Chapter 7 - Equity Trading Markets Flashcards
Define an insider.
Owners, directors, partners, greater than 10% owners, and immediate family members of all listed
Individuals must register with the SEC within _______ of becoming an insider.
Individuals must register with the SEC within 10 days of becoming an insider.
When must insiders report their transactions?
Within 2 business days of the trade
What are the two ways order tickets can be marked when selling securities?
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
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) following the trade date is the settlement for trades involving corporate or municipal securities.
_______ 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).
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.
An investor’s strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).
On the floor of the exchange, who executes orders for the clients of their firm?
The Floor Broker (also called the Commission House Broker)
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.
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.
A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
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.
True or False: Investors generally place stop orders to limit a loss or protect a profit on a stock position.
True
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 (through the stop price)
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 (the next trade after the trigger is touched)
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 (at the stop price)
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 no execution, since no trade occurring after the trigger satisfied the buy limit at $97.
Do stop orders guarantee a specific price when buying or selling?
No, stop orders execute at the market price (which is uncertain) once they are activated.
True or False: Stop-limit orders are guaranteed execution if the trigger is touched.
False.
Stop-limit orders may not be executed if the limit price cannot be met.
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.
The order 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?
The over-the-counter 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.
The Fourth Market is where trades occur between institutions without the use of BDs.
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 I
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.
Level III is exclusively 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 ________.
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
- Nasdaq Capital Market securities
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.
Any quote qualified by the terms “subject”, “workout” or “nominal: is not considered a 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).
Can a stop-limit order have a different stop and limit price?
Yes, e.g., Sell 500 ABC at 50 stop-49.50 limit triggers at or through 50. Then the investor will sell at 49.50 or above.
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.
The Nasdaq Market Center Execution System is the primary system for accessing the quotes of Nasdaq market makers.
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.
On the floor of the exchange, the DMM maintains a fair and orderly market.
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 by the customer
_________ routes orders directly to the DMMs on the NYSE floor.
The Super Display Book System routes orders directly to the DMMs on the NYSE floor.
____________ means the DMM is guaranteeing a price on a public order for a floor broker.
Stopping stock means the DMM is guaranteeing a price on a public order for a floor broker.
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.
What will a firm establish between departments to restrict the flow of potential insider information?
Information barriers
What must be implemented to limit the flow of communication between research and investment banking departments?
Information barriers
A BD is ready to issue a favorable research report. What must exist for the BD to continue regular trading operations?
Effective information barriers must be in place.
A BD is ready to issue a favorable research report. Information barriers must exist between what two departments?
Trading and research
What is the purpose of an information barrier between trading and research departments?
To prevent the trading department from learning of an impending report about a stock in which the firm has a position
The _________ is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.
The third market is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.
Where may quotes for non-Nasdaq (OTC equity) stocks be found?
Pink Sheets or the OTC Bulletin Board
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.
According to NYSE Rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for 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.
According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for 15 minutes.
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.
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.
Market makers must report trades within _____ seconds.
Market makers must report trades within 10 seconds.
Name two prohibitions that relate to being an insider.
- No shorting of the stock
- No keeping of short-swing profits
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.
Trading on material, non-public information is considered _______ _______.
Trading on material, non-public information is considered insider trading.
__________ 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).
__________ 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).
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.
Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.
Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.
If an investor is long stock, a sell stop order can be used to limit ___________ risk.
If an investor is long stock, a sell stop order can be used to limit downside risk.
If an investor is short stock, a buy stop order can be used to limit _________ risk.
If an investor is short stock, a buy stop order can be used to limit upside risk.
Stop orders become _________ orders once they are triggered/activated.
Stop orders become market orders once they are triggered/activated.
Stop-limit orders become ________ orders once they are triggered/activated.
Stop-limit orders become limit orders once they are triggered/activated.
What regulation prohibits an issuer from disclosing material non-public information to securities professionals?
Regulation FD (Fair Disclosure)
