•SEC Rule 606
•Investment Tips for Margin Account
•Types of Orders
•Short Sale Risk & Practice Disclosure
•Day-Trading Risk Disclosure Statement
•Risks to Option Writers
•Special Risks of Index Options
•Business Continuity Plan
•FINRA Regulation for Margin Account
•Characteristics and Risks of Standardized Options (ODD) – PDF
•Option Risk Disclosure Supplements
SEC Rule 606 (Formerly 11Ac1-6) requires certain brokerage firms to make publicly available quarterly reports on their order routing practices. Quest Capital Strategies, Inc. is an introducing broker-dealer. All order routing of transactions is directed through our clearing firm, RBC CS. for quality execution services. Quest Capital Strategies, Inc. relies on RBC CS’s best execution review in determining the best available market or venue to route client orders.
RBC Correspondent Services (RBC CS) has provided information pursuant to a U.S. Securities and Exchange Commission rule (11Ac1-6) that requires firms to make publicly available, quarterly reports on the firm’s order routing practices. The report provides information on the routing of “non-directed orders” which is generally defined as any order that the client has not specifically instructed to be routed to a particular venue for execution.
For these non-directed orders, RBC CS has selected the execution venue on behalf of its clients.
The report is divided into four sections: one for securities listed on the New York Stock Exchange, one for securities listed on The Nasdaq Stock Market, one for securities listed on the American Stock Exchange or regional exchanges, and one for exchange-listed options.
For each section, this report identifies the venues most often selected by RBC CS, sets forth the percentage of various types of orders routed to the venues, and discusses the material aspects of RBC CS’s relationship with the venues.
Transaction Auditing Group (TAG) has been selected to disseminate on their public Web site the Order Handling Disclosure Report for RBC CS.
Quest Capital and/or RBC CS do receive remuneration, compensation or other consideration for directing customer orders for equity securities to particular brokers/dealers or market centers for execution. Such consideration may take the form of financial credits, monetary payments or reciprocal business.
At Quest Capital Strategies, Inc., we understand the importance of protecting customer’s privacy. Quest Capital has been committed to keeping our customer information private and secure.
At Quest Capital, we have a responsibility to protect the privacy and confidentiality of customer information. The physical, electronic and procedural safeguards we maintain comply with federal standards to save and secure information about clients from unauthorized access, alteration and destruction. For example, we maintain control policies that permit access to personal information only by individuals who need access to do their work.
Periodically, we may enter into agreements with other companies to provide services to us or to make products and services available to you. Under these agreements, the companies may receive information about you but they must protect this information and they are not permitted to use it for any other purposes. Since concerns you and your account(s) were collected by our representative(s), he/she has been instructed to protect the same while under our employ and beyond. In the event that you should transfer your account to a new broker-dealer, your information will be disclosed to the new firm.
Information We Have About You
Various sources provide us with information about you. We may receive or derive information from:
• Your requests for Quest Capital products or services, such as your financial information on a new account application
• Your transactions with us, such as your account balances and transaction history
• Credit bureaus and other consumer reporting agencies
Information Quest Capital May Share
For legal and routine business reasons as allowed by law, Quest Capital shares information it has about you. For example, we may share information with regulatory authorities, such as SEC, FINRA, various state authorities and law enforcement; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We may also share information we have about you, as described above, with firms Quest Capital hires to market Quest Capital products and services. Quest Capital does not share personally identifiable information it has about you with anyone, except as stated in this paragraph. If you have any questions regarding this policy, please feel free to contact us at (949) 830- 4885.
SEC guidelines can be found here
Market orders: An order to buy or sell at the price immediately available in the market. While order execution is guaranteed, price is not and can change between the time of order submission and the time of order execution.
Limit orders: A limit order is an order to only execute if a price at or better than the set “limit” (at or below for buy and at or above for sell). While price is guaranteed, order execution is not as there may not be other parties willing to trade at the selected limit prices.
Stop orders: become market orders if the bid or ask price (depending on whether it is a buy or sell order) of the security reaches the stop price.
Stop Limit orders: become limit orders if the bid or ask price (depending on whether it is a buy or sell order) of the security reaches the stop price.
Day orders: expire if not filled by the end of the day.
Good-Till-Canceled orders: do not expire until canceled or the time limit determined by Quest Capital and/or our Clearing Firm is reached, whichever is sooner. Our clearing firm or Quest Capital can cancel any Good-Till-Canceled orders at any time with or without notification. We can cancel them selectively or as a part of a periodic clean-up cancellation.
At-the-opening and Market On-close orders: are executed at the opening of the trading day after the order is placed or as close as possible to the close of trading on the day (cut off time for entry is 3:40 P.M. EST) the order is placed.
Not-Held orders: give the broker discretion on price and time of execution.
Fill or Kill: orders must be executed immediately in their entirety or will be canceled (killed).
All or None orders: must be executed in full, but not immediately, if there is insufficient supply to meet the quantity requested by the order then it is canceled at the close of market.
Selling short (Short Sale) is a strategy employed by aggressive investors attempting to benefit from the expected price deterioration of a security. It is the reverse strategy of purchasing stock in a margin account. While purchasing stock long is the speculation of upward price movement, selling short is the speculation of downward price movement of a stock. In a short sale losses could be limitless.
The stock market as represented by various indices has appreciated in the last few decades except for short periods of downturns. Therefore, from a historic perspective the stock market imposes substantially more risks on short sales than buying long.
When you sell short, you are borrowing the stock that you are shorting from the clearing firm. Therefore, you are shorting the stock for as long as the stock is available for borrowing. For instance, if the stock is a “tight issue” it could be called back the next day and you will be forced to purchase the stock to cover the position. Speculators tend to short sell certain stocks, creating large short positions. In the event that the stock continues to appreciate, short sellers would have to cover their positions from time to time with purchases. If enough of them are buying within a relatively short period of time, the price of the stock is pushed further up, forcing more short sellers to cover their positions. This is called a “Short Squeeze.” You are warned of the danger that you may be forced to cover your short positions due to this.
Every new contribution toward your short account would be your affirmation of the direction and strategy of the activities in the account. You are told that these additional contributions, whether or not they were the result of margin call(s), will increase the likelihood of increasing the size of a loss.
The margin requirement is lower for shorting against the box. Once you decide to close a “short against the box” position utilizing your long sided position, you must submit a letter to Quest Capital detailing how you want to offset the position. This letter is required for record of intent and for tax purposes. If the short side is purchased, the remaining long side is a new purchase. If the long side is sold, the remaining short is treated as a new short position. There may also be the possibility that an additional deposit of funds may be required to meet minimum margin requirements.
The credit balance in a short account represents the market value of the securities that are short in the account. This balance may not be used for trading or pay out. No interest will be paid on this balance. SMA requires special computations, which are beyond the scope of this discussion. Lastly, Quest Capital is hereby informing you that short selling is a highly speculative strategy and the repercussions are outlined in each of the above paragraphs. Despite these warnings, in the event that you would like to proceed with a short sale, you agree not to hold Quest Capital and its representative, directors, officers and employees liable, even though this may be considered a highly speculative investment.
You should consider the following points before engaging in a day-trading strategy. For purposes of this notice, a “day-trading strategy” means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities. Your account is not to be used for the purpose of engaging in a day-trading strategy unless you agree to notify Quest Capital in writing and obtain its approval prior to adopting a day-trading strategy.
Day trading can be extremely risky and generally is not appropriate for someone of limited resources, limited investment or trading experience, and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success. Be cautious of claims of large profits from day-trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day-trading. Day-trading can lead to large and immediate financial losses.
Day-trading requires in-depth knowledge of securities markets, trading techniques and strategies. In attempting to profit through day-trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day-trading. You should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Day-trading will generate substantial commissions, even if the per trade cost is low. Day-trading involves aggressive trading, and generally you will pay a commission on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. When you day-trade on margin or short selling it may result in losses beyond your initial investment. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy may also lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
Covered option writing involves risks associated with option trading in general, as well as the additional risk of selling an option for its premium return.
1. Some Strategies, Types, and Actions of Options:
“Covered Calls”: An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium. In writing a call option, the investor is selling the right to someone else in exchange for cash paid today. This seller gives the buyer of the option the right to buy your shares before the option expires at a predetermined price, called the strike price.
“Naked Calls” are an options strategy in which an investor writes (sells) call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the security shares that are eligible to be exercised under the options contract.
“Options Exercise”: In options trading, the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price.
“Put Options” are an option to sell assets at an agreed price on or before a particular date.
“Option Assignment” is the receipt of an exercise notice by an option writer that requires him/her to sell the security in the case of a call option, or to buy the security in the case of a put option, at the specified strike price. Here, also called exercise assignment or exercise notice.
2. “Walk down” of the option selling strategy is the closing of one position while opening another one in the same underlying stock but at different maturity dates. This strategy is often employed when the underlying stock has experienced a continuing decline in price. While a larger premium will be earned with a longer-term option contract to compensate for the loss of value in the underlying stock, the additional premium may not be comparable to what can be earned with other income instruments. Further, the stock may deteriorate to such a level that option writing may no longer be possible, thereby resulting in a substantial loss of principle. Rapid stock price deterioration would make a “walk down” strategy impossible to implement.
3. There is no corresponding “walk up” strategy to preserve income when the underlying stock appreciates. The stock will get called away when it is “in the money” for the purchaser. As a result of being “called away,” you will not be participating in any further stock appreciation.
4. Frequent trading activity may happen in your account by using the option writing strategy due to option expiration or exercise or assignment. The total transaction costs may reduce your profit or you may lose your principal.
5. An option writer may be assigned an option contract exercise at any time during the life of that option, whether or not you have received notice of the assignment.
6. The writer of a covered call forgoes the opportunity to benefit from an increase in the value of the underlying issue above the option strike price, yet continues to bear the risk of a decline in the value of the underlying stock.
7. The writer of an uncovered call is in an extremely risky position and may incur large losses if the value of the underlying interest increases above the exercise price.
8. As with writing uncovered calls, the risk of writing put options is substantial. The writer of a put option bears a risk of loss of the value if the underlying interest declines below the exercise price, and such loss could be substantial if the decline is significant.
9. The risk of being an option writer may be reduced by the purchase of other options on the same underlying interest – and thereby assuming a spread position – or by acquiring other types of hedging positions in the options markets or other markets. However, the risks can still be significant.
10. The obligation of a writer of an uncovered call or of a put that is not cash-secured to meet applicable margin requirements creates additional risks.
11. Since the leverage inherent in an option can cause the impact of price changes in the underlying interest to be magnified in the price of the option, a writer of an option that is uncovered and unhedged may have a significantly greater risk than a short seller of the underlying interest.
12. The fact that an option writer may not receive immediate notification of an assignment creates a special risk for an uncovered writer of physical delivery. Call stock options that are exercisable when the underlying security is the subject of a tender offer, exchange offer, or similar event will create greater risk.
13. There is a risk that an option exercise will be assigned to an option writer based on news that is published after the established exercise cut-off time, and that the writer may not have an effective remedy to compensate for the violation of the options market’s rules.
14. If a trading market in an option should become unavailable, or if the writers of the option are otherwise unable to engage in closing transactions, the writers of that option would remain obligated until expiration or assignment.
15. A sudden development may cause a sharp upward or downward spike in the value of the interest underlying a capped option.
All factors present now or which may appear in the future can negate your option strategies. Please inform us of any changes in your trading strategy in writing.
Investing in options involves many potential risks and is not suitable for all investors. Additional documentation and information with respect to investing in options can be made available upon request.
1. Writers of cash-settled index call options cannot provide in advance for their potential settlement obligations by acquiring and holding the underlying interest.
2. Even if the writer of a cash-settled index call option could assemble a securities portfolio that exactly reproduced the composition of the underlying index, the writer still would not be fully covered from a risk stand point because of the “timing risk” inherent in writing cash-settled options.
3. The timing risk discussed in the preceding paragraph makes spread positions and certain other multiple option strategies involving cash-settled American-style index options substantially riskier than similar strategies involving physical delivery options.
4. Investors using index options to hedge against market risk entailed in investing in individual securities should recognize the complexities of utilizing index options in this manner.
5. Just as holders and writers of index options bear the risk that transactions in their underlying security may be erroneously reported, holders and writers of index options bear the risk that the reported current index level may be in error.
6. A holder of a cash-settled index option who exercises it before the exercise settlement value of the index for that day is available runs the risk that the level of the underlying index may subsequently change.
7. Cash-settled index options whose exercise settlement values are based on the opening prices of the constituent securities are not traded on the last scheduled trading day for those securities prior to the option expiration date.
8. Current index levels will ordinarily continue to be reported even when trading is delayed or interrupted in some or all of the constituent securities of the index or when the reporting of transactions in those securities has been delayed.
9. OCC has no authority to restrict the automatic exercise of capped index options, even while other styles of options may be restricted.
10. The purchase and sales of index options in foreign markets at times when U.S. markets are closed may present special risks.
In accordance with FINRA Rule 3510 and 3520, Quest Capital Strategies, Inc. has developed a Business Continuity Plan on how we will respond to events that significantly disrupt our business. Since the timing and impact of disasters and disruptions is unpredictable, we will have to be flexible in responding to actual events as they occur. Quest Capital is committed to protect and minimize damages to customers, representatives, employees, and the corporation as a whole in an event that a disaster was to take place.
Purpose of Business Continuity Plan
Our firm’s policy is to respond to a Significant Business Disruption (SBD) by safeguarding employees’ lives and firm property, making a financial and operational assessment, quickly recovering and resuming operations, protecting all of the firm’s books and records, and allowing our customers to transact business. In the event that we determine we are unable to continue our business, we will assure customers prompt access to their funds and securities.
We plan to quickly recover and resume business operations after a significant business disruption and respond by safeguarding our employees and property, making a financial and operational assessment, protecting the firm’s books and records, and allowing our customers to transact business. In short, our business continuity plan is designed to permit our firm to resume operations as quickly as possible, given the scope and severity of the significant business disruption.
Our business continuity plan addresses: data back up and recovery; all mission critical systems; financial and operational assessments; alternative communications with customers, employees, and regulators; alternate physical location of employees; critical supplier, contractor, bank and counter-party impact; regulatory reporting; and assuring our customers prompt access to their funds and securities if we are unable to continue our business.
Our clearing firm, RBC Correspondence Services, backs up our important records in a geographically separate area. While every emergency situation poses unique problems based on external factors, such as time of day and the severity of the disruption, our clearing firm has advised us that its objective is to restore its own operations and be able to complete existing transactions and accept new transactions and payments within forty-eight hours. Your orders and requests for funds and securities could be delayed during this period.
If you have questions about our business continuity planning, you can contact us at 949-830-4885 or write us at 23832 Rockfield Blvd., Suite# 130, Lake Forest, CA 92630
FINRA Guidelines can be found here.