Securities Trader Representative (Series 57) Practice Exam

What is a market maker NOT allowed to do while holding a large institutional order?

1. Execute an order for its own account in an option on the security

2. Accept an execution against its own account

3. Execute any other customer orders for the security

4. Execute orders for its own account in the security

The correct answer is: Execute an order for its own account in an option on the security

A market maker is prohibited from executing an order for its own account in an option on the security while holding a large institutional order to ensure that there is no potential for conflicts of interest that could disadvantage the institutional client. This restriction is in place to maintain the fairness and integrity of the trading process. When a market maker has a large institutional order, it is essential that its actions do not influence the market price unduly or impinge upon the fulfillment of the larger client’s needs. By restricting its ability to trade on its own account in options, regulations help to prevent any possible price manipulation or inappropriate trading practices. Executing orders for its own account in the security, accepting executions against its own account, or executing other customer orders can still be conducted, provided it is done in a manner that doesn't conflict with the execution of the large institutional order. This way, the market maker can continue to function normally while prioritizing the execution of the institutional order.