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September 1, 2011

New Trader Test Draws Near

By John D'Antona Jr.

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  • New Trader Test Draws Near
  • Page 2

It's time to cram. Market makers, proprietary traders and floor brokers only have a few weeks left to take and pass the Series 56 exam, otherwise known as the "Proprietary Traders Qualification Exam," or see their careers come to an abrupt halt.

Regulatory agencies including the Securities and Exchange Commission and the Financial Industry Regulatory Authority, and exchanges such as the Chicago Board Options Exchange, the CBOE Stock Exchange, C2 and CBX, are all requiring traders to pass the exam by Sept. 19. The International Stock Exchange is requiring traders to have either Series 7 or Series 56 accreditation.

However, not all regulators have decided on whether or not a trader has to take the exam yet, especially if the trader already has passed the Series 7.

Originally, the deadline for taking the test was Aug. 12, but it was pushed back due to a lack of available study materials. According to exchange officials, study materials are now plentiful.

Danon Robinson, founding partner at Toro Trading in New York, recently took the test and told Traders Magazine he had little trouble finding study materials for the exam. However, he was surprised at the test's contents and difficulty.

"It wasn't easy," said Robinson. "There were a some topics I felt weren't highlighted in the study materials."

For example, he said, the test had many questions that were customer-related, rather than pertaining to trading. He passed the Series 56, as his designated examination authority is the CBOE. Another trader at his firm has already taken the exam. However, others have not and are applying for waivers that would exempt them from taking it.

While the Series 56 covered topics Robinson felt were not necessary for a prop trader to know, he did say it also covered applicable topics and made more sense for him and his traders to take, rather than the Series 7-a much longer and more comprehensive exam.

Typically, market makers and prop traders are required to take either the Series 7 exam and/or one of the house exams devised by the exchanges in order to trade. Examples of those are Nasdaq's Series 55 exam, NYSE Amex's Series 48 exam and NYSE Arca's Series 44 exam.

The new test will likely supersede the house exams. Still, some exchanges might continue to require new traders to take an orientation test, to ensure they understand the vagaries of the exchange's rules.

The new Series 56 contrasts sharply with the Series 7, a lengthy test covering a wide array of brokerage topics. Most of the content in the Series 7, its detractors say, is irrelevant to trading, as it takes in such matters as municipal bond trading and opening customer accounts. The Series 7 is primarily geared toward retail stock brokers.

However, for traders who already have a Series 7 license, the new exam seems like overkill. According to Dennis Dick, a prop trader at Bright Trading in Detroit, the new exam is similar to the Series 7, which should be enough for anyone.

"All current Bright traders are already required to take the Series 7 examination and are not affected by the new Series 56 requirement," Dick said. "Our self-regulatory organization, the Chicago Stock Exchange, has a proposed rule change currently outstanding that would allow prop traders associated with its members the option of either taking the Series 7 or the Series 56."