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Series 7 > Chapter 3 - Secondary Market > Flashcards

Chapter 3 - Secondary Market Flashcards

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Series 7 Top-off Exam flashcards
1
Q
  • this is one of the two classifications of stock in the Secondary Market
  • most investors start with this type of stock position
  • an investor in this stock position owns the stock and has not sold
  • an investor in this type of stock position is optimistic about the stock and believes that it will increase in price

– this type of investor is called a Bull because he/she anticipates that the stock price will rise in the future

  • an investor with this type of position can theoretically lose the entire investment, but no more
A

Long Position

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2
Q
  • this is one of two classifications of stock position
  • this stock position is suitable for an investor that is pessimistic about the stock’s future performance
  • a pessimistic investor is referred to as a Bear
  • a Bear will sell the stock when it is high, hoping to buy the stock later when it is low
  • the Bear establishes this type of stock position by borrowing the stock. The Bear then sells the borrowed stock with the obligation to replace it in the future
  • an investor with this type of stock position has potentially unlimited risk

– someday the short seller must buy shares of the stock that were borrowed and return them to the lender. No substitutions are allowed

A

Short Position

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3
Q
  • executes trades as either broker or dealer, but never both

– if the firm only matches up a buyer and a seller, then it is acting as broker. The firm is said to be acting in an Agent capacity and charges a commission. Acting in this capacity involves no risk

– if the firm uses its inventory account, it is said to be acting as a dealer. The firm is acting in a principal capacity and charges a markup. On the other hand, if the principal buys/places a security into its own inventory it charges a markdown. This always involves risk because there is no assurance the principal can sell the security quickly for a profit

A

Broker/Dealer

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4
Q
  • also referred to as the Trade Ticket
  • this term is the original record that documents the buy-or-sell transaction
  • certain info is required to be on each ticket, such as:

– name of the security, symbol, account number, price, quantity, and whether the trade is solicited, unsolicited, or discretionary

– if the ticket is for a sell, it must be marked “long” or “short”

— for long sales if the b/d is not holding the securities in street name the RR must receive affirmation by from the customer that the customer can deliver the securities by the settlement date

— for short sales, the RR must receive affirmation from the customer concerning the source of the borrowed securities. Short sales must also abide by Regulation SHO

  • three time stamps are required on the ticket. When the order is received, when the ticket hits the trading desk, and when the trade is executed
  • the ticket must be adjusted if there has been a stock split or stock dividend
A

Order Ticket

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5
Q
  • under this regulation, if the b/d misses 13 consecutive settlement dates on a threshold security, the b/d is required to perform a mandatory buy in
A

Regulation SHO

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6
Q
  • a security with a large short position where the b/d might be at risk of covering the short
A

Threshold Security

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7
Q
  • this must be sent to customers no later than the completion of the transaction or settlement of the trade
  • the following info must be included:

– The b/d name and address; Whether the trade was a purchase or sale; Complete security description; Quantity; Trade date and settlement date; Delivery and payment instructions; Capacity of the b/d (agent or principal); Commission (if b/d is acting as agent); and Markup or markdown (if b/d acted as principal in a NASDAQ or riskless principal trade)

– the member firm is required to disclose the amount of mark-up or mark-down it applies to trades with retail customers in these securities if the member also executes an offsetting principal trade in the same security on the same trading day

A

Trade Confirmation

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8
Q
  • this figure is the difference between the bid price and the offer/ask price
  • the market for a security is always the highest bid price and the lowest ask price
  • a narrow spread between the bid and ask price indicates active trading in a security
A

Trading Spread

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9
Q
  • the price at which investors can sell their shares
  • this price represents the highest price that a purchasing dealer is willing to pay for a security
A

Bid Price

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10
Q
  • also called the offer price
  • this is the price at which investors can buy the shares
  • it is the lowest price that a selling dealer is willing to accept
A

Ask Price

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11
Q
  • this is a guideline (not a rule) used to determine whether a commission or markup is fair to the public
  • this guideline applies to nonexempt (corporate) securities traded in the OTC secondary market, and securities listed on an exchange
  • this guideline does not apply to exempt securities (i.e. treasuries and municipals), nor to prospectus offerings
  • this guideline also applies to miscellaneous bond wire services, proceeds trades, agency cross trades, riskless and simultaneous principal transactions, and other nonexempt stock and bond trades
  • the Third Market also abides by this guideline
A

Five Percent Policy

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12
Q
  • a physical location where b/d’s execute investor orders to buy and sell securities
A

Stock Exchange

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13
Q
  • formed in 1792, this is the oldest and largest exchange market in the United States
  • operates in seven liquid markets
  • most active of the world’s stock exchanges
  • securities must meet certain standards to be listed on the exchange

– must have at least 1.1 million shares outstanding, at least $140 million market value of shares, and aggregate pretax earnings over the last 3 years of $10 million. The share price must be at least $4 at the time of listing

  • the trading of listed securities on an exchange is called the First Market; it is an auction market
A

New York Stock Exchange

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14
Q
  • this term is the individual who has a seat on the exchange
  • each firm that is a part of the NYSE must have an individual employee who owns a seat on the exchange
  • there are four types of categories for these individuals

– Commission house broker or floor broker; Two dollar broker; Registered competitive traders; and the Designated market maker (DMM)

A

NYSE Member

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15
Q
  • also referred to as the Floor Broker
  • this NYSE Member executes orders for clients of the broker’s firm
  • member firms charge a commission to their clients
A

Commission House Broker

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16
Q
  • this NYSE Member executes orders for Floor Brokers when they are too busy to execute all of their firm’s orders
  • this NYSE Member may execute orders for a number of Floor Brokers
  • they charge each broker a commission
A

Two Dollar Broker

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17
Q
  • this NYSE Member executes orders for their own accounts
  • they seldom work for clients, but if they have a client order, they must give it priority over their own orders
A

Registered Competitive Trader

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18
Q
  • this NYSE Member has the responsibility of maintaining a fair and orderly market
  • this Member must buy when no buyers exist and sell when no sellers exist and hold these orders in his or her own account
  • may also act as an agent for a Floor Broker

– this occurs when the Floor Broker cannot execute a client’s order due to price or timing

— this order is recorded in the term’s book and is held until it can be executed

—- if executed, the term charges a commission

  • the term is also permitted to stop the stock for public orders meaning that the trader guarantees an order fill at a specified price for a period of time
  • term’s act in a dual capacity meaning that they can either trade in their own account (principal) or they can act in an agency capacity on behalf of other member firms
  • terms are committed to making an orderly market and must buy when sell orders are dominant and sell when buy orders are dominant

– when terms buy for their own account, they must buy higher than the highest bid. Vice versa, when selling they must sell lower than the lowest offerred

— in other words, terms must narrow the spread

  • note that a term is not expected to go into default by supporting a market in a security that is dropping so rapidly. Meaning that terms cannot be forced to make a market in a worthless security
A

Designated Market Maker

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19
Q
  • these orders are electronically sent to the exchange floor from a member firm’s office
  • the system is called the NYSE super display book (SDBK)
  • the trade goes directly to the DMM’s book and back again electronically
A

Wire Order

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20
Q
  • this term provides the last trade information of the securities that trade on the exchange
  • this information includes:

– Symbol, which is the unique character that is used to identify the company

– Shares trades. This number is expressed in round lots

– Price Traded

– Change direction. A symbol indicates whether the price is higher or lower than the previous day’s closing price

– Change amount. The difference from the previous day’s close

A

Consolidated Tape

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21
Q
  • some shares trade in this term
  • the public cannot see the number of shares traded, nor can they see the price per share
  • these transactions come from large institutional investors
A

Dark Pool of Liquidity

22
Q
  • this occurs when an investor buys a security on one exchange and simultaneously sells the same security on another exchange
  • this enables the investor to take advantage of small price deviations between the exchanges
  • this is typically done with large blocks of securities
A

Market Arbitrage

23
Q
  • this is another form of arbitrage that is used in a merger and acquisition scenario
  • the arbitrageur buys the stock of the company that is being acquired and sells short the stock of the purchasing company that is doing the acquisition
  • there are also arbitrage opportunities with convertible securities

– this occurs when the arbitrageur purchases a convertible bond or preferred stock then converts to common stock

— this is favorable when the common shares are trading above parity

A

Risk Arbitrage

24
Q
  • this term begins with an order being generated by the order or wire department
  • the purchase and sales department then processes the orders
  • the margin department then reviews all orders
  • the order then goes to the cashier cage
  • O > P > M > C
A

Order Flow

25
Q
  • also known as “crossing the market”
  • occurs when an order to buy and an order to sell come in to the member firm from two different customers for the same stock

– the order must first be offered on the exchange floor for $0.01 higher than the current bid for at least 16 seconds before the b/d may cross the transaction within its own client base

A

Cross Transaction

26
Q
  • this is a security purchase or sale where no price is specified
  • the order must be exercised immediately at the prevailing or current market price for that particular security
  • if multiple of these orders are received, the exchange will determine which orders get filed first based on priority (time), precedence (size), and parity (coin toss)
A

Market Order

27
Q
  • this is an order to buy at or below a specified price, or to sell a stock at or above a specified price
  • this is a conditional order designed to avoid the danger of adverse unexpected price changes
  • this type of order is not guaranteed and market order have priority of this type of order

– it is not guaranteed because it is a day order unless entered good till cancelled

A

Limit Order

28
Q
  • this type of order must be placed below the market, and instruct that if a stock goes down to the stop price, the stop is elected
  • once the stop has been elected, the order becomes a market order for immediate execution
  • this type of stop is placed at or below support for a stock
A

Sell Stop

29
Q
  • this type of order must be placed above the market, and is executed at or above the stop price
  • once the market hits the order price, and releases the stop, execution is at the very next trade
  • this type of stop is placed at or above resistance on a stock
  • this type of stop is used as protection from short sales where the position has unlimited risk from market appreciation
A

Buy Stop

30
Q
  • this type of order is entered below current market price
  • the order is triggered when the stock price trades at or below the stop price
  • the order then becomes a live limit order that will only be executed at a designated price or better
  • this type of order can be used for protection of long positions or to take short positions
A

Sell Stop Limit

31
Q
  • this type of order is entered above current market value
  • the order is triggered at or above the stop price, then becomes a live limit order, to be executed at or below the limit price
A

Buy Stop Limit

32
Q
  • this type of order is a market order that gives the floor trader time and price flexibility
  • the floor broker may fill this type of order at any time throughout the day that the floor broker things is best
  • this is not a discretionary order
  • all orders are day orders and are cancelled unless entered as GTC
A

Not Held Order

33
Q
  • quantity takes priority over time in this type of order
  • these orders do not have to be filled immediately and are considered day orders which must be executed or canceled by the close of the trading day
A

All or None Order

34
Q
  • this type of order prioritizes both quantity and time
  • the order must be executed in its entirety at the time of order entry
  • this type of order is not placed in the specialist’s book and must be killed if not immediately executed
A

Fill or Kill Order

35
Q
  • this type of order prioritizes time
  • when the order is placed, it must be filled immediately with as many shares as are available

– if the order is partially filled, the unfilled amount is cancelled

A

Immediate or Cancel Order

36
Q
  • also referred to as Market Orders at the Close
  • this type of order is entered to be filled at the close of the trading day
  • the order is canceled and must be re-entered if there is a trading halt that prevents the order from being filled
A

Market on Close

37
Q
  • this type of order is done off of the floor and off tape
  • this order usually involved taking a block trade on a low-priced, comparatively thinly traded stock into the Third Market (OTC - NASDAQ) and dribbling the order in slowly throughout the trading day rather than all at once on the exchange
A

Block Order

38
Q
  • this market is a decentralized, 24-hour market that takes place over telephone lines and the internet
  • it is the world’s largest market for equities and debt
  • this market is a Negotiated Market (contrary to the NYSE, which is an Auction Market)
A

Over the Counter (OTC) Market

39
Q
  • this is the electronic quotation system that hosts shares of the largest corporations that trade OTC
  • the stocks quoted must meet the listing requirements, which include asset size and numbers of outstanding shares
  • this market is open to all firms that are members of FINRA
  • any firm is allowed to register as a market maker for a particular security if they meet minimum requirements
  • the FINRA member firm may subscribe to the NASDAQ system in three different levels
A

NASDAQ

40
Q
  • this gives the seller the option to deliver the security during any time period ranging from 6-60 business days
  • this is called a negotiated settlement and also locks in the right to buy and sell the security at a specific price
A

Seller’s Option

41
Q
  • this entity provides liquidity for all OTC stocks, both NASDAQ and non-NASDAQ
  • the entity is always a broker/dealer, however, not all broker/dealers are this entity

– this is because some b/d’s either do not have the capital or choose not to risk their capital to make a market in a security

A

Market Makers

42
Q
  • this refers to the trading of exchange-listed securities in the OTC market
  • this market has no physical location and all trading in this market is done electronically
  • securities in this market include: any exchange-listed stocks; ADR’s; Rights or Warrants
  • trades large enough to create an order imbalance in a particular stock will be done in this market (OTC)
  • part of this market is represented in the Consolidated Tape

– this is an attempt by the SEC to provide for centralized trading info on all actively traded US equities, wherever they may be traded

A

Third Market

43
Q
  • this term is designated by FINRA in certain listed stocks trading on NASDAQ
  • required to register as Designated Reporting Members (DRM’s)

– if both firms are DRM’s in a security, the sell side is required to report the transaction within 10 seconds

– if both firms are not DRM’s (non-reporting), the sell side reports the transaction within 10 seconds

– if just one firm is a DRM, then the DRM reports the transaction within 10 seconds

A

Third Market Makers

44
Q
  • this term contains inter-dealer net and last trade info on corporate notes and bonds
A

Yellow Sheets

45
Q
  • this term consists of Institutional Investors (i.e. mutual funds & pension funds) electronically trading big blocks of securities with one another
  • These investors use Electronic Communications Networks (ECN’s)

– ECN’s facilitate Agency Cross Services, taking the shares from the seller and providing them to the buyer electronically, and provide confirmation records to each institution

— this is a less costly way of trading because without a middleman, there are no commissions

A

Fourth Market

46
Q
  • this term is a violation that occurs when the b/d places another firm between itself and the customer
  • this is only allowable if it provides a better price to the end customer
  • b/d’s can choose to direct or route their orders through systems available for order routing, such as Advanced Computerized Execution System (ACES), which are usually used by order entry firms

– b/d’s must disclose their order routing policies quarterly to FINRA

A

Interpositioning

47
Q
  • linked Electronic Communication Networks (ECN’s) use Trade Reporting Facilities for this term
  • if the firm is using an Alternative Display Facility (ADF) and on an unlinked ECN, the system used for this term is TRACS (Trade Reporting and Comparison Service)
  • OTC Reporting Facility (ORF) is used to report OTC non-NASDAQ
A

Trade Reporting

48
Q
  • this term is used to track orders that have been placed by b/d’s
  • the system audits orders based on the timestamps to make sure that the firm was not front running the customer order and was providing the customer with best execution
A

Order Audit Tracking System

49
Q
  • this reports trades by b/d’s who complete transactions in US treasury and corporate bonds
  • this term requires that both the buy and sell side report within 15 minutes of the transaction
  • once both sides of the trade report through this term, FINRA will release the info to the public immediately
A

TRACE

50
Q
  • this is the MSRB system which tracks municipal bonds
  • this makes the info available and provides greater bond market transparency to the public
A

Real Time Transaction Reporting System

Series 7 (11 decks)

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