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."
The Series 56 is designed to test a candidate’s knowledge of applicable products, securities markets, trading and reporting practices, investment strategies, and anti-fraud provisions as applicable to the role of a proprietary trader or market maker.
Dick said Bright might consider requiring new traders to take the Series 56 rather than the Series 7 after Sept. 19.
But the exchanges might have something to say about that. The CBOE is requiring everyone who trades or makes markets on it to take the Series 56, regardless of whether they hold a Series 7. A spokesperson said that equates to about 300 or so traders who need to take the exam, and that some are filing waiver requests to not take the new exam.
A spokesperson for the ISE said testing requirements will be communicated to its members in a Regulatory Information Circular in due course.
According to Toro’s Robinson, the new exam is 100 questions long and takes about two and a half hours to complete. Specifically, the test covers such topics as concentration monitoring, closing out errors, expiring exercise declarations and exercise limits.
Like most of the industry tests, the Series 56 will be administered by FINRA.
For those taking the Series 56, there is a so-called "30-30-180" rule that applies. A trader must wait 30 days to retake the test if he fails, and another 30 days before applying to take it again, should he fail it a second time. After that, he must wait 180 days before taking it a third time.
The development of the Series 56 began back in 2009. The SEC discovered some exchanges were not registering prop traders and market makers, or broker-dealer employees not dealing with customers. It directed the CBOE and ISE to plug the gaps. The two exchanges set about creating tests to do so. The CBOE then met with other exchanges and drove the Series 56 initiative.
As the deadline to the exam approaches, traders still have time to either get study materials or submit a waiver request. According to a person with knowledge of the test at the CBOE, pros at the exchange are still submitting waivers in the hopes of not taking the exam.
"We don’t have a final number of waivers yet. And there is still talk the SEC might give a blanket waiver to all those holding a Series 7, but no one is sure yet," the person said.
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