Free FINRA Series 7 (General Securities Representative) Processing Transactions Practice Questions

Choice B is correct because Rule 611 (the Order Protection Rule) of Regulation NMS requires trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs of protected quotations. A trade-through occurs when an order is executed at a price inferior to a protected quotation displayed by another trading center. This ensures that investors receive the best available price across all markets.

Choice A is incorrect because Regulation NMS does not impose a specific time limit for order execution. The rule focuses on price protection across markets, not execution speed.
Choice C is incorrect because the Order Protection Rule requires price priority, not volume-based routing. Orders must be routed to obtain the best price, not necessarily to the highest-volume exchange.
Choice D is incorrect because the obligation for market makers to maintain continuous two-sided quotes relates to exchange rules and SEC market maker obligations, not specifically to Rule 611 of Regulation NMS.

Choice C is correct because in a principal transaction, the broker-dealer acts as a dealer, buying from or selling to the customer from the firm's own inventory (proprietary account). The firm earns a markup or markdown rather than a commission.

Choice D is incorrect because executing a customer order on an exchange for a commission describes an agency transaction, where the firm acts as a broker on behalf of the customer.
Choice B is incorrect because matching buy and sell orders between customers describes an agency cross transaction, not a principal transaction.
Choice A is incorrect because routing a customer order to another firm for execution is an agency function (order routing), not a principal transaction from the firm's own account.

Choice B is correct because a crossed market occurs when the national best bid on one exchange exceeds the national best offer (ask) on another exchange. This creates an anomaly where a buyer is willing to pay more than a seller is asking, indicating a breakdown in normal price discovery. Regulation NMS prohibits trade-throughs and requires market centers to prevent crossed and locked markets through their quotation practices.

Choice A is incorrect because two exchanges displaying the same best bid price describes a situation where bid prices are equal, which is normal competitive quoting. A crossed market specifically requires the bid to exceed the offer across venues, not merely equal bids on different exchanges.
Choice D is incorrect because Regulation NMS does not establish maximum bid-ask spread widths for market makers. While wide spreads may indicate poor liquidity, they do not constitute a crossed market. A crossed market is defined by the relationship between the best bid and best offer across exchanges.
Choice C is incorrect because executing a customer order at a price worse than the NBBO describes a trade-through violation under Rule 611 of Regulation NMS, not a crossed market. While both are prohibited under Reg NMS, they are distinct concepts. A crossed market is a quoting anomaly, while a trade-through is an execution violation.