Chapter 04 : Operation and Regulation of Secondary Markets Flashcards
1
Q
One trader asks another trader to delay a trade report or misreport a transaction, what is this practice called?
A
Collusion
2
Q
What is the maintenance requirement for all forms of communication with the public?
A
Three years from last use
3
Q
The ex-dividend date occurs ___ business day(s) ______ the record date.
A
The ex-dividend date occurs one business day before the record date.
4
Q
Between 3:55 and 3:58 p.m. ET, for what reason may MOC/LOC orders be cancelled?
A
Only to correct a legitimate error
5
Q
Identify the acronym: SEC
A
Securities and Exchange Commission
6
Q
How often must a physical count of all securities in the firm be conducted?
A
Inventory counts must be conducted every quarter.
7
Q
Which market is considered negotiated?
A
The over-the-counter (OTC) market in which market makers negotiate prices (e.g., the OTCBB)
8
Q
Nasdaq market makers use a Level ____ terminal.
A
Nasdaq market makers use a Level 3 terminal.
9
Q
If an RR receives information about a new company from someone in the research department of his BD, what must be done?
A
The RR must report the analyst’s disclosure to his manager. This could be a case of insider trading.
10
Q
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
A
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
11
Q
What is interpositioning?
A
The placement of another BD between a customer and the best market
12
Q
What is an ECN?
A
Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes
13
Q
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.
A
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.
14
Q
True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.
A
True
15
Q
What yield would be disclosed for a bond purchased at a premium and callable at par?
A
Yield to call (YTC)
16
Q
Market makers must report trades within _____ seconds.
A
Market makers must report trades within 10 seconds.
17
Q
For how long must retail communication, institutional communication, and correspondence be maintained?
A
For three years, but easily accessible for the first two years
18
Q
True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.
A
False. She must have EXERCISED the options, rights, or warrants.
19
Q
What is the violation for a market maker failing to honor its firm quote?
A
Backing away
20
Q
What can be found on Level II Nasdaq?
A
Current quotes of all market makers for a specific security
21
Q
What is the system that provides quotes for the Third Market?
A
Consolidated Quotation System (CQS)
22
Q
True or False: BD records may only be maintained in physical form.
A
False. Documents may be maintained in any format, but if an electronic media is used, the SRO must be notified.
23
Q
What does Level III Nasdaq give market makers the ability to do?
A
Change their quotes
24
Q
The inside market is the _________ bid and the ________ ask.
A
The inside market is the highest bid and the lowest ask.
25
Where can you find quotes for stocks not listed on an exchange or Nasdaq?
The OTCBB and Pink Sheets
26
9
| According to FINRA rules, written customer complaints must be maintained for ____ years.
According to FINRA rules, written customer complaints must be maintained for four years.
27
Trades involving corporate or municipal securities settle by the _______________ day following the trade date (T + __).
Trades involving corporate or municipal securities settle by the second business day following the trade date (T + 2)
28
If an equity option is exercised, when does the transaction in the underlying security settle?
In two business days (T + 2)
29
9
| True or False: Nasdaq is a physical trading venue.
False. Nasdaq is an electronic trading platform and the participants are competing market makers.
30
Put the following four types of orders in the correct priority: Group Net, Member, Presale, Designated
1) Presale 2) Group Net 3) Designated 4) Member (Remember: P, G, D, M)
31
__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
32
What does the term good delivery mean?
The security is in proper form and endorsed or accompanied by a stock power.
33
Which federal law created the SEC?
The Securities Exchange Act of 1934
34
After an account is closed, for how long are customer account records maintained?
For 6 years after the account is closed
35
Up to _____ p.m. ET, all MOC/LOC orders may be cancelled for any reason.
Up to 3:55 p.m. ET, all MOC/LOC orders may be cancelled for any reason.
36
If securities are discovered missing during a quarterly securities count, what is the reporting period?
No later than 10 business days from discovery
37
Without an order imbalance, MOC/LOC orders may not be entered after _____ p.m. ET.
Without an order imbalance, MOC/LOC orders may not be entered after 3:55 p.m. ET.
38
When is settlement for a transaction using a seller's option settlement?
On a date that is agreed on by both parties, but not earlier than three business days after the trade date
39
Which federal law governs the registration of RRs and their firms?
The Securities Exchange Act of 1934
40
What yield would be disclosed for a bond purchased at a discount?
Yield to maturity (YTM)
41
What system is used to report Nasdaq trades?
The Trade Reporting Facility (TRF)
42
According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than _________ old.
According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than 24 hours old.
43
To be a threshold security, how many shares must be in a failing position?
10,000 shares or more
44
If a BD receives bearer bonds from an unknown source, what should the firm do?
Make an inquiry of the Securities Information Center
45
What is the SIC?
Securities Information Center; created to identify and intercept stolen, forged or missing securities
46
True or False: On the ex-dividend date, a buy stop order's price would be reduced.
False. On the ex-dividend date, the prices for buy limit and sell stop orders are reduced.
47
How long is a municipal purchase and sales blotter required to be retained?
6 years
48
How often are blotters of all transactions, as well as records of cash and securities movements, created?
On a daily basis
49
What is the Nasdaq Market Center Execution System?
What is the Nasdaq Market Center Execution System?
50
What is the trade reporting system for OTC equities?
Over-the-Counter Reporting Facility (ORF)
51
If the S&P 500 falls by 20% from the previous day's close, trading halts for ________________________.
If the S&P 500 falls by 20% from the previous day's close, trading halts for the remainder of the day.
52
Under FINRA rules, market makers are required to report trades in what types of securities?
All Nasdaq securities, Nasdaq-listed convertible bonds, CQS securities, OTC equities
53
A transfer agent, the Securities Information Center (SIC), and FBI are notified together for what probable reason?
Stolen or counterfeit securities have been discovered.
54
What types of records are maintained for the life of the BD?
Documents that create the BD, such as partnership agreements and corporate charters
55
True or False: A memorandum of each trade must show the terms of the transaction along with any modifications.
True. Trade tickets will also show the account name or number and the person accepting the order.
56
What securities settle in two business days after the trade date?
Corporate securities (stocks and bonds) and municipal securities
57
The ___________________________ is the primary system for accessing the quotes of Nasdaq market makers.
The Nasdaq Market Center Execution System is the primary system for accessing the quotes of Nasdaq market makers.
58
Any quote qualified by the terms "subject", "workout," or "nominal" is not considered a ______ quote.
Any quote qualified by the terms "subject", "workout" or "nominal: is not considered a firm quote.
59
Of what violation is an RR guilty when buying stock based on knowledge of a pending large client order?
Front running
60
An _________ is any person who has possession of material non-public information.
An insider is any person who has possession of material non-public information.
61
True or False: Syndicate managers may change the priority of orders if justifiable and in the syndicate's best interest.
True
62
XYZ's record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?
On Wednesday, May 2 or later. She must remain the owner at least through May 3 to keep the dividend.
63
The _________ date is the date by which stock must be owned to receive the dividend.
The Record date is the date by which stock must be owned to receive the dividend.
64
When do municipal bond trades settle?
Two business days after the trade date (T+2)
65
A BD buys a security to fill an existing client order. This is called a ___________________________ transaction.
A BD buys a security to fill an existing client order. This is called a riskless/simultaneous principal transaction.
66
All documents are to be maintained readily accessible for the first ___ years.
All documents are to be maintained readily accessible for the first 2 years.
67
A written customer complaint is retained for _____ years from the date of its resolution.
A written customer complaint is retained for four years from the date of its resolution
68
When is confirmation of a transaction sent to a client?
No later than completion of the transaction
69
True or False: Level III Nasdaq is available to the public.
False. Level III is exclusively for market makers.
70
After 3:55 p.m. ET, only MOC/LOC orders on the ____________ of a published imbalance may be entered.
After 3:55 p.m. ET, only MOC/LOC orders on the contra side of a published imbalance may be entered.
71
___________ is the settlement for cash transactions (also referred to as cash trades or cash settlement).
Same day is the settlement for cash transactions (also referred to as cash trades or cash settlement).
72
Account statements must be sent to customers at least ____________.
Account statements must be sent to customers at least quarterly.
73
True or False: An exchange is always a physical location.
False. Nasdaq (essentially an electronic marketplace) is an exchange.
74
When are Nasdaq trades required to be reported to the Trade Reporting Facility (TRF)?
Within 10 seconds
75
When must insiders report their transactions?
Within 2 business days of the trade
76
What does Regulation SHO regulate?
Short sales
77
What are the two ways order tickets can be marked when selling securities?
Long (selling shares that are owned) or short (selling stock that is being borrowed)
78
Where may quotes for non-Nasdaq (OTC equity) stocks be found?
Pink Sheets or the OTC Bulletin Board
79
After conducting a securities count, a BD determines that securities are missing, when must an SIC report be filed?
No later than 10 business days following the count
80
According to FINRA, when are member firms required to provide clients with a statement of financial condition?
Upon request
81
May firms allow for the free flow of information between their research department and investment banking department?
No, these two departments must be separated to avoid conflicts of interest.
82
If a BD believes a security has been stolen, with whom is a report filed?
The Securities Information Center (SIC), the issuer's transfer agent, and the FBI
83
83 of 159
| Under which federal law are firms, RRs, and exchanges registered?
The Securities and Exchange Act of 1934
84
Transactions of less than $_______ do not require an inquiry of the SIC.
Transactions of less than $10,000 do not require an inquiry to the SIC.
85
____________ is the buyer's refusal to accept the delivery of municipal bonds.
Rejection is the buyer's refusal to accept the delivery of municipal bonds.
86
The ___________________ has the authority to change the priority of orders.
The syndicate manager has the authority to change the priority of orders.
87
A 7% decline in the S&P 500 would trigger a ____-minute trading halt on the NYSE.
A 7% decline in the S&P 500 would trigger a 15-minute trading halt on the NYSE.
88
When must a BD notify the authorities if securities are discovered missing due to a securities count?
Within 10 business days
89
9
| The ______________ is where trades occur between institutions without the use of BDs.
The Fourth Market is where trades occur between institutions without the use of BDs.
90
When executing a COD order, who receives the confirmation of the transaction?
The client (unless otherwise instructed)
91
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Tuesday, October 18 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.
92
A BD executes a proprietary put purchase before executing a client's stock sale. Is this practice permitted?
No. This prohibited practice is referred to as front-running.
93
_______________ following the trade date is settlement for trades of U.S. Government securities or option contracts.
1 business day (T+1) following the trade date is settlement for trades of U.S. Government securities or option contracts
94
What are treble damages?
The civil penalty for insider trading, which is three times the profit made or loss avoided
95
What is the trade reporting system for Nasdaq securities?
Trade Reporting Facility (TRF) - formerly the Automated Confirmation Transaction system (ACT)
96
If two firms agree to settle a trade in nine business days, what settlement style is being used?
Seller's option
97
The maximum denomination of registered bonds pursuant to MSRB good delivery rules is $________.
The maximum denomination of registered bonds pursuant to MSRB good delivery rules is $100,000.
98
The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.
The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.
99
List some of the information to be included on a municipal customer confirmation.
Description, price and yield (lower of YTM or YTC), BD capacity (commission for agency), trade and settlement dates
100
If there is a market-wide halt on the NYSE, what happens on the Nasdaq Exchange?
It is halted as well.
101
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
102
Executing a series of trades at the end of the day to manipulate the price of a security is called ________________.
Executing a series of trades at the end of the day to manipulate the price of a security is called marking-the-close.
103
What items are shown on a securities ledger?
For each security, the ledger shows its physical location and the account that owns it.
104
How frequently do BDs conduct physical counts of securities in their possession?
Quarterly
105
Individuals must register with the SEC within __________ of becoming an insider.
Individuals must register with the SEC within 10 days of becoming an insider.
106
According to NYSE rules, if the S&P 500 falls by 13% from the previous day's close, trading will halt for ____ minutes.
According to NYSE rules, if the S&P 500 falls by 13% from the previous day's close, trading will halt for 15 minutes.
107
To satisfy best execution requirements for a non-Nasdaq OTC equity, BDs must obtain quotes from how many dealers?
A minimum of three BDs or all BBD that are quoting a price if there are less than three.
108
____________________ is the insertion of a third party between a customer and the best market price.
Interpositioning is the insertion of a third party between a customer and the best market price.
109
Define completion of a transaction
When a client delivers cash or securities to a BD, or when the client's account is debited for cash or securities
110
Whose authentication is acceptable for mutilated securities?
The transfer agent, registrar, trustee, or issuer
111
__________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
112
A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
113
How often must member firms send clients an account statement?
At least quarterly
114
Transactions effected on an exchange or OTC must be reported within ____ seconds.
Transactions effected on an exchange or OTC must be reported within 10 seconds.
115
For how long is an employee questionnaire (Form U4) and fingerprint cards retained?
For 3 years after the representative leaves the firm
116
What does the following quote of a Nasdaq market maker indicate it is willing to do? 15.30 - 15.35, 6 x 10
Buy up to 600 shares at 15.30 or sell up to 1,000 shares at 15.35
117
"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?
The SEC can sue for three times the damage (profit made or loss avoided).
118
All forms of communication with the public must be kept for _____ years, but easily accessible for the first ___ years.
All forms of communication with the public must be kept for three years, but easily accessible for the first two years.
119
For active accounts, account statements must be sent ____________.
For active accounts, account statements must be sent monthly.
120
When must customer confirmations be sent?
By the completion of the transaction (usually the settlement date)
121
Copies of confirmations and statements are maintained for ___ years.
Copies of confirmations and statements are maintained for 3 years.
122
After what time may MOC/LOC orders no longer be cancelled for any reason?
3:58 p.m. ET
123
______________ is the return of municipal bonds that were originally accepted for delivery.
Reclamation is the return of municipal bonds that were originally accepted for delivery.
124
True or False: Nasdaq is a securities exchange registered with the SEC.
True
125
When will a cash trade for a municipal bond settle?
Same day
126
Fails-to-deliver in threshold securities that have existed for ___________________ settlement days must be closed-out.
Fails-to-deliver in threshold securities that have existed for 13 consecutive settlement days must be closed-out.
127
Are quotes on the OTCBB firm?
Yes (except for DPPs)
128
What issue is the threshold security list designed to address?
Aged fails to deliver
129
For how long must mutual fund retail communication be kept on file?
For three years (but kept easily accessible for the first two years)
130
For a BD to trade along with an institutional customer, ____________ consent is required.
For a BD to trade along with an institutional customer, affirmative consent is required.
131
True or False: The OTCBB is an electronic, real-time, quote and execution system.
False. The OTCBB does not have an execution feature.
132
What yield would be disclosed for a bond purchased at a premium and callable at a premium?
The lower of the YTM or YTC
133
Name two prohibitions that relate to being an insider.
1. No shorting of the stock and 2. No keeping of short-swing profits
134
What happens if the S&P 500 declines by 20% at any time during the day?
The market is closed for the remainder of the trading day
135
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
136
A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
137
Is interpositioning an acceptable practice?
No, it is generally prohibited.
138
What yield would always be disclosed for a bond that has been prerefunded?
YTC
139
THE NYSE would close for the day if the DJIA fell by ___%.
THE NYSE would close for the day if the DJIA fell by 20%.
140
If a pricing error occurs when reporting a trade, the client is obligated to accept the ________ price.
If a pricing error occurs when reporting a trade, the client is obligated to accept the actual price.
141
A BD deposits $40,000 worth of MSFT in an account of a new client. With whom must an inquiry be made?
A BD deposits $40,000 worth of MSFT in an account of a new client. With whom must an inquiry be made?
142
Identify the acronym: OTC
Over-the-Counter
143
True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.
False, the convertibles must already have been TENDERED for conversion.
144
The highest bid and the lowest offer for a security is referred to as the ________________.
The highest bid and the lowest offer for a security is referred to as the Inside Market.
145
When are third market trades involving IBM required to be reported to the Trade Reporting Facility (TRF)?
Within 10 seconds
146
Trading on material, non-public information is considered ________ ________.
Trading on material, non-public information is considered insider trading.
147
A record of all customers’ securities positions, along with profits and losses, must be maintained for _____ years.
A record of all customers’ securities positions, along with profits and losses, must be maintained for six years.
148
What is the criminal penalty for insider trading by corporations?
$25 million per violation
149
How often does a BD need to make a physical examination and count of securities?
Quarterly
150
May client information be given to a third party?
Only if the third party has legal authority (e.g., IRS) or the client provides written consent
151
True or False: An RR may mark a sell order ticket long if the seller will make delivery within 10 business days.
False. The RR must have an expectation that the seller will deliver no later than the settlement date.
152
True or False: Stocks found in the Pink Sheets are often thinly traded.
True
153
For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?
Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).
154
If a published imbalance exists for a stock, on what side of the imbalance may an LOC/MOC order be entered?
On the contra side of the imbalance
155
Which level of Nasdaq will only show the inside market for a security?
Level I
156
A 13% decline in the S&P 500 would trigger a ____-minute trading halt on the NYSE.
A 13% decline in the S&P 500 would trigger a 15-minute trading halt on the NYSE.
157
In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?
Easy to borrow (called the locate requirement)
158
Pursuant to short sale activities, when must a BD identify that shares are available for borrowing?
Prior to effecting a short sale
159
According to NYSE rules, if the S&P 500 falls by 7% from the previous day's close, trading will halt for ______ minutes.
According to NYSE Rules, if the S&P 500 falls by 7% from the previous day's close, trading will halt for 15 minutes.
