Chapter 5 - Secondary Markets (15%)

Question 1

What is the difference between a dealer and a stock broker?

Answer 1

A dealer actually buys and sells securities. They take up a position in the market and then sell it on. Ie trading in principal

Question 2

Firms that are involved in acting as a agent and trading in principal can be described as

Answer 2

Broker - Dealers

Question 3

What is a regulated market

Answer 3

Basically a stock exchange

Question 4

What is an MTF

Answer 4

Self regulated trading space operated by a market operator allowing the free trade of securities.

Question 5

What is a systematic internaliser

Answer 5

Investment firms dealing from their own books of stocks.

Question 6

What is meant by ‘Over-The-Counter-

Answer 6

Buying/Selling securities outside of an official stock exchange, typically by dealers trading with one another that is not coordinated or subject to the formal procedures of an exchange

Question 7

What is meant by a ‘Dark Pool’

Answer 7

A trading system where stocks are traded without the order price being displayed until the trade is complete

Question 8

Are Dark Pools part of a regulated exchange or an MTF

Answer 8

MTF

Question 9

What is quote driven system?

Answer 9

Market makers agree to buy and sell a quantity of shares at quoted prices

Question 10

What is order driven system?

Answer 10

A system that simply brings together buyers and sellers

Question 11

Which one of the two systems has greater liquidity

Answer 11

Quote driven

Question 12

If a firm is selling from principal, what does this mean?

Answer 12

They are selling from their own book of securities

Question 13

What does a Market Maker do?

Answer 13

Sell securities to buyers and buy securities from sellers

Question 13

What is an Inter-Broker Dealer?

Answer 13

Facilitates transactions between investment banks, broker dealers, and other large financial institutions

Question 14

What is the key benefit to using an Inter-Broker Dealer?

Answer 14

Their identity remains a secret

Question 15

What is Prime Brokerage

Answer 15

Collection of services provided by an investment bank to their hedge fund clients

Question 16

What is a systematic internalizer

Answer 16

An investment bank that deals on its own account rather then an exchange

Question 17

Two key reasons why algorithmic trading is gaining popularity?

Answer 17

1. Removing the emotion and preserving the discipline of trading
2. Speed, accuracy & reduced costs

Question 18

How does HFT Work

Answer 18

Use of powerful computers to trade very quickly in response to price movements

Question 19

What is a Market Order?

Answer 19

Do not specify a price and re immediately executed at the best available price

Question 20

What is a Limit Order?

Answer 20

Have a price and time limit

Question 21

What is an iceberg order

Answer 21

Large order sizes. They can be hidden from the market/public so the impact is reduced

Question 22

What is an Execute and Eliminate order

Answer 22

Will execute as much of the trade as possible and cancel the rest. This order type will not execute below a specified price

Question 23

What is a Fill or Kill order

Answer 23

All order executed at a set price, or all order is killed

Question 24

What is an All or None order?

Answer 24

Same as fill or kill but they will wait until the end of the trading day before killing

Question 25

What is the difference between Fill/Kill and All/None

Answer 25

All/None will wait till the trading day has closed before cancelling the order

Question 26

What are 5 benefits to using a CCP

Answer 26

Reduced counterparty risk Anonymous Reduced Admin Netting Better Prices

Question 27

What type of fee does a CCP Charge?

Answer 27

Flat Fee

Question 28

What is a PIP

Answer 28

Primary Information Provider

Question 29

Why would a firm use a PIP

Answer 29

To alert the market of price moving information

Question 30

What is the LSEs PIP

Answer 30

Regulatory New Serivce

Question 31

What does 'Capitalisation-weighted' refer to?

Answer 31

An indices that is based on other stocks capitalization instead of price

Question 32

What market does the Nikkei Stock 225 represent?

Answer 32

Japan

Question 33

What market does the Hang Seng represent?

Answer 33

Hong Kong/China

Question 34

What market does the STOXX represent?

Answer 34

600 Largest global capitilazation companies

Question 35

What market does the NMSCI represent?

Answer 35

1700 Largest companies from 23 Countries

Question 36

What market does the CAC represent?

Answer 36

BLAADDY FRENCH

Question 37

What market does the Wiltshire 5000 represent?

Answer 37

US, 5OOO Companies in US - The 'Original total market index'

Question 38

Page 145 Equation

Answer 38

Page 145 Equation

Question 39

What is a Price Return?

Answer 39

Measures the price performance. Therefore DOES NOT include dividends

Question 40

What is Total Return?

Answer 40

Measures both price performance AND dividend return

Question 41

What is Net Total Return?

Answer 41

Accounts for dividend reinvestment AFTER TAX

Question 42

What does the 'Free Float' of a company refer to?

Answer 42

% of shares not held by large owners. Ie how much the public hold

Question 43

What % must be held for an investor not to be included in the free float amount?

Answer 43

5%

Question 44

Who issues government bonds in the UK

Answer 44

Debt Management Office (DMO)

Question 45

What is a GEMMs

Answer 45

Gilt-Edged Market Makers. Baso sell government bonds

Question 46

What are the three obligations of a GEMMs

Answer 46

1. Make effective two way prices to customers 2. Participate in the DMOs issuances of Gilts 3. Provide information to the DMO on all things price

Question 47

What are the three privileges of a GEMM

Answer 47

1. Exclusive rights to bid directly with the DMO 2. Exclusive facility to trade as a counterparty with the DMO 3. Exclusive access to the services of Gilte-Inter-Dealer-Brokers

Question 48

What is specific about a Gilt Inter-Dealer Broker (IDBs)

Answer 48

They can not take a principal position and must remain a secret. Shhh!

Question 49

How long is a T-Bill for?

Answer 49

Less then a year

Question 50

How long is a T-Note for?

Answer 50

2-10 Years

Question 51

How long is a T-Bond for?

Answer 51

30+ Years

Question 52

What type of bond is traded on a decentralized dealer market

Answer 52

Corporate Bonds

Question 53

What, apart from corpy bonds, is an example of a decentralized dealer market?

Answer 53

Foreign exchange

Question 54

What is a Retail Bond Market

Answer 54

A bond market facilitated by a stock exchange

Question 55

What is LSE's retail bond market called?

Answer 55

Order Book for Retail Bonds (ORB)

Question 56

What are the three ways Dealer-to-Dealer bond trading can occour?

Answer 56

1. Direct telephonin' 2. Indirect via a IDB (Inter Dealer Broker) 3. Electronic Market

Question 57

How do dealer-to-customer systems typically operate ?

Answer 57

Request for Quote basis.

Question 58

How has technology/electronic trading benefitted an investor when attempting to trade bonds through a 'Request for Quote' basis

Answer 58

More prices being available at once, meaning the price should be competitive and go down.

Question 59

How does the Request for Quote basis work?

Answer 59

Request quotes from a number of dealers simultaneously

Question 60

What are the 4 issuer factors that effect

Answer 60

1. Issuers current credit rating 2. The structure and seniority of the particular issue 3. Price on other bonds 4. Macro-economic factors

Question 61

What are the 3 Market factors that effect bond pricing

Answer 61

1. Liquidity 2. Method of trading 3. Ability to borrow