DISCLAIMERS

Recently, there has been a marked increase in the price volatility of many stocks, particularly those of Internet issuers. This volatility has been coupled with record trading volume in many of these stocks, leading to large order imbalances, systems queues, and backlogs. During these extreme market conditions, procedures are often implemented to preserve the continuous execution of customers’ orders while also lessening the exposure of the broker-dealer to extraordinary market risk. For example, some Market Maker firms temporarily discontinue normal automatic order executions and handle orders manually. Firms also reduce their size guarantees on individual stocks or groups of stocks (i.e., stocks of Internet issuers) on a going-forward basis. Delays in order executions and executions at prices significantly away from the quoted market price may occur, which in turn could lead to market losses caused by executions at prices higher or lower than customers expected.

See Also:

NASD "Guidance to Investors Regarding Stock Volatility and On-Line Trading"

NASD Notice to Members 99-11 NASD Regulation Issues Guidance Regarding Stock Volatility
(PDF File)

High volumes of trading at the market opening or intra-day may cause delays in execution and executions at prices significantly away from the market price quoted or displayed at the time the order was entered. Market Makers may execute orders manually or reduce their size guarantees during periods of volatility, resulting in possible delays in order execution and losses. On-line investors, who have come to expect quick executions at prices at or near the quotes displayed on their computer screens will encounter slower processing of their orders, at times significantly so.

In a volatile market, the kind of order you choose is very important since the markets aren't moving in their typical, orderly fashion. The following information describes the kinds of orders you can place and how they affect an execution.

Market Order - This order will typically assure you an execution, but not a specific price. When you send a market order, you ask to be filled at whatever price is available when your order reaches its destination based on a first-come, first-served basis. In a volatile market, this can be substantially different from the price that was quoted.

Limit Order - A limit order is an order to buy or sell a stock with a price restriction. A buy limit sets the maximum price you are willing to pay, and a sell limit sets the minimum price at which you are willing to sell. It guarantees you a specific price (or a better price), but it does not guarantee you an execution. For example, you may wish to purchase a stock that is currently quoted at 50 1/4 bid, 50 1/2 ask, but do not want to pay more than $48. If you place a buy limit order at $48, you will only be filled if the price drops to $48 or lower and there are no orders ahead of yours. If it continues to trade above $48, you will not receive an execution.

Stop Order - A stop order is an order designed to protect a profit or guard against loss. Although it does not work well in all conditions, it can be an effective strategy in certain situations.

When placing a stop order, you specify a stop price that, when reached, converts your order to a market order. For example, you may have purchased a stock at $25 and it is now trading at $55. If it drops to $40, you want to sell the stock. You can place a sell stop order at $40, and if the stock trades there, your order becomes a market order to sell and will execute at the next best bid price. The risk with this type of order is that once triggered, your order can be filled at any price because it is a market order. For example, if you place a stop order before the market opens, and the stock opens at $20, your order will be triggered and executed far below your original stop price.

Stop Limit Order - A stop limit order is a variation on the stop order. It works in a similar fashion in that it is triggered once the stock hits the stop price, but instead of becoming a market order, it becomes a limit order at a price that you select. For example, you want to limit losses on a stock that you purchased at $50, you enter a sell stop limit order at "$40 Stop Limit." Once the stock trades at $40 or below, your order becomes a limit order to sell at $40. This will ensure that you do not sell at an extremely low price if a stock opens drastically lower. However, you will still own the stock since the order was not executed.

Each of the above orders has its pros and cons. You should pick the order that is best for your situation and considers current market conditions.

Customers may suffer market losses during periods of volatility in the price and volume of a particular stock when systems problems result in inability to place buy or sell orders. Customers trading on-line may have difficulty accessing their accounts due to high Internet traffic or because of systems capacity limitations. Customers trading through brokers at full-service or discount brokerage firms or through representatives of on-line firms when on-line trading has been disabled or is not available because of systems limitations may have difficulty reaching account representatives on the telephone during periods of high volume. If you encounter difficulty using MAXXtrade's on-line services, you should contact the firm at:

accounts@maxxtrade.com

Any references or claims made concerning the speed and reliability of our trading services represent our experience as based upon normal market conditions. However, such references or claims may be materially altered by market conditions such as volatility or by interruptions in services caused by, for example, system outages, telecommunication failures, or equipment failures. Such circumstances may impose additional risks upon customers as a result of delayed executions or inability to timely access the markets.

There recently has been significant volatility during the period of time when certain IPOs have opened for secondary market trading, particularly the IPOs of Internet issuers. When some of these IPOs started trading on an exchange or on The Nasdaq Stock Market, Inc., after going public, they initially have traded at a much higher price than their IPO offering price. The prices of some of these "hot" IPOs have doubled or more in initial trading, only to fall sharply in subsequent trading. This price volatility has been accompanied by significant trading volume. Certain non-IPO stocks of Internet issuers also recently have traded for a period of time under fast market conditions. The extraordinary volume of orders and cancellations entered on-line and otherwise during those periods caused queues and backlogs for many order entry and Market Maker firms. As a result of the level of market volatility and volume of orders, a number of Market Makers discontinued their normal automatic execution of orders and began handling orders manually. Firms also reduced their size guarantees on individual stocks or groups of stocks. This in turn led to delays in order executions, executions at prices significantly away from the market quoted at the time the order was entered, and delays in execution confirmations and cancellation reports.

Among the options Maxxtrade would consider selecting in response to such market conditions are

• Halting on-line trading of hot IPOs and stocks and requiring customers to purchase these securities through a registered representative, either in person or via the telephone. When contacted, the representatives will explain, for example, the difference between market and limit orders and the benefits and risks of each, and encourage customers whose primary goal is to achieve a target price and protect against sudden price moves, and who understand that there is a possibility that the order will not be executed, to enter limit orders.
• Refusing to accept market orders for hot IPOs and requiring customers who wish to buy these stocks to enter a limit order specifying the highest price they would pay for these issues.
• Refusing to accept any orders for certain IPOs that are forecast to be hot until the IPO begins trading in the secondary market.
• Contacting clients who have placed orders on IPOs that look to be volatile and confirming the order.

Customers are urged to familiarize themselves with all notices posted on our web site, particularly those alerting customers to new restrictions or policies effecting on-line accounts, volatile markets, or "hot" stocks.

All firms, whether on-line or otherwise, may raise margin requirements for volatile stocks. Maxxtrade may from time to time raise the amount of equity that must be maintained in margin accounts (maintenance margin) for long positions in certain volatile stocks to between 40 percent and 100 percent. This will help ensure that the equity in a customer’s margin account is sufficient to cover large changes in the price of a stock. Increasing maintenance margin requirements protects both the firm and customers by ensuring that investors have more equity in their margin accounts as protection in case of a large change in the value of a stock, which reduces the likelihood that the firm will have to liquidate assets in the customer’s account to meet a margin call. In evaluating stocks for more stringent maintenance margin requirements, Maxxtrade will examine price fluctuations, market capitalization, and volatility.

Among the options Maxxtrade would consider selecting in response to market conditions are:

• Prohibiting the use of margin to purchase certain securities, thereby requiring customers to purchase the securities with 100 percent initial margin, allowing payment to be made within three days of settlement.
• Designating some securities as "not marginable," thereby eliminating the use of such securities in computing available buying power.
• Designating certain securities as "cash on hand," thereby requiring customers to have 100 percent of the purchase price of the security in the account before the transaction can be executed.

In the event that the minimum monthly account balances are not retained, at the sole discretion of Maxxtrade, services may be discontinued, or the account closed.

The graphics, screens, and other data displays presented in Maxxtrade's marketing materials and through its website may vary depending on the computer and telecommunication equipment you have installed. Additionally, the proper running of such data display may require computer and telecommunication equipment to satisfy minimal standards of capacity. Consequently, the printed and on-line depictions are for presentation purposes only, and may vary significantly based upon a number of systems and equipment issues.

Pursuant to SEC Rule 11Ac-1-6, Maxxtrade, Inc. is required to make available a quarterly report with regard to our non-directed orders. To comply with this rule, Maxxtrade, Inc.’s clearing firm, Penson Financial Services, has entered into an agreement with Transaction Audit Group ("TAG") to disclose the required information pertaining to this rule and any non-directed orders entered on the Phase 3/Sunguard system. The resulting reports may be viewed at the following web address: http://www.tagaudit.com/rule6.asp?user=pfsi