Chapter 7 Flashcards
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
Name two prohibitions related to being an insider.
- No shorting of the stock and 2. No keeping of short-swing profits
Insiders must return short-swing profits, which are those earned on stock held less than ____ months.
six months
Individuals must register with the SEC within __________ of becoming an insider.
10 days
When must insiders report their transactions?
within 2 business days of the trade
Trading on material, non-public information is considered __________________.
insider trading
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)
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
__________ is a manipulative activity designed to keep the price of a stock from rising (and is prohibited).
Capping
__________ is a manipulative activity designed to keep the price of a stock from falling (and is prohibited).
Pegging
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
yes
The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison.
$5 million; 20 years
What are treble damages?
The civil penalty for insider trading, which is three times the profit made or loss avoided
What is the criminal penalty for insider trading by corporations?
$25 million per violation
_______________ following the trade date is the settlement for trades involving corporate or municipal securities.
3 business days (T + 3)
___________ is the settlement for cash transactions (also referred to as cash trades or cash settlement).
Same Day
What does selling short mean?
Selling securities that are not owned, but are borrowed from a BD
An investor’s strategy is __________ when effecting a short sale.
bearish
On the floor of the exchange, who executes orders for the clients of their firm?
The Floor Broker
The highest bid and the lowest offer for a security is referred to as the ________________.
Inside Market
What orders may be placed in the Designated Market Maker’s (Specialist’s) Book?
Stop and limit orders placed away-from-the-market
A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
market
A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
limit
True or False: Investors generally place stop orders to limit a loss or protect a profit on a stock position.
True
Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____________.
stop price
If long stock, a sell stop order can be used to limit ___________ risk.
downside
If short stock, a buy stop order can be used to limit _________ risk.
upside
Stop orders become _________ orders once triggered/activated.
market orders
Stop-limit orders become ________ orders once triggered/activated.
limit
Order is entered to sell 1,000 ABC at 50 stop. Trades occur at 50.10…50.03…50…49.98…49.90. The trigger price is:
$50 (at the stop price)
Order is entered to sell 100 ABC at 50 stop. Trades occur at 50.10…50.03…50…49.98…49.90. The execution price is:
$49.98 (the next trade after the trigger is touched)
If a stop order is activated, at what price will the trade be executed?
The next trade after activation
If a stop-limit order is activated, at what price will the trade be executed?
The next trade that satisfies the limit price. Not receiving execution is possible.
Order is entered to buy 2,000 XYZ at $73 stop. Trades occur at 72.95…72.99…73.02…73.08… 73.12. Trigger price is:
73.02
Order is entered to buy 800 XYZ at $73 stop. Trades occur at 72.95…72.99…73.02…73.08… 73.12. Execution price is:
73.08
Order is entered to buy 500 RST at 97 stop-limit. Trades occur at 96.97…96.99… 97…97.02…97.05. Trigger price is:
97
Order is entered to buy 5,000 RST at 97 stop-limit. Trades occur at 96.99…97…97.02…97.05. Execution price is:
There is none
Do stop orders guarantee a specific price when buying or selling?
No, they become market trades after stop price is hit
True or False: Stop-limit orders are guaranteed execution if the trigger is touched.
False
What type of order gives discretion as to price and time of execution?
Not Held
May the Designated Market Maker (Specialist) accept a not held order?
No
If an order has been entered as Immediate-or-Cancel (IOC), is a partial execution acceptable?
Yes, must be executed immediately, but not completely
What are the three orders that are reduced on the ex-dividend date?
Buy Limits, Sell Stops, and Sell Stop Limits (unless marked DNR)
Which market is the decentralized, negotiated market?
OTC
What is the system that provides quotes for the Third Market?
Consolidated Quotation System (CQS)
True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.
True
The ______________ is where trades occur between institutions without the use of BDs.
fourth market
True or False: Nasdaq is a securities exchange registered with the SEC.
True
Which level of Nasdaq will only show the inside market for a security?
Level 1
What can be found on Level II Nasdaq?
Current quotes of all market makers for a specific security
What does Level III Nasdaq give market makers the ability to do?
Change their quotes
True or False: Level III Nasdaq is available to the public.
False. Only for Market Makers
What is the violation for a market maker failing to honor its firm quote?
Backing Away
How is a firm acting if it is trading for, or from, its own inventory?
As a principal / dealer
To what is a firm entitled when acting in the capacity of a principal or dealer?
Markup when selling to a customer and markdown when buying from a customer
How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade?
Agent or Broker
Firms acting in the capacity of a broker will collect a ____________.
Commission
What is the Nasdaq Market Center Execution System?
The automated quotation and execution system for Nasdaq
True or False: Stocks found in the Pink Sheets are often thinly traded.
True
What is the trade reporting system for Nasdaq securities?
Trade Reporting Facility (TRF) - formerly the Automated Confirmation Transaction system (ACT)
What is the trade reporting system for OTC equities?
Over-the-Counter Reporting Facility (ORF)
What are the three categories of Nasdaq issues?
Nasdaq Global Select, Nasdaq Global Market, and Nasdaq Capital Market securities
Transactions effected on an exchange or OTC must be reported within ____ seconds.
30 seconds
What is interpositioning?
The placement of another BD between a customer and the best market
Is interpositioning an acceptable practice?
No, it is generally prohibited
Any quote qualified by the terms “subject,” “workout,” or “nominal” is not considered a ______ quote.
firm quote
When must dealer-to-dealer confirms be sent?
Next business day (T + 1)
List some of the information to be included on municipal dealer-to-dealer confirmations.
Description, call features, yield/price, final dollar amount, confirming/contra party, trade/settlement dates, CUSIP #
“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).
What regulation prohibits a BD from disclosing material non-public information to securities professionals?
Regulation FD (Fair Disclosure)
Can a stop-limit order have a different stop and limit price?
yes
What does DNR mean, and when is it used?
Do Not Reduce; used when a client does not want their Buy Limit, Sell Stop or Sell Stop-Limit reduced on ex-dividend.
The ___________________________ is the primary system for accessing the quotes of Nasdaq market makers.
Nasdaq Market Center Execution System
Market makers must report trades within _____ seconds.
30 seconds
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
What is an ECN?
Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes
On the floor of the exchange, the _____ maintains a fair and orderly market.
DMM
What are some of the different functions of Designated Market Makers?
Maintaining liquidity and buying and selling from their own account
How long will a Day Limit order remain on the Display Book?
Until executed or the end of the day if unexecuted
How long will a GTC Limit order remain on the Display Book?
until executed or cancelled
_____________________________ routes orders directly to the DMMs on the NYSE floor.
The Super Display Book System
_________________ means the DMM is guaranteeing a price on a public order for a floor broker.
Stopping Stock
What rules must DMMs follow when trading for their own account?
DMMs may compete as market participants. The specialist, which preceded DMMs, could not compete.
A DMM holds two orders: Buy 100 ABC at 55 stop and Buy 500 ABC at 52.50. Which would be reduced on ex-dividend?
The buy limit order (Buy 500 ABC at 52.50), since it is the one entered below the market.
The ______________ is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.
third market
Where may quotes for non-Nasdaq (OTC equity) stocks be found?
Pink Sheets or OTC Bulletin Board (OTCBB)
True or False: Super Display Book accepts market orders, limit orders, and both round-lot and odd-lot orders.
True
According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for ______ minutes.
15 minutes
According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for ____ minutes.
15 minutes
If the S&P 500 falls by 20% from the previous day’s close, trading halts for ________________________.
remainder of the day
