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Series-7 - Obtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes and Confirms Transactions - Section 4.1

Apply the types of orders and quotes, short-sale requirements, and best-execution obligations when obtaining and entering customer purchase and sale instructions.

Distinguish the order types - market, limit, stop, all-or-none (AON), fill-or-kill (FOK), immediate-or-cancel (IOC), and market-on-close (MOC) - and the conditions under which each executes, and apply firm versus subject quotes. Apply the short-sale locate, marking, and delivery requirements of Regulation SHO and FINRA Rule 4320, and the member's best-execution obligation under FINRA Rule 5310.

Limit orderStop orderRegulation SHOBest executionFINRA Rule 5310

Practice question for this objective

Free sampleObtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes and Confirms Transactionsmedium

Under FINRA Rule 5310 on best execution, what does a member firm's core obligation require when handling a customer order?

  • ATo route every customer order to the exchange that lists the security, regardless of the price available elsewhere.
  • BTo guarantee the customer the national best bid or offer displayed at the exact instant the order is entered.
  • CTo use reasonable diligence to ascertain the best market and obtain a price as favourable as possible under prevailing conditions. Correct
  • DTo execute the order only as principal so the firm can control the markup and improve the customer's net price.
FINRA Rule 5310 requires reasonable diligence to find the best market and obtain the most favourable price under prevailing conditions. Best execution is a diligence standard, not a price guarantee. The firm must weigh factors such as price, market conditions, size, and the character of the market to seek a result as favourable as reasonably possible for the customer.

Why A is wrong: Best execution is market-neutral and does not mandate the listing exchange. Rule 5310 asks the firm to compare markets, so a fixed routing rule ignoring price conflicts with the standard.

Why B is wrong: The rule sets a diligence standard, not a guarantee of a specific displayed price. Best execution considers several factors, so promising the NBBO at a single instant overstates the duty.

Why C is correct: Rule 5310 requires reasonable diligence to determine the best market for the security so the resulting price is as favourable as possible for the customer given current market conditions.

Why D is wrong: Best execution does not require a principal capacity, and trading as principal does not by itself satisfy the duty. The obligation is about diligence across markets, not about how the firm is compensated.

See more Series-7 practice questions with worked answers.

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