Trading, Settlement, Customer Accounts, and Prohibited Activities
This chapter covers the mechanics of how securities trade and change hands, the timeline for completing a trade, the different ways customers hold their assets, and the conduct rules that keep the markets fair. It is the largest section of the SIE exam because day-to-day brokerage work touches all of these areas. Master how orders are entered and filled, how a trade settles and clears, which account type fits which customer, and the bright-line conduct rules that separate a legitimate transaction from a violation. Anti-money-laundering obligations round out the chapter, since every firm must know its customers and watch for suspicious money movement.
How Trades Happen: Orders, Quotes, and Market Roles
When a customer wants to buy or sell, the instruction is captured as an order. A market order fills immediately at the best price available, while a limit order sets a maximum price to pay or a minimum price to accept and will only fill at that price or better. Stop orders sit dormant until the market reaches a trigger price, then activate. Every quoted security shows a bid (the highest price buyers will pay) and an ask or offer (the lowest price sellers will take); the gap between them is the spread, which is effectively a cost of trading and tends to be wider for thinly traded securities. A customer who buys expecting prices to rise is long; a customer who borrows shares to sell now and repurchase later at a hoped-for lower price is short. Trades occur either on organized exchanges, which use a centralized auction, or in the over-the-counter (OTC) market, a decentralized dealer network connected electronically.
Market Makers, Agency, and Principal Transactions
A firm can act in two capacities when handling a trade. As an agent (or broker), it arranges a transaction between a customer and a third party and charges a commission for the service, never taking the security into its own inventory. As a principal (or dealer), it trades from its own account, selling securities it owns to the customer or buying securities into inventory, and earns its compensation through a markup or markdown built into the price rather than a separate commission. A market maker is a dealer that continuously quotes both a bid and an ask for a given security, standing ready to buy or sell and thereby providing liquidity. The capacity in which a firm acts must be disclosed to the customer on the trade confirmation, and a firm cannot charge both a commission and a markup on the same trade.
Settlement, Clearing, and Corporate Actions
Executing a trade is only the first step; the trade must then settle, meaning cash and securities actually change hands. For most securities, settlement occurs one business day after the trade date, known as T+1. Clearing organizations sit between the buying and selling firms, guaranteeing performance and netting obligations so that securities and money flow correctly. Corporate actions are events initiated by an issuer that affect its shareholders, such as dividends, stock splits, and mergers. Several key dates govern who is entitled to a dividend: the declaration date announces it, the record date determines who is on the books as an owner, the ex-dividend date is the cutoff after which a buyer no longer receives the pending dividend, and the payable date is when the dividend is actually paid. Under a T+1 cycle, the ex-dividend date is typically the same business day as the record date.
Types of Customer Accounts
Firms open accounts in several forms to match how customers own and control their assets. An individual account has one owner. A joint account has two or more owners; joint tenants with right of survivorship (JTWROS) pass a deceased owner's share automatically to the survivors, while tenants in common (TIC) pass a deceased owner's share to that person's estate. A custodial account, such as an UGMA or UTMA account, is opened by an adult for the benefit of a minor, with the custodian managing it until the minor reaches the age of majority. A trust account is managed by a trustee according to a trust document for named beneficiaries. Retirement accounts, including traditional and Roth IRAs and employer plans, receive special tax treatment in exchange for contribution and withdrawal rules. A discretionary account authorizes the representative to make trades without contacting the customer first, but only with prior written authorization.
Prohibited Activities and Conduct Violations
Securities law draws bright lines around conduct that harms investors or distorts markets. Insider trading is buying or selling based on material nonpublic information in breach of a duty, and it is prosecuted aggressively. Market manipulation includes schemes like painting the tape, matched orders, and pump-and-dump campaigns that create a false appearance of trading activity or price. Churning is excessive trading in a customer's account driven by the representative's desire for commissions rather than the customer's interests. Unauthorized trading is entering an order without the customer's consent in a non-discretionary account. Selling away is a representative privately arranging securities transactions outside the firm without the firm's knowledge and approval. Each of these can lead to fines, suspension, or a permanent bar from the industry.
Anti-Money-Laundering: BSA, CIP, and Reporting
The Bank Secrecy Act (BSA) is the foundation of the U.S. anti-money-laundering framework, requiring financial institutions to help the government detect and prevent money laundering. Every broker-dealer must maintain a written AML compliance program with a designated officer, ongoing training, and independent testing. The Customer Identification Program (CIP) requires firms to verify the identity of each customer at account opening by collecting name, date of birth, address, and a taxpayer identification number. Know Your Customer (KYC) obligations go further, requiring firms to understand each customer's financial situation and objectives. Firms must file a Suspicious Activity Report (SAR) when they detect transactions that appear designed to evade reporting or that lack a lawful purpose, and a Currency Transaction Report (CTR) for cash transactions exceeding a set dollar threshold in a single day.
Last updated: July 2026