16 Trading Securities

Question 1

Which of the following persons would be found on the floor of an exchange?

A. Block trader
B. Registered principal
C. Specialist
D. Registered rep

Answer 1

C. Specialist

Rationale:
No room for all the registered reps on the floor of the exchange.

Question 2

A sell stop order would be activated when:

A. The stock price hits or passes through the trigger price
B. ⅔ of all market makers elect to place a bid on the stock
C. The stock price hits the trigger price
D. The stock price passes through the trigger price

Answer 2

A. The stock price hits or passes through the trigger price

Rationale:
That’s the textbook definition of a stop order—doesn’t have to pass through the stop price. As soon as it hits or passes through the trigger price, the order is elected/triggered/activated.

Question 3

On which of the following prices would a buy stop at 45 be triggered?

A. 44.37
B. 44.87
C. 46
D. 44

Answer 3

C. 46

Rationale:
As soon as the price goes to or above the trigger price, the buy-stop order is elected/triggered. For a sell- stop order the answer would be “hits the trigger price or below.” Because it’s moving in the opposite direction now.

Question 4

A market maker is quoting XYZ at 20.00 - 20.25, with the inside market at 20.00 - 20.05. If the market maker sells to a retail customer @20.25 net, what is the amount of the markup?

A. 25 cents
B. 20 cents
C. 5 cents
D. Zero

Answer 4

B. 20 cents

Rationale:
The only thing that matters when determining the fairness of a markup/markdown is the price to the customer compared to the inside market. What the firm was quoting has no relevance. So, the inside ask price was $20.05, representing the best price at which a customer could purchase the stock. If the firm charges $20.25, that’s 20 cents higher than the inside ask.

Question 5

What is the “first market”?

A. The first report over the consolidated tape
B. The primary market
C. The exchanges
D. The first market to which an institutional buyer presents an order

Answer 5

C. The exchanges

Rationale:
The exchange market, with NYSE as the leader, is the first market. The primary market is a totally different thing. Securities are issued in the primary market; they are traded in the secondary market.

Question 6

Which of the following orders would be used to protect against a loss in a long position?

A. Buy limit
B. Sell stop
C. Sell limit
D. Sell stop-limit

Answer 6

B. Sell stop

Rationale:
Eliminate any choice with the word “buy” in it. If you’re long the stock, you don’t need to buy it again. You need to sell it. The word “limit” destroys protection.” For protection, we need the word “stop.”

Question 7

Which of the following orders could be used to protect a paper profit in the short position?

A. Buy stop-limit
B. Buy limit
C. Sell limit
D. Buy stop

Answer 7

D. Buy stop

Rationale:
The word “limit” destroys protection. And, you don’t need to sell the stock again.

Question 8

Which of the following is true of a “third market”?

A. It is the third highest bid and third lowest ask among all market makers
B. It is the third largest institutional order reported to the consolidated tape in an opening trading rotation
C. It involves listed stocks being traded over the counter
D. It is the lowest bid and third highest ask among all market makers

Answer 8

C. It involves listed stocks being traded over the counter

Rationale:
The “third market” is sort of a hybrid between the first and second markets. It’s a listed stock, but it’s traded over-the- counter, through a market maker.

Question 9

One of your firm’s customers calls to purchase 1,000 shares of XLYZ, a Bulletin Board stock, with the inside market at BID $15.00 -ASK $15.25. The firm places the customer on hold and purchases 1,000 shares of XLYZ at $15.25. Five seconds later the firm sells 1,000 shares of XLYZ to the customer for $15.55. What price should be disclosed on the trade confirmation?

A. The best price available at the time plus a standard differential
B. $15.30 net+ $15.00 commission
C. $15.55 net
D. A fair and reasonable price

Answer 9

C. $15.55 net

Rationale:
When a firm acts as a dealer/principal, it does not have to disclose the amount of the markup. The word “net” implies that a markup was factored in, because most firms like to make a profit. Had the firm acted as a broker, the amount of the commission would have been disclosed. But, they can’t charge a markup AND a commission. They’re either a broker on the transaction or a dealer, not both at the same time.

Question 10

A market maker responds to a request for a quote on ORCL by saying, “BID fifteen -ASK fifteen-twenty.” The purchasing dealer says she will buy 700 shares at the offer price. Therefore, the market maker must sell at least:

A. 700 shares @$15.15
B. 100 shares @$15.15
C. 700 shares @$15.20
D. 100 shares @$15.20

Answer 10

D. 100 shares @$15.20

Rationale:
Since the market maker did not know the number of shares involved, he only has to honor the quote for one round lot. The ask price is the price the customer must pay Had the purchasing dealer asked for a quote on 700 shares the market maker would be on the hook for all 700 shares at the price quoted firmly.

Question 11

A customer places the following order:

Sell 100 XYZ @35 stop, limit

The following prices are reported to the tape:

36.00, 35.50, 35.10, 34.98, 34.90, 34.99, 36.00, 37.00, 34.95

What is true of this order?

A. It was triggered @34.98 and could be sold @$36.00
B. It was triggered @34.98 and could not be sold until the price reached @34.95
C. It has not yet been triggered
D. It has not yet been elected

Answer 11

A. It was triggered @34.98 and could be sold @$36.00

Rationale:
The order wasn’t triggered until it hit $34.98, which was “at or below the trigger price.” Once triggered, this order can’t be sold unless/until we can get at least $35 for it. That happens at the price of $36.

Question 12

Your customer shorted 5,000 shares of XYZ@65. With the price of XYZ now down at $50, you should recommend that he place a:

A. Buy-stop @51
B. Buy-stop @50, limit
C. Sell-stop @50
D. Buy-stop @50

Answer 12

A. Buy-stop @51

Rationale:
If it goes up, the buy-stop will automatically buy the stock back. No need to enter it at $50, though, since the stock is already at 50. Place it $1 above that price to give yourself some leeway. And—as always—the word “limit” does not equal “protection.”

Question 13

A customer needs to acquire 10,000 shares ABC at a price no higher than $34 a share. At the same time, if he can’t have all the shares right now, he is willing to take as much as he can get at that price and skip the rest. This customer should place a:

A. Buy-limit @34, all or none
B. Buy-stop @34, immediate or cancel
C. Buy-limit @34, fill or kill
D. Buy-limit @34, immediate or cancel

Answer 13

D. Buy-limit @34, immediate or cancel

Rationale:
The customer names the price he’ll pay, so it’s definitely a buy-limit (not a stop). He’ll take any part he can get—only order that takes a partial fill is an “IOC” or “immediate or cancel” order.

Question 14

Your customer is an avid chartist. He believes that ARZ is finding consistent support at S30. If the price ever dropped below support, he is convinced the stock would experience a sudden dramatic decline in price. He would like to sell short 500 shares as soon as the stock lost support but does not want to initiate the position at any price lower than $28. You recommend that he enter:

A. Sell short 500 ARZ @31, limit
B. Buy 500 ARZ @29.50, limit 28
C. Buy 500 ARZ @30, limit 28
D. Sell short 500 ARZ @29.50 stop, limit 28

Answer 14

D. Sell short 500 ARZ @29.50 stop, limit 28

Rationale:
Remember that the customer wants to sell, not buy.

Question 15

With the inside market on QRT at BID $10.00 -ASK $10.25 a firm is quoting QRT at BID S9.95-ASK $10.50. If the firm sells 200 shares QRT to a customer for “$10.50 net,” the amount of the markup is:

A. 50 cents, in violation of the5% guideline
B. As determined by FINRA rules of random arbitration
C. As negotiated by a principal at the firm and the customer’s legal representative
D. 25 cents, within the 5% guideline

Answer 15

D. 25 cents, within the 5% guideline

Rationale:
The price charged is 25 cents above the inside ask. .25 divided by the $10.25 ask = a markup of 2.4%, well within the 5% markup guideline.

Question 16

The 5% markup policy applies to all of the following securities except:

A. Corporate bonds
B. Municipal securities
C. Preferred stock
D. Corporate stock

Answer 16

B. Municipal securities

Rationale:
The policy applies to corporate stock and bonds traded in the secondary market.

Question 17

The 5% markup policy applies to all of the following except:

A. Variable annuities
B. Common stock
C. Corporate stock
D. Preferred stock

Answer 17

A. Variable annuities

Rationale:
Anything sold with a prospectus or other offering document is a primary transaction. Markups only apply to trades, which happen in the secondary market.

Question 18

The 5% markup policy applies to all of the following except:

A. Preferred stock
B. Closed-end funds
C. Common stock
D. Open-end funds

Answer 18

D. Open-end funds

Rationale:
Anything sold with a prospectus or other offering document is a primary transaction. Markups only apply to trades, which happen in the secondary market.

Question 19

Which of the following is a true statement?

A. Corporate stock usually carries a lower markup than corporate bonds
B. Riskless and simultaneous transactions are not permitted
C. Market makers buy at the bid price and sell at the ask price
D. Corporate bonds usually carry higher markups than corporate stock

Answer 19

C. Market makers buy at the bid price and sell at the ask price

Rationale:
They’d have to do that, since customers buy at the ASK/sell at the BID.

Question 20

All of the following aware true of the specialist except:

A. Cannot trade for own account
B. Is a member of the exchange
C. Flips a coin if two market orders come in at same time, same size
D. Each stock has just one specialist

Answer 20

A. Cannot trade for own account

Rationale:
Trading for your own account is what being a specialist is all about. Plus that pan about the “fair and orderly market.”

Question 21

Which of the following orders on the specialist’s book would be reduced as a result of a cash dividend?

A. Sell 100ARZ@35
B. Buy 100 XYZ @37, stop
C. Buy 100 XYZ @37
D. Not held order

Answer 21

C. Buy 100 XYZ @37

Rationale:
Only the orders placed below the current market price are adjusted downward for a cash dividend (except the ones marked DNR).

Question 22

Which of the following orders on the specialist’s book would be reduced as a result of a stock dividend?

A. Sell 100 ARZ@3
B. Buy 100 XYZ @3
C. All choices listed
D. Buy 100 XYZ @37, stop

Answer 22

C. All choices listed

Rationale:
Stock splits/dividends affect all orders . . . just as they adjust the price for options, warrants, rights, convertible securities, etc.

Question 23

An increase in which of the following orders could trigger a further rise in a bull market?

A. Buy stop
B. Sell limit
C. Sell stop, limit
D. Buy limit

Answer 23

A. Buy stop

Rationale:
If the stock goes up, suddenly all these orders to buy will be put on auto-pilot at the same time. Buy-buy-buy … that usually sends the price up-up-up.

Question 24

Which of the following is/are true statements?

I. NASDAQ Level 1 allows market makers to enter quotes
II. NASDAQ Level 2 allows market makers to enter quotes
III. NASDAQ Level 3 is an interactive system
IV. NASDAQ Level 1 displays all quotes from all market makers

A. l, II, III
B. III
C. II, IV
D. I, II

Answer 24

B. III

Rationale:
Level 1 and 2 have no entry capabilities. Level 2 shows all quotes from all market makers, while Level 1 shows the inside market (best prices) only. Only Level 3 would allow a market maker to enter a quote.

Question 25

What is the minimum number of shares that must be purchased when buying closed-end funds?

A. 10,000
B. 100
C. 1000
D. none of the choices listed

Answer 25

D. none of the choices listed

Rationale:
There are no minimum order sizes, period.

Question 26

Who determines the opening price on a stock such as GE or IBM?

A. NYSE Chairman
B. Federal Reserve Board Chairman
C. Specialist
D. FRB Undersecretary

Answer 26

C. Specialist

Rationale:
The specialist is an individual working for a specialist firm, which is a member of NYSE. The specialist’s whose job it is to maintain a “fair and orderly” market in a particular NYSE-listed security. All trades happen in front of the specialist.

Question 27

A customer tells you to sell 1,000 shares ORCL in order to buy 1,000 shares MSFT. The markets for both stocks are, respectively:

ORCL BID $10.00 -ASK $10.50
MSFT BID $50.00 - ASK $50.50

Your firm happens to make markets in both stocks and, therefore, buys the 1,000 shares ORCL from the customer @$9.50 and sells 1,000 MSFT to the customer @$51.00 net. What is true of this situation?

A. It is a violation of FINRA bylaws, since firms cannot sell to retail customers stock In which they also make a market
B. Your firm should not have charged both a markup and a markdown
C. It is not a violation of FINRA bylaws, but would be considered fraudulent by the SEC
D. This is considered painting the tape

Answer 27

B. Your firm should not have charged both a markup and a markdown

Rationale:
The firm should treat this “proceeds transaction” as just one transaction, meaning they should charge either a markup OR a markdown. Another way to answer the question is to say that the combined markup/markdown should be 5% or lower.

Question 28

After a 25% stock dividend, an order to sell 100 shares ABC @50 would become:

A. An order to sell 150 shares ABC @33.33
B. An order to sell 100 shares ABC @40.00
C. An order to sell 125 shares ABC @40.00
D. An order to sell 125 shares ABC @50.00

Answer 28

C. An order to sell 125 shares ABC @40.00

Rationale:
It would be adjusted exactly the way 100 shares held long would be adjusted. 25% more shares at a lower price.

Question 29

The inter-dealer market represents:

A. Highest bid, lowest ask
B. Lowest bid, lowest ask
C. Highest bid, highest ask
D. Lowest bid, highest ask

Answer 29

A. Highest bid, lowest ask

Rationale:
The inside or “interdealer” market is simply the best deal for the customer.

Question 30

You are not familiar with the stock symbol SRQY, but you can conclude:

A. It is a bond
B. It is NYSE-listed
C. It trades over the counter
D. It trades on INSTINET

Answer 30

C. It trades over the counter

Rationale:
Listed/exchange stocks have 3 or fewer letters in their symbol.

Question 31

Which of the following orders would be reduced as a result of a cash dividend?

A. Sell 100ABC@2
B. Sell 100 ABC@25, stop
C. Buy 100 ABC @30, DNR
D. Buy 100 ABC @30, stop

Answer 31

B. Sell 100 ABC@25, stop

Rationale:
Only the orders placed below the current market price would be reduced for a cash dividend, but not the ones with the little DNR attached.

Question 32

All of the following may justify a higher than usual markup except”

A. Liquidity
B. Type of security
C. Price dealer paid for security
D. Market price of security

Answer 32

C. Price dealer paid for security

Rationale:
Nobody cares what the dealer paid for the stock, except maybe the dealer.

Question 33

Which of the following orders are placed above the current market price?

I. Buy limit
II. Buy stop
III. Buy stop-limit
IV. Sell stop

A. I
B. II, III
C. I, III, IV
D. II, IV

Answer 33

B. II, III

Rationale:
Memorize where these orders are placed in relation to the overall market and work on visualizing the direction that prices have to move in order to trigger and/or fill these specialized orders.

Question 34

Which of the following orders are placed below the current market price?

I. Sell limit
II. Sell stop
lll. Sell stop-limit
IV. Buy stop

A. I, IV
B. IV
C. II, III
D. I, II

Answer 34

C. II, III

Rationale:
Memorize where these orders are placed in relation to the overall market and work on visualizing the direction that prices have to move in order to trigger and/or fill these specialized orders.

Question 35

If a customer wants to see all quotes from all market makers currently quoting a particular stock, he needs to apply for:

A. NASDAQ Level 2
B. NASDAQ Level 1
C. SEC associate status
D. A license

Answer 35

A. NASDAQ Level 2

Rationale:
That’s what Level 2 does. It shows an amateur investor just enough information to lose 75% of his investment capital in a hurry.

Question 36

A customer doesn’t want to buy a stock unless it trades at least as high as $35 dollars a share; however, she refuses to pay any more than $36.35 for the security. Which of the following orders should she place?

A. Sell limit @35, not over 36.35
B. Buy @35 stop, limit 36.35
C. Market order @35
D. Buy limit @35

Answer 36

B. Buy @35 stop, limit 36.35

Rationale:
Don’t buy until it hits this price, but don’t pay any more than this price? Buy stop-limit.

Question 37

When the commission house broker is left to determine the time of day and price to pay for a security, the order is referred to as:

A. Broker’s call
B. Price-sensitive discretionary
C. Discretionary
D. Not held

Answer 37

D. Not held

Rationale:
Time and price discretion do/does not require written discretionary authorization. In the “not held” order, the commission house broker is not held to a particular price or time, but is also not executing immediately, as he would for a market order.

Question 38

An insurance company would trade directly with a mutual fund via which of the following markets?

A. Primary
B. OTC
C. Fourth market
D. Third market

Answer 38

C. Fourth market

Rationale:
Also referred to as INSTINET. INSTI-tutionals trade over INSTINET.

Question 39

A dealer asks for a quote on 700 shares of XYZ. The market maker responds, “BID $20.00 - ASK $20.25.” The purchasing dealer says he’ll buy 700 shares at the offer. Therefore, the market maker must:

A. Sell 100 shares @20.25
B. Buy 700 shares @20.25
C. Buy 100 shares @$20.25
D. Sell 700 shares @20.25

Answer 39

D. Sell 700 shares @20.25

Rationale:
The market maker’s quote is always good for at least one round lot. If he knows the number of shares he’s quoting, he’s on the hook for that number of shares.

Question 40

An illiquid security:

A. Usually carries a lower markup
B. Usually carries a higher markup
C. Does not subject an investor to marketability risk
D. Is easily bought and sold

Answer 40

B. Usually carries a higher markup

Rationale:
Just like an ugly, unpopular car would fetch a lousy trade-in price at the car dealership, right? They don’t want to hold some ugly, orange vehicle nobody wants, so if you want to trade it in, don’t expect a good price. And if you want to buy it, they’re going to try to get as much as possible for it, since it been taking up space for such a long time.

Question 41

Short sellers would least likely sell which of the following short?

A. T-bonds
B. T-notes
C. Common stock
D. Municipal bonds

Answer 41

D. Municipal bonds

Rationale:
Municipal securities are often in tight supply, as most are purchased by individuals who buy them and lock them up in a safe-deposit box just to collect tax-free interest payments. You don’t want to be trying to cover (buy back) your short position when the thing you’re trying to buy back is in short supply.

Question 42

A hedge fund is buying convertible preferred stock in order to short the underlying common stock and profit from an unequal drop in price between the common and the convertible preferred. This represents:

A. Arbitrage
B. An illegal practice under FINRA rules
C. Short-buying
D. An illegal practice under SEC rules

Answer 42

A. Arbitrage

Rationale:
Arbitrage involves a disparity in prices between two securities. Nothing illegal about it, and there is no such thing as “short buying.”

Question 43

Where would a customer find a quote for an over-the-counter, unlisted stock that was not on NASDAQ?

A. OTC Bulletin Board
B. Yellow sheets
C No such quotes are available to retail customers
D. Green list

Answer 43

A. OTC Bulletin Board

Rationale:
If it’s unlisted, it trades OTC (over the counter). The biggest, most important OTC stocks trade over NASDAQ. If the stock isn’t on NASDAQ, it’s on the OTC Bulletin Board or Pink Sheets.

Question 44

A customer wants to sell short 100 shares ABC if the price falls below $35, but is not interested in executing the short sale for any less than $34. Which of the following orders would achieve that goal?

A. Market order
B. Sell limit
C. Sell stop-limit
D. Sell stop

Answer 44

C. Sell stop-limit

Rationale:
You see a trigger price and a limit price—that’s a sell-stop, limit.

Question 45

What is the difference between AON and FOK orders?

A. Fill-or-kill must be filled in their entirety
B. Fill-or-kill are only for corporate bonds
C. All-or-none may be left GTC
D. All-or-none must be filled in their entirety

Answer 45

C. All-or-none may be left GTC

Rationale:
Both AON and FOK orders must be filled in their entirety. The difference is that you have to kill the FOK order if you can’t fill it all on your first attempt; the AON can hang out GTC.

Question 46

Which of the following orders would be used to protect a profit in a short position?

A. Buy limit
B. Sell limit
C. Buy stop-limit
D. Buy stop

Answer 46

D. Buy stop

Rationale:
Don’t name a limit price if you want protection.

Question 47

Which of the following orders would not be found on the specialist’s book?

A. Sell stop-limit
B. Buy limit
C. Sell stop
D. Market

Answer 47

D. Market

Rationale:
There would be no reason to place a market order on the specialist’s book. A market order is executed ASAP. The stop and limit orders go on the specialist’s book.

Question 48

An investor originally purchased 100 shares of INTC at $20 a share. Now the stock is at $60. The investor is still bullish on the stock for the long-term but fears a possible downturn in the short-term. As her registered rep, you would tell her to place a:

A. Buy stop order at $61
B. Sell stop order at $59
C. Sell limit order at $59
D. Market order to sell

Answer 48

B. Sell stop order at $59

Rationale:
A market order to sell would capture the profit, but the customer is still bullish on the stock and will call you 17 times a day if you sell the stock now before it starts its meteoric rise. A sell limit doesn’t work either, since the stock would be sold as soon as it hit the limit price of $59—wait, it’s already there, so you’re accidentally placing a market order, really, as it will immediately be executed. Eliminate any choice that says “buy” in it, since the customer already bought.

Question 49

It doesn’t look as if your customer’s buy limit order is going to be filled today, since the stock isn’t likely to fall that far in the next few hours. Your customer is thinking of canceling the order and entering a new one GTC. You should tell him:

A. Canceling orders is considered bad form in securities trading and after 10 such cancellations your license could be in jeopardy.
B. That is a good idea.
C. Leave the order open; if it doesn’t get executed today, we’ll enter a new one tomorrow
D. As his registered rep you can not advise him on the type of order placed without discretion

Answer 49

C. Leave the order open; if it doesn’t get executed today, we’ll enter a new one tomorrow

Rationale:
If you cancel your order, you lose your place in line.

Question 50

The terms priority, precedence, and parity are associated with:

A. NYSE
B. NASDAQ
C. All transactions with institutional investors
D. All fiduciary transactions

Answer 50

A. NYSE

Rationale:
The specialist uses these three p-words to maintain a “fair and orderly market” in a particular NYSE-listed security.

Question 51

Issuers subject to SEC reporting requirements must file quarterly reports known as:

A. The big Q
B. 10-K
C. 10-Q
D. SECQ1

Answer 51

C. 10-Q

Rationale:
The “q” stands for “quarterly.”

Question 52

Issuers subject to SEC reporting requirements must file annual reports known as:

A. 10-Q
B. The big one
C. 10-K
D. Audit Affirmations

Answer 52

C. 10-K

Rationale:
Annual reports are also known as 10-K’s

Question 53

Two commission house brokers with different firms want to buy shares of GE at precisely the same time. One broker has an order to buy 1,000 shares; the other has an order to buy 10,000 shares. Which order is filled first and why?

A. Either order can be filled; specialist flips a coin
B. The order for 10,000 shares has priority
C. The two orders cancel each other out
D. The order for 10,000 shares has precedence

Answer 53

D. The order for 10,000 shares has precedence

Rationale:
Larger orders have precedence. The proverbial coin toss only happens if the orders are the same size, shouted at the same time. The coin toss is called “parity.”

Question 54

A large position trader sees the ASK on GE at the NYSE is $30. That seems too high, so he calls a market maker and negotiates an order @29.55. This transaction:

A. Is illegal
B. Took place on the third market
C. Is unethical though technically legal
D. Took place on the second market

Answer 54

B. Took place on the third market

Rationale:
Exchange-listed stock traded OTC = third market

Question 55

All of the following bear financial risk except:

A. Agent
B. Investment banker
C. Principal
D. Underwriter

Answer 55

A. Agent

Rationale:
Agents have no capital at risk, only their jobs.

Question 56

None of the following bear financial risk except:

A. Syndicate member in a firm commitment
B. Broker
C. Syndicate member in a best efforts underwriting
D. Agent

Answer 56

A. Syndicate member in a firm commitment

Rationale:
Agents/brokers never have capital at risk.

Question 57

Securities are traded on the secondary market. Securities are issued:

A. Only via NASDAQ
B. Only on the NYSE
C. On the primary market
D. Also on the secondary market

Answer 57

C. On the primary market

Rationale:
Make sure you know that the primary market is for issuing securities. The secondary market is for trading securities already issued.

Question 58

The specialist’s book shows that 400 shares are ready to be purchased @20.10 and 200 shares are ready to be sold @20.35. What is the size of the specialist’s BID?

A. As large as the specialist wants
B. 20.35 x 2
C. 40
D. 4

Answer 58

D. 4
Rationale:
“4” means 4 round lots. The size of the ask, by the way, would be “2.

Question 59

The specialist’s book shows that 400 shares are ready to be purchased @20.10 and 200 shares are ready to be sold @20.35. What is the size of the specialist’s ASK?

A. 20.1
B. 2
C. As large as the specialist wants
D. 20

Answer 59

B. 2

Rationale:
200 shares is 2 round lots, shown as “2” by the specialist. The size of the bid, by the way, is 4 (for 400 shares, 4 round lots).

Question 60

All of the following are factored into the specialist’s quote except:

A. Number of round lots
B. Buy limits
C. Stop orders
D. Sell limit

Answer 60

C. Stop orders

Rationale:
Stop orders don’t determine the specialist’s quote. Limit orders do that, and the size is also indicated in round lots

Question 61

The Securities Exchange Act of 1934 covers all of the following except:

A. Fraud
B. Registration of persons
C. Insider trading
D. Registration of new issues

Answer 61

D. Registration of new issues

Rationale:
New issues are covered by the Act of 1933.

Question 62

The SEC was created with the passage of:

A. Securities Act of 1919
B. Maloney Act of 1938
C. Securities Act of 1933
D. Securities Exchange Act of 1934

Answer 62

D. Securities Exchange Act of 1934

Rationale:
That one will probably show up on the exam. The SEC was formed with the passage of the Securities Exchange Act of 1934.

Question 63

The OTC market is what type of market?

A. Auction
B. Non-negotiated
C. Double auction
D. Negotiated

Answer 63

D. Negotiated

Rationale:
OTC = negotiated.

Question 64

All of the following are roles played by the specialist except:

A. Setting the opening price for a stock
B. Maintaining a book of public market orders
C. Maintaining a fair and orderly market
D. Trading for own account

Answer 64

B. Maintaining a book of public market orders

Rationale:
No need to put a market order on the book—just execute it at the best available price. The orders that are waiting for a specific price are on the book.

Question 65

When is a buy stop @72 triggered?

A. When the stock rises above 72
B. When the specialist determines parity
C. When the stock trades @ 72 three times in a row
D. When the stock rises to 72 or above

Answer 65

D. When the stock rises to 72 or above

Rationale:
Doesn’t have to be above the stop price—AT or above the stop price. Note that for a sell- stop the trigger occurs at or below the stop price.

Question 66

When is a sell stop @55 activated?

A. When the specialist determines parity
B. When the stock drops to 55 or below
C. When the stock drops below 55
D. When the stock trades below 55 three ticks in a row

Answer 66

B. When the stock drops to 55 or below

Rationale:
Doesn’t have to be below the trigger/elect price—AT or below will do the trick. Trigger and elect mean the same thing, since everything in this business needs at least two names.

Question 67

All of the following involve listed securities except:

A. OTCBB
B. Chicago Stock Exchange
C. NYSE
D. AMEX

Answer 67

A. OTCBB

Rationale:
The OTC Bulletin Board is not considered to have “listed “ stock.

Question 68

Your customer would like to buy 8,000 shares of URT @55. If your commission house broker can only buy some of the shares at that price, your customer will take that portion and cancel the remainder. The order, therefore, should be entered as:

A. 8,000 URT AOL at 5
B. 8,000 URT at 55
C. 8,000 URT IOC at 55
D. 8,000 URT FOK at 55

Answer 68

C. 8,000 URT IOC at 55

Rationale:
IOC means “immediate or cancel.” The customer will take the portion that can be had at that price and cancel the remainder.

Question 69

Your customer would like to buy 8,000 shares of URT @55. If your commission house broker can not fill the entire order on one attempt, the customer does not want the stock at all. The order, therefore, should be entered as:

A. 8,000 URT IOC at 55
B. 8,000 URT at 55
C. 8,000 URT AOL at 55
D. 8,000 URT FOK at 55

Answer 69

D. 8,000 URT FOK at 55

Rationale:
Fill it (all) or kill it (all). The abbreviation "FOK" implies what the investor wants to do with the order if he can't have it all.

Question 70

Yourcustomerwouldliketobuy 8,000 shares of URT @55. If your commission house broker can not fill the entire order on one attempt, the customer wants him to wait until the order can be filled in its entirety. The order, therefore, should be entered as:

A. 8,000 URT AON at 55
B. 8,000 URT IOC at 55
C. 8,000 URT at 55
D. 8,000 URT FOK at 55

Answer 70

A. 8,000 URT AON at 55

Rationale:
He needs it all, but not on the first attempt. The difference between this and FOK is that FOK orders have to be killed—AON can remain GTC

Question 71

Your firm is a qualified market maker in ARZ. Currently, your firm is long 1,000 shares of ARZ and short 3,000 shares. Therefore, your firm is:

A. Short 2,000 shares of ARZ
B. Long 1,000 shares of ARZ
C. Long 4,000 shares of ARZ
D. Short 4,000 shares of ARZ

Answer 71

A. Short 2,000 shares of ARZ

Rationale:
Just net out the two positions.

Question 72

What is trie of a broker-dealer charging a reasonable commission and markup on the same customer transaction?

A. This describes normal activities for market makers
B. This is a violation of trading rules
C. Provided both are reasonable, this is permissible
D. This is a violation known as pegging

Answer 72

B. This is a violation of trading rules

Rationale:
Don’t let the word “reasonable” throw you off – broker-dealers either charge a commission (broker) or a markup/markdown (dealer) on any one trade.

Question 73

Transactions in all the following securities would appear on the Consolidated Tape except:

A. NYSE-llsted warrants
B. NYSE-listed stocks trading on the Pacific Exchange
C. NYSE-listed stocks trading on the Chicago Stock Exchange
D. Options

Answer 73

D. Options

Rationale:
Be a good test-taker…one of these things is not like the other, one of these things just doesn’t belong.

Question 74

Which TWO of the following orders are executed in falling markets?

I. Buy-stops
II. Buy limits
III. Sell-stops
IV. Sell limits

A. I, II
B. I, III
C. II, III
D. II, IV

Answer 74

C. II, III

Rationale:
The orders placed below the current market price would be executed as the market price falls, right? Note that these are also the only orders that are reduced for a dividend payment… except when they aren’t (DNR).

Question 75

The SEC does all of the following except:

A. Regulate the Over The Counter market
B. Approve securities for sale in the primary market
C. Regulate broker-dealer members of FINRA
D. Regulate broker-dealer members of the NYSE

Answer 75

B. Approve securities for sale in the primary market

Rationale:
The words “SEC” and “approve” do not go together. Some test-takers will convince themselves that only FINRA regulates the OTC—never forget the ultimate regulators, the SEC.

Question 76

All of the following types of orders remain open until certain criteria are met except:

A. GTC
B. Buy-stop
C. AON
D. Market order

Answer 76

D. Market order

Rationale:
A market order is executed just as quickly as possible, without any special criteria. The exam might ask the fastest way to get an order filled—market order. Don’t get fussy, just fill that thing NOW.

Question 77

The 5% markup policy is applied in a proceeds transactions to:

A. Only the buy side
B. The buy and sell side as a total of 5%
C. Both the buy and the sell side separately
D. Only the sell side

Answer 77

B. The buy and sell side as a total of 5%

Rationale:
The firm must treat both the sale and the purchase as one transaction subject to the 5% guideline.

Question 78

Which of the following must a dealer use to determine the amount of the markdown?

A. Highest ask/offer
B. Lowest ask/offer
C. Lowest bid
D. Highest bid

Answer 78

D. Highest bid

Rationale:
The inside BID (highest bid) represents the best deal a customer could get when selling, so that’s what they base the fairness of the markdown on.

Question 79

Which form must an investor file once she owns 5% of a public corporation’s outstanding shares?

A. 13-D
B. 144
C. 145
D. 147

Answer 79

A. 13-D

Rationale:
Just for fun, imagine owning 5% of MSFT … what’s 5% of 10 billion shares? Probably something worth filling out a form over.

Question 80

At 2:20 pm EDT, your customer gives you a market order to buy 1,000 DEF “at the close.” Therefore you should:

A. Execute the order the next morning at today’s closing price
B. Send the order to the floor immediately
C. Any of the choices listed
D. Send the order to the floor at 2:55 EDT

Answer 80

B. Send the order to the floor immediately

Rationale:
Send the order to the floor; the floor broker will execute it at the close of the market.

Question 81

Which of the following accurately describe a “securities exchange”?

I. The offer and sale of any security
II. Highest bid and lowest offer prices prevail
III. Prices are determined by negotiation
IV. Only listed securities are traded

A. I, III, IV
B. II, IV
C. I
D. II, III

Answer 81

B. II, IV

Rationale:
“Negotiated market” describes the OTC or “second market,” not the exchange market. Only securities listed for trading on a particular exchange trade on that exchange.

Question 82

Which of the following is a true statement of the Consolidated Tape?

A. Used primarily to report bond transactions on the secondary market
B. Used primarily to report transactions in NASDAQ securities
C. Opens earlier and closes later than the NYSE
D. Opens later and closes earlier than the NYSE

Answer 82

C. Opens earlier and closes later than the NYSE

Rationale:
The consolidated tape reports NYSE-listed stocks, wherever they are trade, which includes NYSE, third market, and fourth market.

Question 83

The NYSE has which of the following authorities over a registered representative found to have violated exchange rules?

A. Authority to impose monetary fines and misdemeanor prison sentences
B. Authority to impose monetary fines only
C. None, as that power has been ceded to the SEC exclusively
D. Authority to censure, fine, and bar the representative

Answer 83

D. Authority to censure, fine, and bar the representative

Rationale:
The exchange can discipline a registered representative but not throw him in prison. Beyond monetary fines, registered rep’s can be suspended or barred.

Question 84

Which of the following statements is inaccurate concerning the OTC market?

A. The “ask” price is the lowest price at which a dealer will sell a security
B. ADRs and CMOs are securities that may trade OTC
C. The “bid” price is the highest price at which a dealer will bay a security
D. It is considered an auction market

Answer 84

D. It is considered an auction market

Rationale:
OTC = negotiated. NYSE = auction.

Question 85

Which of the following is exempt from SEC registration?

A. Securities research analysts
B. Insurance companies offering indexed annuities only
C. Regional stock exchanges
D. National stock exchanges such as NYSE or AMEX

Answer 85

B. Insurance companies offering indexed annuities only

Rationale:
Insurance companies are regulated by the state insurance commissioners.

Question 86

Which of the following is not one of the NASDAQ market tiers?

A. NASDAQ Regional Exchange Market
B. NASDAQ Global Market
C. NASDAQ Capital Market
D. NASDAQ Global Select Market

Answer 86

A. NASDAQ Regional Exchange Market

Rationale:
The three market tiers are NASDAQ Global, NASDAQ Global Select, and NASDAQ Capital Market.

Question 87

If a pension fund’s portfolio manager liquidates all stocks and currently invests all assets in cash and cash equivalents, her market outlook is considered:

A. Bullish
B. Bearish
C. Reversionary
D. Neutral

Answer 87

B. Bearish

Rationale:
If you get completely out of stocks, you must be bearish on the stock market.

Question 88

A DMM on the NYSE may “stop stock” for which of the following orders?

A. Reversionary
B. Neutral
C. Bullish
D. Bearish

Answer 88

B. Neutral

Rationale:
Only public orders can be “stopped,” which means the DMM guarantees a price and gives the floor broker a chance to seek an even better price from the crowd.

Question 89

A transaction for 20 shares of an OTC equity security @$245 per share is reported as:

A. 1 odd lot
B. 20 round lots
C. 20 odd lots
D. 1 round lot

Answer 89

B. 20 round lots

Rationale:
A new rule defines a round lot for OTC equity securities trading at $175 a share or higher as just 1 share.

Question 90

A trade of 12,000 shares ABC common stock @25 will be reported on the consolidated tape as:

A. ABC 25s12,000
B. ABC 12.25
C. ABC 12s25
D. ABC 12,000s25

Answer 90

D. ABC 12,000s25

Rationale:
Up to 10,000 shares only the number of round lots is indicated, but when it gets to 10,000 shares or more, the report looks like this “10,000s or “12,000s.”

Question 91

Regulation SHO’s locate requirement applies to:

A. Preferred stock only
B. Municipal bonds
C. Corporate bonds
D. All equity securities

Answer 91

D. All equity securities

Rationale:
Before executing a short sale of any equity security.

Question 92

Acustomerwouldfind information on a “penny stock”

l. On the consolidated tape
II. On NASDAQ display facilities
III.On the OTC Bulletin Board
IV. On the Pink Sheets

A. I
B. Ill, IV
C. II
D. I, II, III, IV

Answer 92

B. Ill, IV

Rationale:
A “penny stock” by definition does not trade on NASDAQ or NYSE.

Question 93

In the over-the-counter market stock prices are determined by:

A. FINRA’s 5% markup policy
B. Negotiated bids
C. Negotiation
D. Auction

Answer 93

C. Negotiation

Rationale:
Associate “OTC” with “negotiated market.” The first market = “auction.”

Question 94

When a specialist enters a bid to buy for her own account in order to narrow the spread, she is acting as a (an):

A. Broker
B. Exchange employee
C. Principal
D. Broker-dealer

Answer 94

C. Principal

Rationale:
The specialist is not an employee of the exchange. If she buys for her own account, she’s acting as a principal (dealer).

Question 95

A trade of 13,000 shares of ABC was just executed for 37 per share. Therefore, the consolidated tape would properly display the sale as:

A. ABC 10s37.3s37
B. ABC 13s@37
C. ABC 13s37
D. ABC 13,000s37

Answer 95

D. ABC 13,000s37

Rationale:
For whatever reason, when the trades get as big as 10,000 shares, they use “10,000s” and so on.

Question 96

The NYSE ticker tape reports:

IBM 75.10 .15

This means:

A. 75 shares of IBM traded at $10.15
B. 100 shares of IBM traded at 75.10, followed by 100 shares traded at 75.15
C. 100 shares of IBM traded at 75.10
D. 75 shares of IBM traded at $101.50

Answer 96

B. 100 shares of IBM traded at 75.10, followed by 100 shares traded at 75.15

Rationale:
If there is no number before the price, assume it’s a trade of one round lot. There is then a space with just a “.15,” meaning that another round lot traded at $75.15.

Question 97

The following information is reported to the NYSE ticker tape:

K 44. 2s .05

This means that:

A. 44 round lots of K traded at $205
B. 440 shares of K traded at 44.05
C. 100 shares of K traded at 44, followed by 200 shares at 44.05
D. 44 preferred shares traded at 5% of par value

Answer 97

C. 100 shares of K traded at 44, followed by 200 shares at 44.05

Rationale:
With no number before “44,” assume it’s a round lot. The “2s” means “200 shares,” and the “.05” means to add .05 to $44 for these 200 shares.

Question 98

When shares of ABC begin to trade ex-dividend a GTC order to buy 300 shares at 44 stop would:

A. Remain as-is
B. Be increased by the amount of the dividend
C. Be canceled by the specialist
D. Be reduced by the amount of the dividend

Answer 98

A. Remain as-is

Rationale:
The buy-stop (like the sell-limt) order is placed above the current market price, so the paying of a dividend would not cause these orders to go off. No need to adjust them. Buy-limit and sell- stop orders are adjusted by the amount of the dividend, except when they’re marked “DNR,” which means “do not reduce.”

Question 99

Tommy Trader has just entered a stop order to buy 300 shares of MSFT @41, with the current market price at 40. If MSFT then trades at 41, what happens?

A. The trade can be executed if the ask is 41 or higher
B. The order is canceled immediately by the specialist
C. The order becomes a market order for immediate execution
D. The trade can be executed if the bid is 41 or higher

Answer 99

C. The order becomes a market order for immediate execution

Rationale:
This buy stop is activated when the stock trades at 41 or higher. Once it’s activated, it is simply executed at the best available price-it becomes a market order. Also note, that a limit price could be added to this order. But it wasn’t in this question.

Question 100

Filling a customer’s purchase order by selling shares of another customer’s securities at the same brokerage firm. This is known as:

A. Frontrunning
B. An agency cross transaction
C. Freeriding
D. A riskless and simultaneous principal transaction

Answer 100

B. An agency cross transaction

Rationale:
It’s not the firm’s securities, so it cant have the word “principal” in there. It’s not a violation. It’s called an “agency cross transaction.” The firm is acting in an agency capacity.

Question 101

A customer order to purchase 400 shares of XYZ at 51.50 or better will be processed by the following brokerage departments in which chronological order?

I. Purchasing and Sales
II. Wire Room (order dept.)
III. Margin
IV. Cashier

A. Ill, I, II, IV
B. I, II, IV, III
C. I, II, III, IV
D. II, I, III, IV

Answer 101

D. II, I, III, IV

Rationale:
The wire room sends the order to the appropriate exchange. Purchasing and sales deals with the change to the customer’s account. Margin calculates margin requirements. Cashiering deals with the actual exchange of money for securities or vice versa.

Question 102

Suzanne is a member of ABC’s board of directors. Last year she purchased 20,000 shares of ABC common stock on the secondary market. Thirteen months have now passed and Suzanne would like to turn her shares into cash. Therefore,

A. She must identify any capital gains as short-term
B. She must report the sale to the SEC
C. She must identify any capital gains as a short-wing profit
D. She need not report the sale to the SEC

Answer 102

B. She must report the sale to the SEC

Rationale:
She’s an insider (board of directors, officers, immediate family members thereof, 10% or more owners of voting stock) so she reports her sales. It isn’t fair to let the folks who really know what’s going on dump all their shares and in the process drive down the share price for everybody else. Also, the little guys can draw conclusions based on what these insiders are doing with their own stock and act accordingly.

Question 103

The Securities Exchange Act of 1934 is associated with all of the following but:

A. Provided for the regulation of credit
B. Provided for the regulation of securities exchanges
C. Provided registration processes for new issues of securities
D. Created the Securities and Exchange Commission

Answer 103

C. Provided registration processes for new issues of securities

Rationale:
The Securities Act of 1933 provides for the regulation of new issues of securities.

Question 104

Donny Deadbeat has once again been slow to pay for securities purchases, and his account, therefore, is currently frozen. Donny should know that:

A. He may place purchase orders only if he deposits the required amount by end of that business day
B. He may place purchase orders only if he first deposits the required amount
C. He may make no trades in the account but may only receive interest and dividend payments
D. He may purchase no further securities until the freeze is listed

Answer 104

B. He may place purchase orders only if he first deposits the required amount

Rationale:
A “frozen account” really just means that the customer’s credit is cut off for 90 days. Not that a firm has to be nice enough to ever let people buy without paying first—this regulation tells firms how nice they can be, if they want to. They can let the customer pay 2 business days after regular way settlement, but if the customer still doesn’t come through, the credit has to be frozen for 90 days.

Question 105

Which of the following orders can a specialist not accept?

A. Buy-limit
B. Not-held
C. Sell-stop-limit
D. Market order

Answer 105

B. Not-held

Rationale:
Tricky-the specialist doesn’t put market orders on his book, but he can execute them, immediately. A “market not- held” order lets the commission house broker (trader for a member firm) use his discretion as to when to enter the order.

Question 106

This type of order becomes a market order if and when the security trades at or through a specific price.

A. Limit order
B. Stop order
C. Stop-limit order
D. Market not held order

Answer 106

B. Stop order

Rationale:
The stop order becomes a market order once it’s activated. A limit order is executed at a specific price or better.

Question 107

One of the investors on your book of business is the CFO of a publicly traded corporation. The CFO purchased shares of her corporation on the secondary market in January of this year. In May, she sells the shares for a profit of $10 per- share. Therefore,

A. She has realized a short-swing profit, which may be kept if deemed insubstantial relative to recent trading volume on the stock
B. She has effected a short sale against the company’s shares, a violation
C. She has realized a short-swing profit, which must be disgorged to the corporation
D. She has engaged in insider trading

Answer 107

C. She has realized a short-swing profit, which must be disgorged to the corporation

Rationale:
As if the test doesn’t have enough stuff to hit you with, it might bring up that insiders cant make short-swing profits (within 6 months) on their company’s stock. If they do it, the corporation can sue to recover it.

Question 108

Which of the following is an accurate statement of a trading halt on the NYSE?

A. If the DJIA drops by 10% or more from its previous close, trading is halted on all 30 stocks comprising the index for 1 hour
B. If the DJIA drops by 20% or more from its previous close, all trading halts for two hours
C. Halts on particular securities may occur, but not on all securities
D. If the DJIA drops by 10% or more from its previous close, trading ceases for the day

Answer 108

B. If the DJIA drops by 20% or more from its previous close, all trading halts for two hours

Rationale:
10% decline = 1-hour halt
20% decline = 2-hour halt
30% decline = enough already!

Question 109

The following information is printed to the NYSE tape:

2s GE SLD 33.50

This indicates that:

A. 200 shares of GE were sold short at $33.50
B. 20 shares of GE preferred stock were sold at $33.5
C. 200 shares of GE traded at $33.50, but the trade is being reported out of sequence
D. 200 shares of GE were sold at $33, followed by 200 more at $33.50

Answer 109

C. 200 shares of GE traded at $33.50, but the trade is being reported out of sequence

Rationale:
SLD means that this price actually should have been reported earlier-therefore, it cant trigger any stop orders.

Question 110

What does the following information pulled from a little pretend NYSE ticker tape indicate?

ABCpr 15s 77
s

A. 15 shares of ABC preferred stock were sold short at $77 per share
B. 150 shares of ABC preferred stock were sold short at $77 per share
C. 150 shares of ABC preferred stock traded for $77 per share
D. 15 shares of ABC preferred stock traded for $77 per share

Answer 110

C. 150 shares of ABC preferred stock traded for $77 per share

Rationale:
A round lot for preferred stock is 10 shares. So 15s means 150 shares. The price is $77.

Question 111

One of your customers entered an order to buy 1,000 shares of ABC at 23 limit and marked the order GTC. Several weeks later, while the customer is visiting his mother in the hospital in another state, ABC trades at 23, and the customer’s order is filled. If the customer cant send a check to arrive within 2 business days of settlement, you should:

A. Cancel the order
B. Advance the customer’s account funds from your personal account with principal approval
C. Sell out the position and freeze the account 90 days
D. Request an extension

Answer 111

D. Request an extension

Rationale:
Too late to cancel the order. This is a legitimate reason for the customer to be granted an extension. He had no idea if or when the GTC buy-limit order would be executed.

Question 112

Alex Hamilton purchased $100,000 par value of T-bonds on Friday May 17th for cash settlement. The transaction will, therefore, settle on:

A. May 18th
B. May 19th
C. May 20th
D. May 17th

Answer 112

D. May 17th

Rationale:
Cash settlements are “same day.” If this had been “regular way,” settelement would have occured on the next business day, Monday May 20th.

Question 113

Which of the following does not follow industry standard procedures for settlement/clearing of securities transactions?

A. A trade of preferred stock settles three business days after the trade date
B. A trade of Treasury bonds settles three business days after the trade
C. A trade of municipal bonds settles three business days after the trade date
D. A trade of common stock settles three business days after the trade date

Answer 113

B. A trade of Treasury bonds settles three business days after the trade

Rationale:
Treasuries settle next business day (regular way), as do listed options.

Question 114

When a broker-dealer purchases 400 shares of XYZ from a market maker in order to fill a customer’s purchase order, the broker-dealer would be acting in which capacity?

A. Principal
B. Agent
C. Fiduciary
D. Dealer

Answer 114

B. Agent

Rationale:
The firm is “effecting a transaction in securities for the accounts of others” here, which is to act as broker/agent for the customer. The firm is a dealer/principal if it sells stock from the firm’s inventory to the customer.

Question 115

The industry’s 5% mark-up policy applies when the member firm is acting in which of the following capacities?

A. Mutual fund sponsor
B. All choices listed
C. Broker-dealer in the OTC market
D. Investment banker

Answer 115

C. Broker-dealer in the OTC market

Rationale:
Securities sold with a prospectus (mutual fund, IPO) aren’t subject to the mark-up policy. The mark-up policy has to do with the secondary market for OTC securities.

Question 116

Which of the following securities can be traded in the over-the- counter market?

I. Open-end funds
II. Closed-end funds
III. Revenue bonds
IV. US Treasury notes

A. I, III
B. II, III, IV
C. I, II, III, IV
D. II, IV

Answer 116

B. II, III, IV

Rationale:
Open-end funds don’t trade among investors.