Securities Trader Representative (Series 57) Practice Exam

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Broker-Dealer X accepts a customer limit order to buy 1,000 shares of ABCD. Which of the following statements is TRUE?

X may display the customer's order in its quote without violating Regulation M
X is prohibited from displaying the customer's order in its quote, as this would violate Regulation M
X may display 500 shares of the customer's order, but must leave the other 500 shares undisplayed
X violated Regulation M by accepting the customer's limit order, regardless of whether it is displayed

The correct answer is: X may display the customer's order in its quote without violating Regulation M

Broker-Dealer X can display the customer's limit order in its quote without violating Regulation M because this regulation primarily addresses issues surrounding manipulative practices in the trading of securities, particularly during a distribution or offering period. When Broker-Dealer X accepts the limit order from the customer to buy shares, it can place that order in the market, contributing to transparency and allowing other market participants to see the supply and demand for ABCD shares. Displaying the order is appropriate as it does not create the kind of potential manipulation that Regulation M aims to prevent. Regulation M’s rules focus on preventing misleading activities that could distort market prices, but merely displaying a limit order from a customer does not fall into this violation. Instead, it can foster an environment of fair trading, benefiting both the firm and market integrity. The other statements do not align with the relevant regulatory framework regarding displaying limit orders. Regulations do not necessitate restrictions on how orders are displayed based solely on being limit orders.