to $75 per share and the investor sells, the investor receives $7,500, less commissions, yielding a $2500 profit, an approximate return of 50% on the original investment. But if the stock were purchased on margin – borrowing half the cost ($2,500) from the broker – the same purchase would only require an outlay of $2,500 form the investor’s pocket. Thus the $2,500 profit would yield a 100% profit.

Conversely, if the stock price decreases, the losses are similarly magnified. If the stock in the foregoing example falls to $25 per share, the loss would be 50 percent on an all cash investment. But on margin, the loss will be 100 percent, (plus the interest on the loan.)

Thus, on margin, if a stock experiences an unexpected dip, there may be no opportunity to continue to hold it until it “comes back”. For this reason, in volatile markets, investors who put up an initial margin payment for a stock may, from time to time, be required through a mechanism called a “margin call” to provide additional cash if the price of the stock falls. Brokerage firms have the right to sell a customer’s securities that were bought on margin. They can do so without notification and at a substantial loss to the investor under specific circumstances that generally relate to the degree of insecurity the broker feels.

Because of the risks associated with margin, brokers are required to determine the suitability of using margin for each particular customer, who is then asked to sign a “margin agreement.”

The margin agreement states that a customer must abide by the rules of the Federal Reserve Board, the New York Stock Exchange, the National Association of Securities Dealers, Inc., and the brokerage firm providing the margin account.

The Federal Reserve Board and many self-regulatory organizations such as the NYSE and NASD, have rules that govern margin trading. Brokerage firms can establish their own requirements as long as they are at least as restrictive as the Federal Reserve Board and SRO rules.

Before trading on margin, the NYSE and NASD, for example, require a deposit with the brokerage firm of a minimum of $2,000 or 100 percent of the purchase price, whichever is less. This is known as the "minimum margin." Some firms may require a deposit more than $2,000.

According to Regulation T of the Federal Reserve Board, a customer can borrow up to 50 percent of the purchase price of “marginable” securities. Not all securities can be purchased on margin. A common requirement for marginability is that the stock be trading above $5 per share. This is known as the "initial margin." Some firms require a deposit of more than 50 percent of the purchase price.

After a stock is purchased on margin, the NYSE and NASD require a minimum amount of equity in the margin account. The equity is the value of the securities less how much is owed to the brokerage firm. NASD margin rules can be found at Rule 2520 in the NASD Manual.

Margin rules require at least 25 percent of the total market value of the securities in the margin account at all times. The 25 percent is called the "maintenance requirement." In practice, many brokerage firms have higher maintenance requirements, typically between 30 to 40 percent. Maintenance margin requirements can fluctuate depending on the type of stock and the market environment.

Maintenance requirements work as follows: Investor buys $16,000 worth of XYZ by borrowing $8,000 from the firm and paying $8,000. If the market value of XYZ drops to $12,000, the account equity will fall to $4,000 ($12,000 - $8,000 = $4,000). With a 25 percent maintenance requirement, the customer must have $3,000 equity in the account (25 percent of $12,000 = $3,000). In this example, there is enough equity because the $4,000 equity exceeds the $3,000 maintenance requirement.

But if the firm requires 40 percent, there would not be enough equity. The firm would require $4,800 (40 percent of $12,000 = $4,800). The $4,000 equity is less than the firm's $4,800 maintenance requirement. As a result, the firm may issue a "maintenance margin call," since $4,000 equity in the account is $800 below the firm's $4,800 maintenance requirement.

If a customer fails to meet the margin call, the firm will sell the securities to increase the equity in the account up to or above the firm's maintenance requirement. Technically, the margin call is a courtesy, and a brokerage firm can sell out the account without waiting for the additional value to be deposited.

Market Order - A market order is an order to buy or sell a stock at the current market price. Unless specified otherwise, a broker will ordinarily enter an order as a market order. Hence the majority of orders placed on the various exchanges are market orders. The advantage of a market order is that it is almost always guaranteed to be executed (as long as there are willing buyers and sellers). Also, some brokerage firms charge lower commissions for market orders than for limit orders.

The disadvantage is that the money paid (or received) when a market order is executed may not always be the price obtained from a real-time quote. This may be especially true in fast-moving markets where stock prices are more volatile. When an order "at the market" is placed, particularly for a large number of shares, there is a greater chance there will be different prices for various parts of the order.

Markka – Unit of currency of Finland before the Euro.

Mortgage-Backed Securities (MBS) - are pools of mortgages used as collateral for the issuance of securities in the secondary market. They are issued by various entities, such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Association as well as by Ginnie Mae. MBS are commonly referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors. The term Mortgage Backed Certificate thus refers to the security itself. The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees. Ginnie Mae MBS are fully modified pass-through securities guaranteed by the full faith and credit of the United States government. Thus, regardless of whether the underlying mortgage payment is made, investors in Ginnie Mae MBS receive full and timely payment of principal and interest.

Mutual Fund - A mutual fund is a fund of pooled money operated by an investment company that invests the money in a variety of instruments (domestic and foreign) like stocks, bonds, options, futures, currencies, money market securities or government securities. A mutual fund offers the advantage of diversifications and professional management. Each mutual fund is different in its make-up and philosophy. Mutual funds are of many varieties, and range from very aggressive to very conservative with respect to risk. Some are designed for growth and others for income. They can be narrowly focused, such as single sector funds (like pharmaceuticals, or technology) or broad based funds that mirror the market as a whole. Funds sold through brokers carry sales charges (load funds) and funds sold directly often do not (no load funds.) All funds charge some type of management fees or administrative fees.

NASAA (North American Securities Administrators Association) – NASAA was organized in 1919 in Kansas (where the first blue-sky law was passed in 1911). It is the oldest international investor protection organization. NASAA membership currently consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico, Canada, and Mexico.

NASAA members, essentially the state and provincial securities regulators, license firms and their agents, investigate violations of state and provincial law, file enforcement actions when appropriate, and educate the public about investment fraud. NASAA makes it easy for regulators from multiple jurisdictions to share information in connection with enforcement actions against brokerage firms deemed to be in violation of blue-sky laws, and indeed enables the targeting of perceived “violators” for enforcement proceedings.

NASD – Formerly known as the National Association of Securities Dealers, NASD is a nonprofit organization formed under the joint sponsorship of the Investment Bankers’ Conference and the Securities and Exchange Commission to comply with the Maloney Act. NASD, as the main ostensibly non-governmental securities regulator in the United States, registers member brokerage firms, establishes rules to govern their behavior, examines them for compliance and disciplines those it deems to be non-compliant. Despite NASD’s position as a non-governmental agency, federal law requires brokerage firms to register with it.

NASD previously owned NASDAQ, which it sold in 2000.

NASD Dispute Resolution, Inc., a wholly owned subsidiary of NASD, became operational on July 9, 2000, replacing a former NASD entity, called NASD Regulation Office of Dispute Resolution. This subsidiary administers NASD’s vast securities arbitration program throughout the United States and England.

NASD Regulation, Inc., another subsidiary, carries out NASD’s regulatory and oversight functions. Through its Department of Enforcement, it implements proceedings against member firms and individuals. Even though NASD is under the supervision and control of the Securities and Exchange Commission (a governmental agency), it is generally not subject to the restraints imposed on the SEC, and hence the subjects of NASD enforcement proceedings are not entitled to constitutional legal protections. This near absolute level of power can sometimes prove troubling.

Natural Gas – Essentially methane, natural gas is a commodity for which futures contracts are traded on NYMEX. Each futures contract is for ten thousand million British Thermal Units, expressed as “10,000 mmBTU” or ten billion BTUs. A BTU is the amount of heat required to raise the temperature of one (1) avoirdupois pound of pure water from fifty-eight and five tenth degrees (58.5°) Fahrenheit to fifty-nine and five tenths degrees (59.5°) Fahrenheit at a constant pressure of 14.73 pounds per square inch absolute. A billion BTU’s is known as a gigajoule. Trading in natural gas futures is governed by NYMEX Rule 220 et seq.

Negligence – failing to do something which a “reasonable man”, guided by those ordinary considerations which generally regulate human affairs, would do, or, conversely, doing something (without fraudulent intent) which a “prudent man” would not do. Negligence is often asserted as a “cause of action” in securities arbitration. It carries a “preponderance of the evidence” burden of proof and is subject to defenses such as “contributory negligence” or “comparative negligence”.

No Load Fund - Mutual Fund offered by an open-end investment company that imposes no sales charge (load) on the purchase or sale of its shares. Investors buy shares in no-load funds directly from the fund companies, rather than through a broker as is done in load funds. Funds can be either front-loaded or back loaded, meaning the load can be paid up-front on purchase or later, upon sale. Many no-load fund families allow switching of assets between stock, bond, and money market funds. The listing of the price of a no-load fund in the newspaper is accompanied by the designation NL. The net asset value, market price and offer prices of this type of fund are exactly the same, since there is no sales charge. If an investor purchases $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the fund. On the other hand, if a purchaser buys a load fund that charges a commission of 5% upon purchase, the amount actually invested in the fund is $9,500. If both funds return 10% in one year, the no-load fund would have grown to $11,000 while the load fund would grow to $10,450. Load versus no-load fund return calculators can be found on the Internet.

Norwegian Krone – Unit of currency of Norway.

NYMEX – New York Mercantile Exchange. NYMEX is the world’s largest physical commodity futures exchange, and is the major trading forum for energy and precious metals. Transactions executed on NYMEX avoid the risk of counterparty default because the NYMEX clearinghouse acts as the counterparty to every cleared trade. Trading is conducted through two divisions, the NYMEX Division, for the energy, platinum, and palladium markets; and the COMEX Division, for other metals, such as gold and silver. NYMEX is headquartered at the World Financial Center in lower Manhattan.

OATS - Order Audit Trail System. To eliminate horsing around with customer orders, NASD Rules 6950 – 6958 require FINRA member firms to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders, including recording all times of these events in hours, minutes, and seconds, and to synchronize their business clocks. The SEC approved these Rules on March 6, 1998. On July 31, 1998, the SEC approved amendments to OATS Rules 6954 and 6957 and NASD Rule 3110. The amendments clarify the recording and recordkeeping requirements associated with the OATS Rules.

NASD, now FINRA, established the Order Audit Trail SystemSM (OATS SM), as an integrated audit trail of order, quote, and trade information for Nasdaq® securities, originally pursuant to a settlement agreement with the SEC. FINRA will use this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms. Essentially, each order reported to OATS is assigned an identifier so the order may be uniquely identified.

Odd Lot – most commonly used to refer to transactions of less than 100 shares of stock. Trading in multiples of 100 shares is called trading in round lots. So if a customer buys 100 shares of XYZ it is a round lot trade, but if a customer buys 56 shares of XYZ it is an odd lot trade. Odd-lot trades could result I higher commissions. Certain securities may trade in round lots of less than 100 shares, a round lot being technically defined as the normal trading unit of the security.

Open Order – An order to purchase or sell securities that has not yet been filled or canceled, such as a Good-Till-Canceled order.

OPRA - Option Price Reporting Authority. OPRA is the securities information processor for market information generated by trading of securities options in the United States. Last sale reports and quotations are the core of the information that OPRA disseminates. However, OPRA also disseminates certain other types of information with respect to the number of options contracts traded, open interest, end of day summaries, and certain kinds of administrative messages. OPRA option codes, the first one to three characters identifying the option root symbol, and the remaining two alpha characters identifying the expiration month, call/put indicator and strike price are being changed by the OSI. Evidently, the limitation of three characters representing the option root creates inconsistency for OTC securities, resulting in the use of illogical identifiers for both options and underlying securities, posing challenges for the marketplace.

Option - The right, but not the obligation, to buy (for the purchaser of a call option) or sell (for the purchaser of a put option) a specific amount of a particular stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified, limited period of time. Stock option contracts are structured so that a single contract covers 100 shares of the underlying stock. So for example if a purchaser, in an opening transaction, buys 5 call contracts for XYZ corporation with a strike price of 50 expiring in two months, that purchaser is purchasing the right, but not the obligation, to buy 500 shares of XYZ stock at $50 per share (even if XYZ stock is higher than $50 per share), at any time up to the expiration date, which is usually the first Saturday after the third Friday of the month in which the option expires.

The potential gain is the difference between the strike price and the actual price of the underlying stock, times 100. The maximum potential loss is the price paid for the option.

The purchaser of a call option becomes a holder of that option. The holder can sell the option at any time up to expiration and profit or limit loss in accordance with the fluctuating price of the call option.

When a holder sells an option, that holder is a seller, since the transaction is a closing transaction. However, if a person sells an option as an opening transaction, the seller is known as a writer.

The writer of an option contract is much like the writer of an insurance contract. For example, the writer of 5 call contracts for XYZ corporation with a strike price of 50 expiring in two months, is guaranteeing that he will sell 500 shares XYZ to the holder of the option at $50 per share, no matter how high the actual price of XYZ is. Conversely, the writer of 5 put contracts at a $50 strike is guaranteeing that he will purchase 500 shares at $50, no matter how low the actual price is.

The writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited.

In order to be able to trade options, an investor must demonstrate suitability for the different levels of option trading offered by most brokerage firms, and complete special account forms that must be approved by a type of supervisor known as a registered options principal. IN turn, the brokerage firm must provide the customer with an Options Clearing Corporation Prospectus, which explains the risks of various option strategies.

There are multiple strategies using options as leverage or hedges against losses, and these strategies can involve different kinds of “spreads”, some of which have bizarre names such as four-legged butterfly and bull put spread, among others.

Order – simply an instruction to a broker to buy or sell a security for a customer account. There are numerous types of orders, such as market orders, limit orders, day orders, good-till-cancelled orders, stop orders, fill or kill orders, all or none orders among others. Basically different types of orders attempt to tailor either the time, price or size of the transaction. Some securities disputes are premised on an allegation that the broker failed to follow or failed to execute and order.

OSI – Options Symbology Initiative. The Options Symbology Initiative is an undertaking by an industry consortium headed by the Options Clearing Corporation (OCC) to eliminate the OPRA codes that have worked well for over 25 years. The consortium collaborated to address limitations in the traditional method of identifying U.S. listed options contracts during back-office processing. This is typically a three to five alpha-character representation; the first three characters are used to identify the option's listing symbol and the remaining two alpha-characters are used to identify the expiration month, call/put indicator and strike price. This method has been used for more than 25 years. The new plan will replace the current five-character symbols with a 17 – 25 character symbol (most commonly a 21 character symbol) that explains the underlying option. The new identification format comprises four key components: the underlying symbol, the expiration date, the strike price and the option type (call or put). This transition from the very complicted 5 symbol method to the streamlined simplified 21 symbol method is, as of 2010, pretty much in effect.

Painting the Tape - The illegal practice in which manipulators buy and sell a specific security among themselves, creating the illusion of high trading volume and significant investor interest. The increased volume attracts other unsuspecting investors who might then buy the stock and enable the traders to profit. For example, XYZ Corp. trades at $1 per share until somebody suddenly offers to buy 100 shares at $2 a share. The offer is accepted, the trade is reported, the news hits, it gets mentioned on CNBC and the manipulators then get out. Distantly related to “pump and dump”.

Pecora Investigation – into the causes of the 1929 stock market crash, began on March 4, 1932 by the Senate Committee on Banking and Currency. Ferdinand Pecora (1882 –1971), a 51 year old assistant district attorney for New York County, (a graduate of New York Law School), was the fourth and final chief counsel for the investigation, originally launched under the Committee's chairman, Republican Senator Peter Norbeck. Hearings began on April 11, 1932, but were criticized by Democrats. Two chief counsels were fired and a third resigned after the Committee refused to give him broad subpoena power. In January 1933, Pecora was hired to write the final report, but found the investigation had essentially accomplished nothing. Pecora sought to hold another month of hearings.

Democrats had won the majority in the Senate, and newly elected FDR urged the new Democratic chairman of the Banking Committee, Senator Duncan U. Fletcher, to let Pecora continue. Roosevelt often conferred with Pecora, encouraged him, and depended on Pecora's work to build public support for reform. So actively did Pecora pursue the investigation that his name became publicly identified with it, not the Committee's chairman. The hearings ended May 4, 1934.

The Pecora Investigation uncovered a wide range of abusive practices by banks and bank affiliates. These included underwriting unsound securities in order to pay off bad bank loans as well as "pool operations" to support the price of bank stocks. His exposé of National City Bank (now Citibank), including that the bank paid cash bonuses to traders who sold the most stocks and bonds, particularly the riskiest ones it wanted to dispose of fastest, made headlines and caused the bank's president to resign within weeks. As a result, Congress passed the Glass-Steagall Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934. Pecora was appointed as one of the first commissioners of the SEC.

In 1939 Pecora published a memoir, Wall Street Under Oath:The Story of Our Modern Money Changers. Pecora wrote: "Bitterly hostile was Wall Street to the enactment of the regulatory legislation." As to disclosure rules, he stated that "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."

PIABA - Public Investors Arbitration Bar Association. In or around 1990, a group of lawyers who tended to represent public investors formed this group in order to share information and strategies helpful to the efforts of investors who were bringing securities arbitration claims against their brokers and brokerage firms. Since that time PIABA has grown to be the largest organization of its type. In general, PIABA engages in a broad range of efforts, funded by dues paying members, to improve the chances of an investor prevailing in a claim against a broker.

PIPE (Private Investment in Public Equity) - A private investment firm's, mutual fund's or other qualified investor’s purchase of stock in a company at a discount to the current per share market price, offered by the company in order to raise capital. That is, a public company typically issues unregistered equity-linked securities to such investors at a discount to the price of the issuer’s common stock at the time the deal is closed. The issuer commits to registering the securities with the SEC so they can be resold to the public, typically within 90-120 days. There are two main types of PIPEs - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued and a structured PIPE issues convertible debt (convertible into common or preferred shares).

Some structured PIPEs have what is known as a “death-spiral” or “toxic” structure. In these, a company issues convertible preferred stock or convertible debentures that convert into common stock. However, the conversion price, rather than remaining fixed, changes relative to the performance of the issuer’s common stock after the deal is closed or over some predetermined period in the future (or some other trigger). If the price of the common stock falls within that period of time, the conversion price drops according to a set formula. This enables the investor to get more stock for the same amount of principal. The problem with such structure is that PIPE investors have incentive to short the common stock in an effort to lower the price down after the deal closed so they could convert to more stock. This incentive can be reduced by deals that include hard or soft floors that prevent “high-level dilution,” thereby reducing the incentives of investors to short the stock.

Despite litigation risks, PIPEs are popular for their relative efficiency in time and cost, compared to more traditional forms of financing such as secondary offerings. PIPEs are advantageous for small- to medium-sized public companies that may have have difficulty tapping into traditional forms of equity financing.

Point – With respect to stocks and stock options, a point is one dollar. If the stock of XYZ Corp moves up 2 dollars per share, it has moved up two points. With respect to indexes, a point is simply a unit of its measurement. If the Dow Jones Industrial Average is 15,375 and it moves up 23 points, it will be 15,398.

With respect to bonds, it refers to percent. Each point is one percent. For a bond with a $1,000 face value, a point is $10. Bond yields are quoted in basis points. A basis point is one one-hundredth of one percent (1% is divided into 100 parts, each part is basis point).

Different types of investment vehicles have their own special usages. For example grain futures use “point” to refer to one-quarter of one cent.

Ponzi Scheme – An investment scheme in which early investors are paid out of money provided by later investors, named for Carlo “Charles” Ponzi, who came to the United States from Italy in 1903. The classical Ponzi scheme was most recently orchestrated to a breathtaking degree by Bernard "Bernie" Madoff, culminating in Madoff's guilty plea on March 12, 2009.

In 1919 Ponzi discovered that postal coupons bought in Spain could be cashed in the US for six times the cost. Ponzi sought to capitalize on this. First he converted dollars into any foreign currency with a favorable exchange rate. Next, Ponzi’s foreign agents would buy international postal coupons in countries with weak economies. Then, the coupons were exchanged into a favorable foreign currency and finally back into dollars. He claimed 400% net profits. In truth, the red tape, coupled with currency transfer delays, ate the profits.

Nevertheless, friends and family grasped the idea and believed him. On December 26, 1919, Ponzi established The Security Exchange Company. He promised 50% interest in ninety days, but claimed to be able to deliver in forty-five days, thus doubling money in ninety days. Thousands of people bought Ponzi promissory notes ranging from $10 to $50,000, but averaging about $300.

Ponzi used the money from later investors to pay off his earlier investors, creating the impression of success. Ponzi grossed around $1,000,000 per week at the height of his scheme. From the start, federal, state, and local authorities investigated him. But since Ponzi had managed to timely pay off all of his notes, no complaint was filed. On July 26, 1920, the Boston Post headlined a story questioning the scheme’s legitimacy. Later that day, authorities somehow convinced him to suspend taking in new investments until an auditor examined his books.

Within hours, crowds lined up demanding their money. Ponzi obliged and issued assurances of stability. He returned money to those that requested it. By the end of the first day, he had settled nearly 1,000 claims. By continuing to meet his obligations, anger dwindled and public support swelled. Two weeks later, the auditors, banks, and newspapers declared that Ponzi was bankrupt. Within days, Ponzi acknowledged a 1908 forgery conviction in Canada and a 1910 conviction in Atlanta, Georgia for smuggling five Italians from Canada into the United States. On August 13, 1920, Ponzi was arrested by the feds and released on $25,000 bond. Moments later he was rearrested by Massachusetts and re-released on an additional $25,000 bond.

There were federal and state civil and criminal trials, bankruptcy hearings, suits against Ponzi, suits filed by Ponzi, and the ultimate closing of five different banks. An estimated 40,000 people had entrusted some fifteen million 1920 dollars in Ponzi’s scheme. A final audit concluded he had taken in enough to buy approximately 180,000,000 postal coupons, of which it could only confirm the purchase of two. It took about eight years, but note holders received an estimated thirty-seven percent of their investment returned in installments.

Ponzi was sentenced to five years in federal prison for mail fraud. After three and one-half years, Ponzi was sentenced to an additional seven to nine years by Massachusetts. He was released on $14,000 bond pending appeal and fled to Florida. Under the alias of Charles Borelli, Ponzi got into a pyramid land scheme, buying land at $16 an acre, subdividing it into twenty-three lots, and selling each lot at $10 apiece. He promised all investors that their initial $10 investment would grow to $5,300,000 in just two years. Much of the “land” was underwater.

Ponzi was indicted for fraud and sentenced to a year in a Florida prison. He jumped bail on June 3, 1926 and fled to Texas. He hopped a freighter for Italy, but was captured on June 28th in a New Orleans port. On June 30th he sent a telegram to President Calvin Coolidge asking to be deported. Ponzi's request was denied and he returned to Boston to complete his sentence. After seven years, Ponzi was released on good behavior and deported on October 7, 1934.

Back in Rome, Ponzi became an English translator. Mussolini offered him a position with Italy’s new airline and he served as the Rio de Janeiro branch manager from 1939-1942. Ponzi discovered that several airline officials were using the carrier to smuggle currency and Ponzi wanted a cut. When they refused, he tipped off the Brazilian government. World War II brought about the airline’s failure. Ponzi wandered from job to job. He tried running a Rio lodge, but that failed. He then alternated between earning a pittance for English lessons and drawing from Brazilian unemployment. Ponzi died in January of 1949 in the charity ward of a Rio de Janeiro hospital.

Poison Pill – A poison pill is not just a drug for spies to kill themselves if caught, but it is also a strategy to enable a corporation to deter or prevent a hostile takeover. The poison pill strategy was invented in 1982 by Martin Lipton, a mergers and acquisitions lawyer at the firm of Wachtell, Lipton, Rosen & Katz. In using a poison pill strategy, the target company attempts to make its stock less attractive to the acquiring company or corporate raider. The strategy often involves either a "flip-in", which permits existing shareholders other than the raider to buy more shares at a discount, or a "flip-over" where shareholders can buy the acquirer's shares at a discount after the merger. Other methods to discourage the takeover involve the use of preferred rights plans, voting rights plans or back end rights plans.

In 1985, the Delaware Supreme Court essentially upheld the legality of poison pills. Moran v. Household Intern., Inc., 500 A. 2d 1346 (Del. S. Ct. 1985). The Court described a Preferred Share Purchase Rights Plan as a "defensive mechanism in the arsenal of corporate takeover weaponry." That same year, The Delaware Supreme Court established a test for the reasonableness of an antitakeover defense plan, in Unocal Corp. v. Mesa Petroleum Co., 493 A. 2d 946 (Del. S. Ct. 1985), now cleverly known as the Unocal test.

Poison pill strategies usually get triggered when an acquirer obtains a certain percentage of shares. For a discussion of whether a mere 5% threshold is acceptable, please see Versata Enterprises v. Selectica, Inc., 5 A. 3d 586 (Del. S. Ct.t 2010).

Foreign jurisdictions may or may not allow poison pills or have restraints on them. Prescriptions for poison pills are remarkably expensive and are not covered by Medicare.

Prime Broker – Prime brokerage is an aspect of the investment banking business. In general, prime brokers are large banks or securities firms that provide specialized services to hedge funds, institutional investors and the like. Prime brokerage services simplify the record keeping obligations of hedge funds, enabling a money manager to trade with multiple brokerage houses while maintaining cash and securities in a single master account. Typically, a prime broker will offer a variety of services, including custody of securities, clearing, lending, financing and technology, among other things, all designed to simplify the tasks facing hedge fund and other large money managers.

Pullman Bonds - a form of asset backed security, secured by the intellectual property rights most often of a musician. Commonly called Bowie Bonds.

Pump and Dump – A fraudulent scheme, also known as "hype and dump manipulation," involve the baseless touting of a company's stock (frequently, if not usually, microcap companies) through false and misleading statements to the marketplace. Often the pumping is done through coercive, high pressure, hard-sell tactics, relying on carefully crafted scripts, and is done by teams of brokers working in a “boiler room”. With volume increases, the Street notices and the price rises. After pumping the stock, the manipulators who bought the stock cheaply (before the pump) make huge profits by selling (the dump) into the market.

Because the fraud involves material misrepresentations, pump and dump schemes of course violate the anti-fraud provisions of the federal securities laws. They often rise to the level of criminal conduct. Fortunately, they are frequently detected, investigated and prosecuted, resulting in fines, license revocations, and sometimes imprisonment. The punishment while severe for the perpetrators is cold comfort to the customers who have lost all their money.

Pyramid – This is the ancient Egyptian word for “scam”. In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. It is similar to a classic Ponzi scheme, except in a pure Ponzi scheme, the promoter actually deals with the investors. In a pyramid scheme, the promoter recruits investors, who in turn recruit other investors, in what soon becomes an arithmetically impossible situation, guaranteeing the entire loss of the investment. For example, if a pyramid were started by one person at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, and so on, the pyramid structure would require the involvement of everyone on earth in just ten layers of people with one con man on top. This human pyramid of suckers being born every minute would be about 60 feet high and the bottom layer would have more than 10 billion people. Often there is no product or service at all, and the entire scheme is based solely on recruiting more people. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over money and getting others to do the same.

An early version of a pyramid scheme involved a chain letter, in which the recipient would mail one dollar to the person at the top of a list, cross that person’s name off, add their own name to the bottom of a list of five or ten people. Then the person would mail the letter to five or ten more people. This created the theoretical requirement that the entire population of earth and the nearest 15 populated galaxies participate.

The fraudsters behind a pyramid scheme often promote their schemes as legal, or tax advantaged, often by creating the false impression that it is a legitimate multi-level marketing program. New recruits pay off early stage investors.

Qualifying Annuity - An annuity permitted for purchase under qualified plans or trusts, such as pension and profit sharing plans, IRAs, 403(b) plans, among others, and which therefore receives favorable tax treatment.

Quant – a quaint slang term for a type of securities analyst, generally someone with math, computer or accounting skills who provides arithmetical or numerical support services to the securities industry. Expressed another way, someone who is skilled in analyzing quantitative data.

Quotation or Quote – The highest bid and lowest asked price for a round lot of a particular security. A customer speaks to a broker and asks for a quote on XYZ, and the broker reports $45.27 bid, $45.32 asked. The difference is called the spread. It means that if the customer wants to place a market order to buy XYZ, he will have to pay $45.32 per share, plus commissions, for 100 shares and that if he places a market order to sell 100 shares, he will receive $45.32 per share, less commissions. Loosely, the price of a security at the time the quote is given.

Rand – Unit of currency of South Africa.

Real – Unit of currency of Brazil.

RED HERRING – The term describes not merely a communist fish, but also a preliminary prospectus for a company seeking to raise money, usually by going public. So named because the preliminary prospectus, not yet approved by the SEC or state regulators, was traditionally printed with either a red border or red printing on the cover of the document. The red printed legend usually said something like: “A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. Information contained in this Preliminary Prospectus is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.” The SEC eliminated the red ink requirement in 1996. (See SEC Release No. 33-7300. “Item 501(c)(8) of Regulation S-K - The red ink requirement applicable to the prospectus caption "Subject to Completion" and related legend is being eliminated, thereby reducing issuer costs and conforming the requirements of Regulation S-K with the requirements of Regulation S-B.”)

The Red Herring is essentially a disclosure / offering document, setting forth the business plan, executive biographies, financial projections and risks inherent in connection with an investment in the company.

REIT (Real Estate Investment Trust) – a liquid, dividend paying means of participating in the real estate market. REITs are generally publicly traded companies (and hence can be purchased on a stock exchange like a stock) that manage real estate portfolios and pass the profits on to their shareholders. Equity REITs purchase actual real estate and shareholders receive their share of the rents received and capital gains upon the sale of the property. Mortgage REITs lend money to developers, and shareholders receive their proportionate share of interest received on the loans. Hybrid REITS mix the two. REITs can themselves avoid taxation if 75% or more their income is from real property and if they distribute 95% of their net earnings to shareholders. This high distribution requirement is what tends to make REITs high yielding investments. REITS invest in a diverse array of properties, such as shopping malls, nursing homes, office buildings, hotels, warehouses and apartment complexes, among others. Some REITs specialize in one type of property. In addition to being available directly on the stock exchanges, one can invest in REITs by investing in REIT mutual funds.

Respondent - In all legal disputes, the party making the complaint is distinguished from the party defending against the complaint. In the courtroom, the party complaining is called a “plaintiff” and the party defending is called a “defendant”. In securities arbitration, the nomenclature is different - the party complaining is called the “claimant” and the party defending is called the “respondent.” The complaint is called a "statement of claim."

Repurchase Agreement – Generally and widely referred to a “Repo”, a repurchase agreement is, functionally, a short-term loan collateralized by a security, although legal title in the security actually passes to the buyer. As a practical matter repos are usually overnight transactions, although they can last up to two years. Basically, in a repo transaction a seller sells a security (often to an institutional buyer) in exchange for cash, while promising to buy it back at a predetermined date and fixed higher cash price. The difference between the sale price and the repurchase price is the investor's (i.e. the repo buyer’s) return, and is referred to as the “repo rate.” For the most part, virtually any security can be sold in a repo transaction, and they frequently involve Treasury or Government bills, corporate and Treasury / Government bonds. Corporate stocks may be used. When a custodian functions as an administrative intermediary between the two parties to a repo transaction, it is called a “tri-party repo.” And, from the perspective of the buyer, the transaction is commonly referred to as a “reverse repo”.

Rial – Unit of currency of Iran, Yemen and of Oman.

Riel – Unit of currency of Cambodia.

Ringgit – Unit of currency of Malaysia.

Risk – The likelihood of losing money (or value) in an investment or the degree of possibility of not gaining value. Also used to describe factors that can affect the likelihood of an investment’s success. In general, the maximum financial risk of every investment is the loss of 100% of the amount invested. However, in certain types of leveraged investments, such as margin transactions and types of commodities transactions, the risk can exceed 100% of the investment. In general, risks that affect the likelihood of success are supposed to be disclosed by the person inviting the investment, and sometimes these risks are disclosed in a risk disclosure document, such as a private placement memorandum or a prospectus.

Rubel – Unit of currency of the Republic of Belarus.

Ruble – Unti of currency of Georgia, Kazakhstan, Republic of kyrgyz, Russia, Tajikstan, Turkmenistan, and Uzbekistan.

Rufiyaa – Unit of currency of the Republic of Maldives.

Rule of 72 – a convenient way to calculate the approximate time it takes money to double at a given interest rate. Simply divide the number 72 by the rate of interest to determine the number of years to double. For example, money earning 9% interest will double approximately every 8 years. (72 divided by 9 is 8). The Rule of 72 works best for annually compounding interest rates, and distortion significantly increases above 20%. (Continuously compounding interest is better calculated by applying a Rule of 69.3).

Sale – a securities transaction in which the seller trades away its right, title and interest in a security in exchange for consideration, usually money. A sale can be accomplished “long” (when the seller owns the security being sold), or “short” when the seller borrows the security in order to sell it, subject to the seller’s obligation to return the security to the party from whom the security was borrowed. In options transactions, when the seller of the option does not own the option, the seller is called a “writer” of the option.

A sale can be effected by an issuer, as part of an IPO, for example, or by a holder or trader in the secondary market. Also, a securities sale can take place either on a public market, such as a stock exchange, or privately, as a matter of contract, such as in a private placement.

Sales of securities are governed not only by the various federal and state securities laws, but also by the Article 8 of the Uniform Commercial Code. Also, the effectiveness or legality of a sale may be subject to a variety of factors, such as restrictions on the security, registration status, or clearing corporation (or transfer agent) rules.

Securities Exchange Act of 1934 - (P.L. 73-291, 48 Stat. 881) 15 U.S.C. § 78a et seq. was the first federal legislation specifically intended to regulate stock exchanges and companies that have distributed securities to the public. It passed both houses of Congress with overwhelming support and was enacted on June 6, 1934.

Congress promulgated the Exchange Act under its authority to regulate interstate commerce, pursuant to Article II, section 8 of the U.S. Constitution. It therefore requires the use of an instrumentality of interstate commerce - communication or transportation - before it applies. The courts have held that the use of mails or a telephone meets this requirement, even if the use is only intrastate.

The Exchange Act requires publicly held companies to make periodic public disclosures and disclosures in connection with proxy solicitations. It also requires certain disclosures in connection with tender offers for the shares of publicly held companies. Finally, the Exchange Act regulates trading by certain company insiders. The Exchange Act broadly prohibits all fraud, manipulation and other abusive practices in connection with the purchase or sale of securities. In the context of most litigated or arbitrated disputes, Section 10(b) is the most often relied upon section, along with Rule 10b-5 (promulgated under the Exchange Act).

With respect to stock exchanges, including the National Association of Securities Dealers, which operates the NASDAQ market, or the New York Stock Exchange, the Exchange Act requires registration and adherence to certain principles of self-regulation to insure the transparent and fair operations of the securities exchanges. Every securities broker and every securities dealer must be a member of a so-called self-regulatory organization. If either a securities firm or a person associated with a securities firm violates the rules or regulations of the exchange, or the federal securities laws, or just and equitable principles of trade, the law permits the imposition of sanctions. These sanctions can range from fines to censures to permanent barring from the securities industry to criminal penalties. The Securities and Exchange Commission (SEC) is the primary regulatory agency charged with enforcing the federal securities laws, including the Securities Act of 1933, and the Securities Exchange Act of 1934.

In the 1932 election, Franklin D. Roosevelt promised economic reform in the effort to emerge from the Great Depression, arguably triggered by the 1929 market crash. The Securities Act of 1933 was the first piece of Roosevelt's New Deal, and Congress enacted it during the first one hundred days of his administration. Roosevelt sought to "bring back public confidence" in the securities markets and was convinced that truthful and full disclosure was essential to this goal. Congress joined in this conclusion, finding that full disclosure would give investors pause before falling prey to panic selling, and passed the Exchange Act for that purpose.

Security – The term is misleading because it implies safety. A far more accurate term would be "risk instrument." "Security" is broadly defined in the Securities Act of 1933 (15 U.S.C. §77a et seq.), and also in the Securities Exchange Act of 1934 (15 U.S.C. §78a et seq.) as well as a host of judicial decsions that have interpreted the definitions. It includes a broad range of investments such as stocks, bonds, futures, options, currency options, debentures, warrants, investment contracts among other things. Congress did not define the term “investment contract”. The test for whether a particular scheme is an investment contract was established by the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293 (1946): “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.”

The courts have consistently viewed the definition broadly. “Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.” Reves v. Ernst & Young, 494 U.S. 56, 61 (1990).

Hence, pretty much anything a broker or an issuer sells a customer for investment or trading purposes is a security. For most people “security” simply refers to stocks, bonds, futures and options. Most securities disputes involve stock, bonds or options and the various strategies relating to the purchase and sale of such securities.

Shelf Registration - An arrangement under the registration rules of the federal securities laws that permits an issuer of securities to file a registration statement for any securities that will be offered on a continuous or delayed basis under the Securities Act of 1933.

Shelf registrations are governed by 17 C.F. R. § 230.415 (2002) (Rule 415). The SEC's Rule 415, adopted initially in 1982, allowed issuers to register securities they expected to sell within two years of the initial effective date, without having to file additional registration statements with each offering. In the case of primary offerings of debt securities by a company eligible to use Form S-3, the company had to register only the amount of securities it reasonably expected to offer and sell within two years of the initial effectiveness date of the registration statement.

In December 2005, new shelf registration rules were effected which generally make the process easier in a number of respects, particularly for the largest and most active issuers with an established track record of filing reports with the SEC required by the Securities Exchange Act of 1934. These issuers are called "well-known seasoned issuers," or WKSIs (pronounced “Wiksi”). One major change is that WKSIs are now permitted to file registration statements that will become automatically effective without SEC review. The rules also liberalize certain existing restrictions to the shelf registration process that are applicable to both WKSIs and “seasoned issuers” that fall outside the definition of WKSI.

For example, both WKSIs and non-WKSIs are no longer required to limit the amount of securities they register to what they intend to offer during the two years from the effective date of the registration statement. Now, non-WKSI seasoned issuers must merely specify an amount of securities on the registration statement, which must be updated every three years, and WKSIs need not specify any amount of securities at all.

Having a registration “on the shelf” essentially allows an issuer to act quickly when the market is right. Under SEC Rule 415, issuers are expected to file amendments disclosing any changes in financial condition. Delayed offerings originally were used by corporations, but the SEC also has approved their use by limited partnership tax shelters, employee benefit plans, and issuers of mortgage pass-through certificates.

Sheqel– Unit of currency of Israel.

Short – Used as a noun, a verb and an adjective, it is essentially the opposite of “long”. A short position in a security is created when a trader has sold something he or she does not own. For example, if a trader is short (goes “short” or “shorts”)100 shares of XYZ at $50 per share, it means the trader sold, as an opening transaction, 100 shares of XYZ at $50 per share, in the hope it will drop in price. The trader accomplishes this by first borrowing the shares, at interest, from someone else. Regulations require the short seller to first determine the availability of the shares to borrow before placing the trade. If the price of XYZ goes down, for example to $40 per share, the trader will buy the 100 shares (called covering the short) at that price and pay back the borrowed shares, pocketing the difference (less interest and commissions.) If the stock goes up, the short trader loses money. A short position is established by selling short and remainig uncovered. It is a bet that the market will go down, and can be used as a hedging device.

Short interest - Total volume of shares of a security that investors have sold short and have not yet been repurchased to close out the short positions. Usually, investors sell short to profit from price declines. The New York Stock Exchange reports short interest. Short interest is often an indicator of the amount of pessimism in the market about a particular security, although there are other reasons to short that are not related to pessimism. For example, hedging strategies for mergers and acquisition as well as derivative positions may involve short sales. Because of the requirement to cover all short positions, however, a high short interest figure reflects potential buying pressure to cover, and may be viewed as a bullish sign.

Side pockets - Hedge funds may hide poor-performing or illiquid assets in a side pocket, a separate account on the hedge fund’s books. Hedge funds can use side pocket accounts in various ways, including (i) estimating the value of the side pocket positions and including a payment for them in the redemption price; (ii) permitting investors to redeem the liquid portion of their interests but keeping the investor in the fund relative to the investor’s share of illiquid positions; (iii) excluding side pocket value from the redemption proceeds for investors wishing to redeem before the illiquid positions are sold, so the redeeming investor simply relinquishes any interest in the side pocket and (iv) creating a separate class of fund interests with some investors only sharing in the liquid positions in the fund’s portfolio, while others, with a longer–term appetite for commitment, participate in the side pocket portion of the fund as well. Hedge funds have to isolate their positions in initial equity public offerings, so investors in the fund who are broker-dealers, or affiliated with them do not participate in the gain from that portion of the hedge fund’s portfolio. See FINRA Rule 2790 relating to hot issue IPO matters.

Some hedge funds require leaving some of the investment in side pockets as a condition for redemption, even though the condition was not disclosed in the investment agreement. There is also the potential for excessive leverage, the over-concentration of positions, the dependence of valuations upon complex proprietary models, and operational risks for settlement and clearance systems. Hedge funds also use techniques known as “gates” and lock-ups” to hold onto investor capital.

In April 2010, the SEC launched in an investigation into whether hedge funds used side pockets to prevent investors from withdrawing money during the 2008 market turmoil.

SIV - Structured Investment Vehicle. SIVs (most often run by banks, but not always) are investment companies that engage in market arbitrage. They purchase predominantly investment-grade debt securities (usually with a weighted average rating in the AA/Aa range) such as medium and long term fixed income bonds and fund themselves with cheaper senior debt instruments such as commercial paper and medium term notes. In other words, they buy highly rated debt securities and fund themselves by issuing senior debt and capital.

The aim of the SIV is to earn the hoped-for net spread between the yield on its asset portfolio and its funding costs, to pay a return to capital holders and to generate fee income for the investment manager. The SIV runs both a liquidity risk and a solvency risk.

Senior debt is usually (but not always) investment-grade commercial paper and medium-term notes issued both in the Euromarkets and in the US domestic market (and sometimes other local markets). Since SIVs rely on short-term commercial paper to fund longer maturing assets, there is an ongoing need to renew funding.

SPAC – Stands for Special Purpose Acquisition Company. A SPAC is a pooled investment vehicle that allows public stock market investors to risk investment in private equity type transactions, particularly leveraged buyouts. SPACs are shell or blank-check companies that have no operations, income or any business. They are generally incorporated with the primary objective of raising funds through an initial public offering of its securities, the proceeds of which are used primarily for the purpose of acquiring or merging with one or more operating copmpanies. If the SPAC fails to make an acquistion within a fixed period of time, generally between 18 and 24 months, the money raised is returned to investors. A SPAC will typically begin as a corporation formed by a small group of industry executives or sophisticated investors (“Founding Stockholders”). The Founding Stockholders buy the SPAC’s common stock for nominal consideration and generally retain, after completion of the IPO, 20% of the SPAC’s common equity, although this percentage is less if the underwriters’ over-allotment option is exercised. Some or all of the Founding Stockholders also serve as the SPAC management team that will search for prospective target operating companies. Once a target is found, 80% of the SPAC shares must approve the acquisition. (Some commentators argue that this is illusory because if management recommends the purchase, shareholders will approve it.)

Because a SPAC is a very clean public shell, it provides the target private company with the option of accepting stock instead of cash in a transaction, thereby avoiding tax requirements. The target company is also able to immediately become a public company without the risk, expenses and time associated with the IPO process. SPAC’s are typically listed in the United States on the OTC Bulletin Board and/or the American Stock Exchange.

Specialist - A market professional that manages the two-way auction market trading in a handful of specific securities in which he or she specializes. A specialist ordinarily works for a specialist firm, an independent company in the business of trading listed securities. A specialist is a member of a stock exchange, such as the New York Stock Exchange, who performs several functions. Specialists must make a market in the stock they trade by displaying their best bid and asked prices to the market during trading hours. Specialists are required to maintain a "fair and orderly market" in the stocks they trade. They do this by committing their own capital to provide liquidity to help reduce market volatility when there are an insufficient number of buyers or sellers. Exchange rules prohibit specialists from trading ahead (a form of “front-running” also cleverly known as “trading ahead”) of investors who have placed buy or sell orders for a security at the same price. The number of stocks a specialist trades depends on how active the stock trades, but most specialists specialize in around five to ten companies.

On the New York Stock Exchange, the specialist obtains consideration for the supply of immediacy and the maintenance of an orderly market by having private access to order-flow information through the order book for the particular stock. On the Paris Bourse, on the other hand, specialists are compensated in cash.

Steepener CD - Steepener CDs pay a guaranteed interest rate pegged to some derivative yield curve benchmark for a short period of time within the total maturity period for the CD. So, for example, the CD will have an 8% guaranteed interest rate for the first year of a ten-year CD. After the first year, the interest rate resets pursuant to some formula, for example: 4 times the difference of the 30-year and the 2-year CMS (Constant Maturity Swap) (positive yield curve) minus 1 % as reported two business days before the start of the quarter (the observation date). But if the 2-year CMS rate on the observation date is greater than the 30-year CMS rate, reflecting a negative yield curve, no interest is paid for the entire quarter. While Steepener CDs are FDIC insured if the CD is held to maturity (10 years), the risks include loss of interest for a significant period of time, credit risks and market risks (i.e., if you need to sell before maturity, you could sustain a loss of principle and you need to locate a buyer.) Steepener’s are available through brokerage firms and are subject to brokerage commissions.

Stop-Limit Order - A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price.

The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock's price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly.

The use of stop limit orders is much more frequent for stocks that trade on an exchange than in the over-counter (OTC) market. In addition, a broker-dealer, or a particular exchange may not allow stop limit orders on some securities, or they may narrow the parameters. For example the American Stock Exchange prohibits stop limit orders unless the stop price and the limit price are equal. Check the rules, as they do change.

Stop Order - A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, the stop order becomes a market order. A stop order can be placed as a day order, good-till-canceled order, or any other type of time-limit order.

Purchasers typically use a stop order when buying stock to limit a loss or protect a profit on short sales. A stop order to buy always places a stop price that is above the current market price.

Sellers typically use a stop order to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell always places a stop price that is below the current market price.

The advantage of a stop order is it that the investor does not have to monitor the stock’s performance on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Once the stop price is reached, the stop order becomes a market order and the actual trade price can be much different from the stop price, especially in a fast-moving market where stock prices change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.

The use of stop orders is much more frequent for stocks that trade on an exchange than in the over-counter (OTC) market. Some broker-dealer may not allow you to place a stop order on some securities or accept a stop order for OTC stocks.

Stub quote – Also known as a placeholder quote, a stub quote is essentially a market maker’s tool to stay away from actually making a market. If XYZ Corporation normally trades for $25.25 per share, an active or liquid market could show a best bid of $25.15 and a best ask at $25.35. A second best bid might be at $25.10 and so forth. A stub quote on the other hand will likely be $0.01 on the bid and $2,000.00 on the ask – both so far away from any real market value that trades will not likely be executed. Stub quotes are usually posted when a stock does not have enough liquidity to trade in its recent price range. The market maker is technically meeting its requirements without exposing itself beyond available liquidity. Ironically, on May 6, 2010 a so-called “flash crash” occurred when real market quotes somehow disappeared for a few moments and market orders were executed at the stub quotes.

Suitability - When a broker recommends that the purchase or sale of any particular security, that broker must have a reasonable basis for believing that the recommendation is suitable for the particular investor. The assessment is made in light of the investor’s level of sophistication, risk tolerance, financial status and investment objectives, among other criteria. FINRA’s current Rule 2310 (scheduled to change in June, 2010) sets forth the criteria and steps that must be taken in making such determination. Suitability can be viewed both quantitatively and qualitatively.

As an instructive example, the National Adjudicatory Council (NAC) of NASD Regulation (now FINRA), in DOE v. Chase, Complaint No. C8A990081 (Aug. 15, 2001) analyzed the following facts: Broker (B) had female client (W) with $800,000 in total assets, $500,000 of which was listed as W’s liquid net worth. B disclosed the risks of a speculative security he recommended to W, an economics student in college. W had access to others who were giving her advice, including an accountant and an attorney. W’s new account form sought speculation. B ultimately had W’s “entire liquid net worth” in one speculative stock, on margin. The NAC noted that among the types of suitability problems that exist, there are “ ‘reasonable basis’ suitability” and “’quantitative’ suitability” issues and confirmed severe sanctions, noting:

A customer's investment objectives, however, are but one factor to consider in determining whether the broker's recommendations were suitable for the customer. Furthermore, a broker cannot rely upon a customer's investment objectives to justify a series of unsuitable recommendations that may comport with the customer's stated investment objectives but are nonetheless not suitable for the customer, given the customer's financial profile. Thus, even where a customer affirmatively seeks to engage in highly speculative or otherwise aggressive trading, a broker has a duty to refrain from making recommendations that are incompatible with the customer's financial situation and needs. See, e.g., John M. Reynolds, 50 S.E.C. 805, 809 (1992) (stating that regardless of whether the customer wanted to engage in aggressive and speculative trading, the broker was obligated to abstain from making recommendations that were inconsistent with the customer's financial situation); Paul F. Wickswat, 50 S.E.C. 785, 786-87 (1991) ("The proper inquiry is not whether [the customer] viewed [the broker's] recommendations as suitable, but whether [the broker] fulfilled his obligation to his client.").

See also, Siegel v. SEC, 592 F. 3d 147 (D.C. Cir. 2010) for discussion of conduct that could lead to unsuitability claims being upheld under FINRA Rule 2310.

Importantly, the knowing recommendation of unsuitable securities can form the basis of a claim of violation of Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder; in other words, securities fraud. See Eickhorst, et al. v. E.F. Hutton Group, Inc. 1990 U.S. Dist. LEXIS 218 (S.D.N.Y. January 11, 1990); Leone v. Advest, Inc., 624 F. Supp. 297, 304 (S.D.N.Y. 1985)("In this circuit, unsuitability states a cause of action under §10(b) and Rule 10b-5 . . .."). See also, Treacy v. Simmons, Fed.Sec. L. Rep. ¶95,920 at 99,569 (CCH) (S.D.N.Y. April 22, 1991)(JFK); Clark v. John Lamula Investors Inc., 583 F.2d 594 (2d Cir. 1978); Bischoff v. G.K. Scott & Co., Inc., 687 F. Supp. 746,752 (E.D.N.Y. 1986); Mauriber v. Shearson/American Express, Inc., 576 F. Supp. 1231, 1237 (S.D.N.Y. 1983). See also, Mihara v. Dean Witter & Co., Inc. 619 F.2d 814 (9th Cir. 1980) (unsuitability arises under Section 10(b)); Zaretsky v. E.F. Hutton & Co., Inc. 509 F. Supp. 68 (S.D.N.Y. 1981) (unsuitability arises under Rule 10b-5); Troyer v. Karcagi, 476 F. Supp. 1142, 1152 (S.D.N.Y. 1979) Cohen v. Prudential-Bache Securities, Inc., 712 F.Supp. 653, 660 n.4. An allegation that defendants knew or reasonably believed that certain securities were unsuitable, but recommended them anyway, "is more than an allegation of `puffery' and states a violation of Rule 10b-5". Cohen v. Prudential-Bache Securities, Inc., 712 F.Supp. 653, 660 n.4 (S.D.N.Y. 1989) citing to Mauriber, supra.

Swap – Generally a swap is the exchange of one asset or liability for a similar asset or liability in order to lengthen or shorten maturities, or to raise or lower coupon rates, to maximize revenue or minimize financing costs. It can involve selling one securities issue and buying another in foreign currency; or buying a particular currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded off-exchange (over-the-counter.) See the discussion of Credit Default Swaps above for an example.

Swaption - An option (the right, but not the obligation) to enter into a specified type of swap at a specified future date certain.

Symbol – A shorthand unique security identifier system employed in stock exchanges and stock markets to facilitate the trading of securities. On the New York Stock Exchange, symbols are from one to three letters. For example, Citigroup trades under the symbol “C”. A broker placing an order for that stock would simply write the letter C on the order ticket. IBM trades under the symbol “IBM”.

Stock options trade pursuant to a more complex symbol designation, with certain letters indicating the month of expiration and certain letters indicating the strike price. For example, a call option expiring in January and striking at $60 would have the company stock symbol plus the letter A for January (B for February and so on, with January put option starting at M) plus the letter L indicating the $60 strike price (each letter reflecting $5 increments). This system can get complicated.

NASDAQ traded securities usually have four letter symbols, such as MSFT for Microsoft. Sometimes a fifth letter is added to indicate a special or unusual situation, as follows:

  • A - Class A
  • B - Class B
  • C - Issuer qualifications exceptions, such as a temporary
    listing continuance where listing standards are not met
  • D - New
  • E - Delinquent in required filings with the SEC
  • F - Foreign
  • G - First convertible bond
  • H - Second convertible bond, same company
  • I - Third convertible bond, same company
  • J - Voting
  • K - Nonvoting
  • L - Miscellaneous situations, such as depositary
    receipts,stubs, additional warrants, and units
  • M - Fourth preferred, same company
  • N - Third preferred, same company
  • O - Second preferred, same company
  • P - First preferred, same company
  • Q - Bankruptcy Proceedings
  • R - Rights
  • S - Shares of beneficial interest
  • T - With warrants or with rights
  • U - Units
  • V - When-issued and when distributed
  • W - Warrants
  • Y - ADR (American Depositary Receipt)
  • Z - Miscellaneous situations such as depositary
    receipts, stubs, additional warrants, and units.

Tag-Along Rights – The term usually arises in venture capital contracts. Usually, the term applies to a minority investor, who, for a contractually determined tag-along period, has the right to join any deal entered into by majority shareholders to sell their shares. The concept is sometimes expressed as “co-sale rights” or sometimes “piggyback rights”. Tag-along rights essentially obligate the majority shareholders to include the minority shareholder position in any negotiations for the sale of majority interests. Tag-along rights are in fact common in various joint venture, private equity, or other venture capital contracts. Tag-along rights protect minority shareholders.

Tax Refund – Government repayment of interest free loans made to it by taxpayers.

Time – Nature’s way of keeping everything from happening all at once. Time also adds value to money, in the form of interest. In a securities context, time is a factor in options trading, as well as with warrants, rights, tender offers and all investments or investment strategies with expiration or maturity dates. Finally, corporate executives, brokers and others, such as inside traders, who violate various provisions of the law are now given time, generally in prison, by judges, after a guilty plea or verdict is obtained by the prosecution.

TIPS – In addition to money you leave your waiter, or a secret message about which horse to bet on, TIPS also refer to Treasury Inflation-Protected Securities. They come in five year, ten year and twenty year maturities. As the name suggests, these are Treasury instruments issued with the full faith and credit of the U.S. government that provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price All Urban Non-Seasonally Adjusted Index (CPI). When a TIPS matures, the investor is paid the adjusted principal or original principal, whichever is greater. Since a TIPS investor will never receive less than the original principal at maturity, the investor's original principal amount is protected against deflation as well.

TIPS pay interest every six months, at a fixed rate, and pay the principal when they mature. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

Trading at Settlement (TAS) – TAS may be thought of as a limit order in the futures market, whereby an order placed during the trading day will be automatically priced at that day’s closing settlement price of the particular futures contract being traded. TAS, sometimes referred to by traders as “buying settlement”, is particularly useful to commercial hedgers in the petroleum markets who often use average pricing in physical transactions as well as those in the natural gas markets who also use derivative products based on Exchange pricing. TAS was introduced in 2000 in the crude oil and natural gas rings.

NYMEX’s TAS rules are set forth at Rule 6.40B of NYMEX’s “Exchange Rulebook”. In addition, NYMEX issues, from time to time, “Notices to Members” which may set forth specific TAS rules for particular products. So, for example, with respect to gasoline, TAS is available for the front two months except on the last trading day and is subject to the existing TAS rules. Trading in all TAS products, including by open outcry, ceases daily at 2:30 PM Eastern Time. TAS products trade off of a "Base Price" of 100 to create a differential (plus or minus) in points off settlement in the underlying cleared product on a 1 to 1 basis. Example: a crude oil contract trades on CME Globex at TAS 103, and the market for that product settles at $72.10. In that case, the TAS trade is executed at $72.13. Conversely, a trade at TAS 97 settles at $72.07. In the first instance the differential was plus three and in the second the differential was minus 3. A trade done at the Base Price of 100 will correspond to a "traditional" TAS trade, which will clear exactly at the final settlement price of the day.

The TAS products and their commodity codes are: WTI crude oil financial TAS (WST); RBOB gasoline financial TAS (RTT); heating oil financial TAS (BHT); natural gas penultimate financial TAS (HPT); natural gas last day financial TAS (HHT); Brent crude oil financial TAS (BBT); NYMEX Europe Brent crude oil TAS (SCT); and NYMEX Europe gasoil TAS (GRT).

Trading Halt -The temporary suspension of trading of a security by a securities exchange, such as the New York Stock Exchange (NYSE) or the NASDAQ Stock Market. A trading halt—which typically lasts less than an hour but can be longer—can be called for multiple reasons. They are commonly called during the trading day to allow a company to announce important news or if the market develops a significant order imbalance between buyers and sellers in a security. A trading delay (or "delayed opening") is called if either of these situations occurs at the beginning of the trading day.

There are two types of trading halts and delays—regulatory and nonregulatory. The most common regulatory halt and delay happen when a company has pending news, such as a merger announcement or an earnings restatement, that may affect the security’s price (a "news pending" halt or delay). The trading halt or delay gives market participants time and an equal opportunity to evaluate the impact of the news. Another type of regulatory halt happens when there is uncertainty over whether the security continues to meet the market’s listing standards. When a regulatory halt or delay is imposed by a security’s primary market, the other U.S. markets that also trade the security honor this halt.

Nonregulatory halts or delays occur on exchanges, such as the NYSE and Amex (but not on NASDAQ), when there is a significant imbalance in the pending buy and sell orders in a security. When an imbalance occurs, trading is stopped to alert market participants to the situation and to allow the exchange specialists to disseminate information to investors concerning a price range where trading may begin again on this exchange. A nonregulatory trading halt or delay on one exchange does not preclude other markets from trading the security.

The SEC does not halt or delay trading in a security for news pending or order imbalances, but it can suspend trading for other regulatory reasons for up to ten days and, if appropriate, take action to revoke a security’s registration.

Tögrög – Unit of currency of Mongolia.

Uncovered Interest Arbitrage - a form of arbitrage where short-term liquid funds are transferred abroad to take advantage of higher interest in foreign monetary centers. It involves the conversion of the domestic currency to the foreign currency to make investment; and subsequent re-conversion of the fund from the foreign currency to the domestic currency at the time of maturity. A foreign exchange risk is involved due to the possible depreciation of the foreign currency during the period of the investment, and that risk is not covered by any type of hedging transaction, as would take place in covered interest arbitrage.

Undigested Securities - Newly issued stocks and bonds that remain undistributed because there is insufficient public demand at the offering price.

Unit Investment Trust (UIT) – Unit Investment Trusts, one of the three basic types of investment company (the other two being mutual funds and closed end funds), are defined at Section 4(2) of the Investment Company Act of 1940 (“ICA”) and discussed in greater detail at Section 26 of the ICA. The ICA states: "Unit investment trust" means an investment company which (A) is organized under a trust indenture, contract of custodianship or agency, or similar instrument, (B) does not have a board of directors, and (C) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities; but does not include a voting trust.

Essentially, a UIT is a registered investment company that buys and holds a generally fixed portfolio of stocks or bonds. "Units" in the trust are sold to investors who receive a share of the principal and dividends. UIT’s come in two basic flavors - equity trusts and bond trusts. Equity trust expire on a fixed date and bond trusts expire on the maturity date of the security. Bond trusts are divided into taxable and tax-free trusts. UITs are sold to investors by brokers and can be resold in the secondary market. A UIT may be either a regulated investment corporation (RIC) or a grantor trust. The former is a corporation in which the investors are joint owners; the latter grants investors proportional ownership in the UIT's underlying securities.

A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor’s "units," at the investor’s request, at their approximate net asset value. Some exchange-traded funds (ETFs) are structured as UITs. Under SEC exemptive orders, shares of ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for example) and are traded on a secondary market. A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. Because the investment portfolio of a UIT generally is fixed, investors know, from the prospectus, more or less what they are investing in for the duration of their investment.

A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.

Uptick - A securities transaction executed at a higher price than the previous trade. Sometimes called a “plus tick”, it is indicated by a plus sign. Under SEC rules governing short trading, a short sale may only be done on an Uptick. This rule is ingeniously called the “Uptick rule” and, since 1990, covers program trading. This rule, sometimes also known as the "short tick rule" is being eliminated by the SEC, and after July 6, 2007, will no longer be in effect.

Variable Annuity - A life insurance annuity contract (either single or multiple premium), which provides future payments to the holder (called the annuitant). Payments can be taken at any time, but are usually taken at retirement. The size of payments varies with the performance of either the underlying securities in the portfolio, or some designated index. The advantage over its opposite, the fixed annuity, is that the variable payments can adjust for inflation. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. Ordinarily the insurance company issuing the variable annuity will guarantee a certain minimum payment, but the “variable” component above the minimum is not guaranteed.

Variable Rate Demand Obligation (VRDO) – This is a floating rate obligation that has a nominal long-term maturity but has a coupon rate that is periodically reset (e.g., daily or weekly). The investor has the option to put the issue back to the trustee or tender agent at any time upon specified (e.g., seven days’) notice. The put price is par plus accrued interest.

Vatu – Unit of currency of Vanuatu.

Velda Sue - Acronym for Venture Enhancement & Loan Development Administration for Smaller Undercapitalized Enterprises, a federal agency that buys small business loans made by banks, pools them, then issues securities that are bought as investments by large institutions. Originally designed to contribute to the development of a secondary market for small business loans.

Voting Right – Among the rights accompanying the ownership of publicly traded common stock is the right to vote in the election of corporate directors and on corporate resolutions. Voting may be either in person or by proxy. Usually the company mails out proxy forms. In smaller companies the importance of shareholder response to mailed solicitations for voter proxies is greater, since they run the risk of not achieving a quorum.

W-9 – An official IRS form required under Section 3046 of the Internal Revenue Code for U.S citizens and resident aliens to certify a taxpayer identification number (for individuals, this is the social security number) as true and correct, in order to avoid federal tax withholding. This form is usually provided when opening an account at a brokerage firm.

Wall Street – Dutch settlers in New York built a wall that ran across lower Manhattan from river to river to protect themselves from the native population. The term is used to describe the financial district in New York where the New York Stock Exchange is located (at the corner of Wall and Broad). It is also used to refer to the investment community as a whole and is most often shortened to “the Street”, as “the Street is bullish on XYZ Corp.”

Warrant - A warrant is a type of long-term purchase right, specifically the right to buy a stock at a particular price within a certain period of time, usually in excess of one year, often for many years, and sometimes with no expiration. Warrants are often issued as part of a “unit” in an IPO, where, for example a unit might originally consist of two shares of common stock and one warrant, until after market trading begins and the warrants are traded independently of the stock. Warrants can also attach to bonds. Put warrants, which give the holder the right to sell a security at a certain price are relatively rare.

WKSI (well known seasoned issuer) - A new category (pursuant to SEC rule changes in 2005) of issuer. The term WKSI (pronounced “Wiksi”) applies to a public company that is current and timely (with limited exceptions) in its Securities Exchange Act of 1934 filings for the previous 12 months and either has (1) a worldwide public common equity float of at least $700 million or (2) registered and issued for cash at least $1 billion in debt or non-convertible securities within the previous three years. WKSIs can take advantage of a streamlined shelf registration process that provides automatic effectiveness of registration statements upon filing (i.e., no SEC review), pay-as-you-go registration fees, and expanded use of prospectus supplements.

Won – Unit of currency of North Korea and South Korea.

Wooden Ticket – A confirmation, sent in violation of MSRB and SEC rules, “confirming” the terms of a transaction with a customer that, in fact, did not take place. The term is used largely in the bond context, and reflects a violation of MSRB Rule G-17. An unscrupulous broker-dealer might send such fraudulent confirmations to unsophisticated investors on the chance that some investors might mistakenly honor the transactions.

The term can also be used to refer to “an order to purchase securities for which the purchaser does not pay whether or not the intention not to pay existed at the time of the order.” United States v. Corr, 543 F.2d 1042, 1045n.4 (2d Cir. 1976).

X – the Roman numeral ten. Rarely used in securities transactions, but lawyers sometimes use Roman numerals to number paragraphs or “articles” in contracts and prospectuses.

Xetra® - Launched in November 1997, Xetra is the trading system for the cash market of Deutsche Börse. It is an electronic trading platform, designed for the Frankfurt Stock Exchange, and is basically an automated system for fully electronic securities trading. Xetra has been licensed by some 14 stock exchanges around the world. Xetra is sometimes loosely referred to as a “German electronic exchange.” Amato v. KPMG LLP, 433 F. Supp. 2d 460, 478 (M.D. Pa. 2006).

Yellow Sheets - Daily publication from the National Quotation Bureau that provides bid and ask prices of corporate bonds traded in the over the counter (OTC) market and firms that are market makers in the particular bond. The sheets are printed on yellow paper. Equity issues (stocks) that trade OTC are covered on the Pink Sheets.

Yen – Unit of currency of Japan.

Yen Bond – any bond denominated in Japanese Yen. Eurobonds denominated in Yen are called Euroyen bonds, generally issued by non-Japanese companies outside Japan. Despite the name, Euroyen bonds are not limited to European markets, but are found in bond markets around the world. For example, a U.S. bank holding Yen Bonds issued by a French company is holding Euroyen bonds. Euroyen bonds also tend to have small par values and high liquidity.

Yuan – Unit of currency of China.

Zero Coupon Security - Debt security that makes no periodic interest payments but is sold at a deep discount from face value.

There are several kinds of zero coupon securities. The most popular is the zero coupon bond. This bond can either be issued by a corporation or by a brokerage firm when it strips the coupons off a bond and sells the principal and the coupons separately. This technique is used frequently with Treasury bonds. Zero coupon bonds are also issued by municipalities. The bondholder does not receive interest payments, only the full face value at redemption on the specified maturity date. The IRS claims that the owner of a zero-coupon bond owes income taxes on the interest that has accrued each year, even though the bondholder does not actually receive any payment until maturity. The IRS calls this “imputed interest”.

Because zero coupon securities do not make interest payment, they are considered more volatile than bonds making periodic payments. When interest rates rise, zeros fall more sharply than interest paying bonds. However, zero coupon securities rise more rapidly in value when interest rates drop.

Zero uptick - A price that is the same as the previous transaction price, but is greater than the most recent different transaction price. It is also known as zero-plus tick, and is the opposite of a zero-minus tick.

Złoty – Unit of currency of Poland.

Z-tranche – Tranche is French for “slice”. Certain investments are structured in pieces, classes, or slices, all of which can be referred to as tranches. A Z-tranche is a special type of bond class in a sequential pay collateralized mortgage obligation. It is the fourth tranche of bonds in a typically structured CMO. It combines features of Zero Coupon Securities and mortgage pass through securities. This class of bond does not receive any interest or principal payments until the three other tranches (A [fast pay] B [medium-pay] and C [slow-pay]) have been completely paid off. In a Z-tranche, the interest that is not paid is accrued and added to the principal for future interest calculation purposes.

The main purpose of the Z-tranche is to speed up the maturity of the senior tranches by disbursing payment that the Z-tranche was supposed to receive to the higher priority tranches. Z-tranche is sometimes known as Z-bond. Mon Dieu.


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