Chapter 7 - Equity Trading Markets

Question 1

Define an insider.

Answer 1

Owners, directors, partners, greater than 10% owners, and immediate family members of all listed

Question 2

Individuals must register with the SEC within _______ of becoming an insider.

Answer 2

Individuals must register with the SEC within 10 days of becoming an insider.

Question 3

When must insiders report their transactions?

Answer 3

Within 2 business days of the trade

Question 4

What are the two ways order tickets can be marked when selling securities?

Question 5

Define painting the tape.

Answer 5

Traders effecting transactions back and forth to create a misleading appearance of activity

Question 6

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

Answer 6

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

Question 7

What are treble damages?

Answer 7

The civil penalty for insider trading, which is three times the profit made or loss avoided

Question 8

What is the criminal penalty for insider trading by corporations?

Answer 8

$25 million per violation

Question 9

________ following the trade date is the settlement for trades involving corporate or municipal securities.

Answer 9

3 business days (T+3) following the trade date is the settlement for trades involving corporate or municipal securities.

Question 10

_______ is the settlement for cash transactions (also referred to as cash trades or cash settlement).

Answer 10

Same day is the settlement for cash transactions (also referred to as cash trades or cash settlement).

Question 11

What does selling short mean?

Answer 11

Selling securities that are not owned, but are borrowed from a BD

Question 12

An investor’s strategy is _______ when effecting a short sale.

Answer 12

An investor’s strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

Question 13

On the floor of the exchange, who executes orders for the clients of their firm?

Answer 13

The Floor Broker (also called the Commission House Broker)

Question 14

The highest bid and the lowest offer for a security is referred to as the ________.

Answer 14

The highest bid and the lowest offer for a security is referred to as the Inside Market.

Question 15

What orders may be placed in the Designated Market Maker’s (Specialist’s) Book?

Answer 15

Stop and limit orders placed away-from-the-market

Question 16

A _______ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.

Answer 16

A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.

Question 17

A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

Answer 17

A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

Question 18

True or False: Investors generally place stop orders to limit a loss or protect a profit on a stock position.

Answer 18

True

Question 19

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:

Answer 19

$50 (at the stop price)

Question 20

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:

Answer 20

$49.98 (the next trade after the trigger is touched)

Question 21

If a stop order is activated, at what price will the trade be executed?

Answer 21

The next trade after activation.

Question 22

If a stop-limit order is activated, at what price will the trade be executed?

Answer 22

The next trade that satisfies the limit price. Not receiving execution is possible.

Question 23

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:

Answer 23

$73.02 (through the stop price)

Question 24

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:

Answer 24

$73.08 (the next trade after the trigger is touched)

Question 25

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:

Answer 25

$97 (at the stop price)

Question 26

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:

Answer 26

There is no execution, since no trade occurring after the trigger satisfied the buy limit at $97.

Question 27

Do stop orders guarantee a specific price when buying or selling?

Answer 27

No, stop orders execute at the market price (which is uncertain) once they are activated.

Question 28

True or False: Stop-limit orders are guaranteed execution if the trigger is touched.

Answer 28

False. Stop-limit orders may not be executed if the limit price cannot be met.

Question 29

What type of order gives discretion as to price and time of execution?

Answer 29

Not Held

Question 30

May the Designated Market Maker (Specialist) accept a not held order?

Answer 30

No

Question 31

If an order has been entered as Immediate-or-Cancel (IOC), is a partial execution acceptable?

Answer 31

Yes. The order must be executed immediately, but not completely.

Question 32

What are the three orders that are reduced on the ex-dividend date?

Answer 32

Buy Limits, Sell Stops, and Sell Stop Limits (unless marked DNR)

Question 33

Which market is the decentralized, negotiated market?

Answer 33

The over-the-counter market (OTC)

Question 34

What is the system that provides quotes for the Third Market?

Answer 34

Consolidated Quotation System (CQS)

Question 35

True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.

Answer 35

True

Question 36

The ________ is where trades occur between institutions without the use of BDs.

Answer 36

The **Fourth Market** is where trades occur between institutions without the use of BDs.

Question 37

True or False: Nasdaq is a securities exchange registered with the SEC.

Answer 37

True

Question 38

Which level of Nasdaq will only show the inside market for a security?

Answer 38

Level I

Question 39

What can be found on Level II Nasdaq?

Answer 39

Current quotes of all market makers for a specific security

Question 40

What does Level III Nasdaq give market makers the ability to do?

Answer 40

Change their quotes

Question 41

True or False: Level III Nasdaq is available to the public.

Answer 41

False. Level III is exclusively for market makers.

Question 42

What is the violation for a market maker failing to honor its firm quote?

Answer 42

Backing away

Question 43

How is a firm acting if it is trading for, or from, its own inventory?

Answer 43

As a principal / dealer

Question 44

To what is a firm entitled when acting in the capacity of a principal or dealer?

Answer 44

Markup when selling to a customer and markdown when buying from a customer

Question 45

How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade?

Answer 45

Agent or broker

Question 46

Firms acting in the capacity of a broker will collect a \_\_\_\_\_\_\_\_.

Answer 46

Firms acting in the capacity of a broker will collect a **commission.**

Question 47

What is the Nasdaq Market Center Execution System?

Answer 47

The automated quotation and execution system for Nasdaq

Question 48

True or False: Stocks found in the Pink Sheets are often thinly traded.

Answer 48

True

Question 49

What is the trade reporting system for Nasdaq securities?

Answer 49

Trade Reporting Facility (TRF) - formerly the Automated Confirmation Transaction system (ACT)

Question 50

What is the trade reporting system for OTC equities?

Answer 50

Over-the-Counter Reporting Facility (ORF)

Question 51

What are the three categories of Nasdaq issues?

Answer 51

* Nasdaq Global Select * Nasdaq Global Market * Nasdaq Capital Market securities

Question 52

What is interpositioning?

Answer 52

The placement of another BD between a customer and the best market

Question 53

Is interpositioning an acceptable practice?

Answer 53

No, it is generally prohibited.

Question 54

Any quote qualified by the terms "subject", "workout," or "nominal" is not considered a ____ quote.

Answer 54

Any quote qualified by the terms "subject", "workout" or "nominal: is not considered a **firm** quote.

Question 55

When must dealer-to-dealer confirms be sent?

Answer 55

Next business day (T + 1)

Question 56

List some of the information to be included on municipal dealer-to-dealer confirmations.

Answer 56

* Description * call features * yield/price * final dollar amount * confirming/contra party * trade/settlement dates * CUSIP #

Question 57

"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?

Answer 57

The SEC can sue for three times the damage (profit made or loss avoided).

Question 58

Can a stop-limit order have a different stop and limit price?

Answer 58

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.

Question 59

What does DNR mean, and when is it used?

Answer 59

Do Not Reduce; used when a client does not want their Buy Limit, Sell Stop or Sell Stop-Limit reduced on ex-dividend.

Question 60

The ___________ is the primary system for accessing the quotes of Nasdaq market makers.

Answer 60

The **Nasdaq Market Center Execution System** is the primary system for accessing the quotes of Nasdaq market makers.

Question 61

Under FINRA rules, market makers are required to report trades in what types of securities?

Answer 61

* All Nasdaq securities * Nasdaq-listed convertible bonds * CQS securities * OTC equities

Question 62

What is an ECN?

Answer 62

Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes

Question 63

On the floor of the exchange, the _____ maintains a fair and orderly market.

Answer 63

On the floor of the exchange, the **DMM** maintains a fair and orderly market.

Question 64

What are some of the different functions of Designated Market Makers?

Answer 64

Maintaining liquidity and buying and selling from their own account

Question 65

How long will a Day Limit order remain on the Display Book?

Answer 65

Until executed or the end of the day (if unexecuted)

Question 66

How long will a GTC Limit order remain on the Display Book?

Answer 66

Until executed or cancelled by the customer

Question 67

\_\_\_\_\_\_\_\_\_ routes orders directly to the DMMs on the NYSE floor.

Answer 67

**The Super Display Book System** routes orders directly to the DMMs on the NYSE floor.

Question 68

\_\_\_\_\_\_\_\_\_\_\_\_ means the DMM is guaranteeing a price on a public order for a floor broker.

Answer 68

**Stopping stock** means the DMM is guaranteeing a price on a public order for a floor broker.

Question 69

What rules must DMMs follow when trading for their own account?

Answer 69

DMMs may compete as market participants. The specialist, which preceded DMMs, could not compete.

Question 70

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?

Answer 70

The buy limit order (Buy 500 ABC at 52.50), since it is the one entered below the market.

Question 71

What will a firm establish between departments to restrict the flow of potential insider information?

Answer 71

Information barriers

Question 72

What must be implemented to limit the flow of communication between research and investment banking departments?

Answer 72

Information barriers

Question 73

A BD is ready to issue a favorable research report. What must exist for the BD to continue regular trading operations?

Answer 73

Effective information barriers must be in place.

Question 74

A BD is ready to issue a favorable research report. Information barriers must exist between what two departments?

Answer 74

Trading and research

Question 75

What is the purpose of an information barrier between trading and research departments?

Answer 75

To prevent the trading department from learning of an impending report about a stock in which the firm has a position

Question 76

The _________ is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.

Answer 76

The **third market** is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.

Question 77

Where may quotes for non-Nasdaq (OTC equity) stocks be found?

Answer 77

Pink Sheets or the OTC Bulletin Board

Question 78

True or False: Super Display Book accepts market orders, limit orders, and both round-lot and odd-lot orders.

Answer 78

True

Question 79

According to NYSE rules, if the S&P 500 falls by 7% from the previous day's close, trading will halt for ______ minutes.

Answer 79

According to NYSE Rules, if the S&P 500 falls by 7% from the previous day's close, trading will halt for **15** minutes.

Question 80

According to NYSE rules, if the S&P 500 falls by 13% from the previous day's close, trading will halt for ____ minutes.

Answer 80

According to NYSE rules, if the S&P 500 falls by 13% from the previous day's close, trading will halt for **15** minutes.

Question 81

If the S&P 500 falls by 20% from the previous day's close, trading halts for \_\_\_\_\_\_\_\_.

Answer 81

If the S&P 500 falls by 20% from the previous day's close, trading halts for **the remainder of the day.**

Question 82

Transactions effected on an exchange or OTC must be reported within ____ seconds.

Answer 82

Transactions effected on an exchange or OTC must be reported within **10** seconds.

Question 83

Market makers must report trades within _____ seconds.

Answer 83

Market makers must report trades within **10** seconds.

Question 84

Name two prohibitions that relate to being an insider.

Answer 84

1. No shorting of the stock 2. No keeping of short-swing profits

Question 85

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.

Answer 85

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than **six** months.

Question 86

Trading on material, non-public information is considered _______ \_\_\_\_\_\_\_.

Answer 86

Trading on material, non-public information is considered **insider trading.**

Question 87

\_\_\_\_\_\_\_\_\_\_ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

Answer 87

**Capping** is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

Question 88

\_\_\_\_\_\_\_\_\_\_ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

Answer 88

**Pegging** is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

Question 89

The criminal penalty for insider trading by an individual is a maximum of $\_\_\_\_\_\_ and/or ___ years in prison.

Answer 89

The criminal penalty for insider trading by an individual is a maximum of $**5 million** and/or **20** years in prison.

Question 90

Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ \_\_\_\_\_\_.

Answer 90

Stop and stop-limit orders are triggered when a round lot trades at, or through, the **stop price.**

Question 91

If an investor is long stock, a sell stop order can be used to limit ___________ risk.

Answer 91

If an investor is long stock, a sell stop order can be used to limit **downside** risk.

Question 92

If an investor is short stock, a buy stop order can be used to limit _________ risk.

Answer 92

If an investor is short stock, a buy stop order can be used to limit **upside** risk.

Question 93

Stop orders become _________ orders once they are triggered/activated.

Answer 93

Stop orders become **market** orders once they are triggered/activated.

Question 94

Stop-limit orders become ________ orders once they are triggered/activated.

Answer 94

Stop-limit orders become **limit** orders once they are triggered/activated.

Question 95

What regulation prohibits an issuer from disclosing material non-public information to securities professionals?

Answer 95

Regulation FD (Fair Disclosure)