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Series 7- Passed with 83% > Chapter 8- Trading securities 20-25 questions > Flashcards

Chapter 8- Trading securities 20-25 questions Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Basics of The Securities Exchange Act of 1934 (The Exchange Act)

A

Established the SEC and it’s power to regulate broker/dealers, exchange, and OTC markets to maintain fair and orderly market

Requires registration of exchange members and those who trade

Provides for all the following:
Creation of SEC
Regulation of exchanges
Regulation of OTC
Regulation of credit by Fed Reserve Board
Registration of broker/dealers
Net capital rules
Regulation of insider transactions, short sales, and proxies
Regulation of trading activities
Regulation of client accounts
Customer protection rule
Filing of 10 K and Qs
Regulation of officers directors and principal shareholders
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2
Q

Composition of SEC

A

Five commissioners appointed by president of US, approved by senate

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3
Q

Registration of Exchanges and Firms

A

Registration of Exchanges
1934- Requires Exchanges to file with the SEC

Exchanges agree to help enforce act

Copies of the bylaws, constitution, and articles of corporation are required

Must disclose any rule changes to be disclosed

Registration of Firms
Companies trading on exchanges or Some OTC must register with SEC

Must file 10Qs and 10Ks

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4
Q

Exchange Market

A

Composed of the NYSE and other exchanges.

Is referred to as an auction market

Listed security is any security listed on an exchange

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5
Q

Over the counter market

A

Second market

Where Securities not listed on the exchange are traded

Internet based

All Municipals and government bonds trade here

Equities are divided into Nasdaq and non Nasdaq

Nasdaq- Global Select Market, Global Market, and Capital Market

Non-Nasdaq- OTC pink and OTC bulletin board

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6
Q

Third Market (Nasdaq intermarket)

A

Broker dealers must be listed as OTC market makers

Exchange listed securities are traded in OTC as long as they are reported to Consolidated Tape in 10 seconds

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7
Q

Fourth Market

A

Institutional Investors

Large blocks of stock both unlisted and listed

Unassisted by broker dealers

Take place through Electronic Communication Networks and are open 24/7

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8
Q

Trading hours of the four markets

A 
NYSE= 9:30-4pm
OTC= same hours, though market makers remain open till 6:30 in extended hour trading

Larger spreads, Greater volatility due to low amounts of bid and asks in OTC

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9
Q

Trading location and pricing system for listed and OTC

A

Listed markets like NYSE and others have trading floors and central market places. Double auction market, and participants compete for best prices

OTC markets- less stringent trading criteria. Traded over network, no central marketplace.

Interdealer network- compete to post best bid and ask. Negotiated market

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10
Q

Quoted

A

Bid- Market maker willing to buy
Ask- willing to sell

Always spread present, bid below ask

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11
Q

Dark Pools of Liquidity

A

Trading volume or liquidity not openly available to public

Usually occur on crossing networks or Alternative Trading Systems (ATS) that match buy and sell orders without routing order to an exchange

Able to execute large block orders without impacting public prices or exposing investment strategy

Orders Can be placed anonymously

Market transparency is darkened

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12
Q

Trade Reporting Facility

A

FINRA Trade Reporting Facility (TRF)

Automated trade Reporting system operated on (Automated Confirmation Transaction) ATC

Used to report trades off of trade floor and NASDAQ

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13
Q

Broker

A

Agents that arrange trades for clients and charge COMMISIONS

Arrange trades between buyers and sellers

Do not effect trades as principal

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14
Q

Dealers or Principals

A

Buy and sell for own account, called position trading

Charge markups or mark downs to clients from the interdealer price

Trading from own supply

Net price includes the mark upon

Like a car dealer

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15
Q

Filling an Order

A

A broker/dealer can fill an order by:

  1. Acting as an agent by finding a seller and arranging the trade
  2. Buy the securities, mark it up and resell them
  3. Sell shares from inventory

Dealer must disclose amount of mark up if it is a Nasdaq security

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16
Q

Can a firm say as both the broker and the dealer in the same transaction?

A

Heck naaaaa

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17
Q

NYSE listing requirements

A

NYSE is the most widely known and often called the Big Board

Largest exchange

Stocks listed in NYSE can also be listed on regional exchange like Chicago Stock Exchange

Must meet a minimum size and minimum number of shareholders holding 100+ shares

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18
Q

Delisting

A

The NYSE reserves the right to delist a security

Reasons:
Failure to meet the minimum maintenance criteria
Bankruptcy
Abnormally low share price or share volume
Corporate actions not deemed in public interest

BOD of a company would have to vote to delist voluntarily

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19
Q

4 different Personnel (NYSE members) who can trade on floor

A
  1. Commission House Brokers (floor brokers)- Execute for clients and for own accounts
    Now allowed to trade non-NYSE
  2. Two-Dollar Broker- Called on when Commission Brokers are too busy to execute all trades. Charge a commission for services
  3. Registered Trader- Trade primarily for their own account. If they accept a public customer’s order from a floor broker must give that priority.
  4. Specialist or Designated Market Maker- Facilitate trading in specific stocks to maintain fair and orderly market.
    Act as both broker and dealer, as well as a auctioneer
    Receive rebates from trades done whenever their Quotes result in trades
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20
Q

Auction Market (double auction market)

A

Buying and selling of exchange securities

Both buyers and sellers call out bids

Best bid must be at least $.01 higher than current best

Best offer must be $.01 lower

Highest and lowest bid are always given first considerations

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21
Q

More than one order at the same price

A

Specialists award trades in following order

  1. Priority- First order in
  2. Precendence- largest order of those submitted
  3. Parity- Random Drawing
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22
Q

Market Wide Circuit Breaker Rules (MWCB)

A

Protects against volatility

Three Levels of Halt:
Level 1- 7% decline in S&P 500
Before 3:25- 15 minutes
At or after 3:25 pm- Trading continues unless level 3

Level 2 Halt = 13% decline in S&P 500
Before 3:25- 15 minutes
At or after 3:25- Trading continues till level 3

Level 1 and 2 can only happen once a day. So once level 1 is triggered level 2 would be next

Level 3 Halt= 20% decline in S&P 500
Any time- Trading done for the day

Existing orders can be closed during market close

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23
Q

Arbitrage

A

Profiting from temporary price differences

Could be due to Three types:
1. Market Arbitrage- Trading in more than one market

  1. Convertible Security Arbitrage- Converting bonds to stock and selling for profit
  2. Risk Arbitrage- Buying stock in acquired company and selling short the acquiring company’s stock
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24
Q

Additional Roles of the Specialist or Designated Market Maker

A

Try to minimize price disparity at open of trade by buying and selling from own supply when needed

Act as agents: execute all orders other brokers leave with them. Accept certain orders like limit and stop orders.

Act as Principal: Buy and sell in own accounts to make a market. May not buy stock at a price that would compete with current market.

Must avoid transacting business at opening or reopening that would upset public balance

Must file reports for exchange

May trade for his account between the bid and ask

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25
Q

Supplemental Liquidity Providers

A

Off-Floor Market Maker operates and competes with Designated Market Maker (DMM)

Must maintain a bid or an offer for 10% of day

Receives rebates as well, but not as large as DMM

May not trade for public customer or agency basis

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26
Q

Trading Posts

A

Horseshoe shaped trading center surrounded by computer terminals

DMM watches each trade but does not have to participate in all of them

Orders can also be submitted on Super Display Book

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27
Q

Crossing Orders

A

Two market orders for same stock, one to buy one to sell

Can use one order to fill both

Must first be offered in the trading crowd at a price higher than the bid by at least .01

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28
Q

4 Price restricted orders

A

Market

Limit

Stop

Stop Limit

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29
Q

Market Orders

A

Sent immediately to the floor without restrictions or limits

Executed immediately at current market price and has priority over all other orders

Guarantee of Execution

Buy executed at lowest offering price
Sell at highest bid price available

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30
Q

Limited Order

A

Limit of acceptable purchase or selling price

Executed at specified price or better

Placed on book to be executed if and when market price meets order

Buy Limit- Placed below current market price
Sell Limit- Placed above

Sometimes not executed even if Market temporarily hits price (FIFO)

Can be handled by specialist as a day order, sometime GTC

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31
Q

Order Protection Rule (SEC Regulation NMS)

A

Firm cannot buy or sell stock at Limit order and not fill a customer Limit order

Can execute partial order but may not deviate from price specified

Created an obligation for the firm to fill order if buying at that price

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32
Q

Stop Order (Stop Loss Order)

A

Designed to protect a profit or prevent a loss

Becomes a market order when a stock hits or moves through the price unlike a limit

Left with and executed by DMM

No guarantee of execution price

Buy stop orders are entered above current market price

Sell stop are below CMV

Triggered by an order being filled at the price of the Stop

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33
Q

Stop Order trades

A

Takes two trades to execute

  1. Trigger- Transaction to activate the trade
  2. Execution- Execution at next price available

May or may not be accepted depending on Exchange or dealer

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34
Q

Buy stop orders

A

Protects a profit or limits loss of a short position

Used by technical traders who track support and resistance levels of stock

Support is bottom, resistance is top

Would be executed once a stock traded for a specific price

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35
Q

Sell stop Order

A

Protects profit or limits loss of a long position

Also used by technical readers

Support is bottom line, Resistance is top

36
Q

Stop Limit Order

A

Stop Order that becomes a Limit order instead of a market order upon hitting a certain price

37
Q

Buy Stop limits and Orders

A

When would you buy?

Buy Limit- Below the market price and purchasing the share

Sell Limit- Above Market Price, would sell the share

Buy Stop- Entered Above the Market Price, and triggered when the market goes through

Sell Stop- entered below the market price and triggered as market order below that price

38
Q

BLISS

A

Buy Limits and Sell Stops for orders being placed below market price

39
Q

Specialist Display Book

A

Orders not immediately executed placed on Designated Market Maker book

Only rounds lots placed on book

Changing an order will result in a cancelation and replace pricess

40
Q

Reducing Orders

A

All orders entered below market price are reduced on the ex-dividend date

Buy limits, sell stops and sell Stop limits are all reduced by the dividend due to the market opening lower

Sell Limits and buy stops are not

UNLESS ITS A DNR ORDER

41
Q

Reductions for stock splits

A

If there is a stock dividend or stock split, all open orders are adjusted

Ex sell 100 XYZ at 50 Stop after a 2:1 stock split is 200 XYZ at 25 stop

If stock dividend makes odd lot, shares are sent to customer account but not included in orders

If there is a reverse split, all open orders are canceled

42
Q

Day order

A

Unless marked otherwise, Stop or limit orders are usually day orders

Partially completed orders are acceptable and rest of order is unfilled

43
Q

Good Till Cancelled

A

Valid until executed or cancelled

Automatically canceled if unexecuted on last business day of April or October

44
Q

At the open and Market on close orders

A

At the open are executed at opening of market

Must reach post before time

Market on close must be entered before 3:40 pm

45
Q

Not Held Orders

A

Coded NH

Floor broker given ability to decide best time and price to execute

May not be placed with the specialist

Day order under NYSE rules

46
Q

Fill or kill Orders vs Immediate or cancel

A

Commission house broker instructed to Fill or Kill order immediately at the limit price or better

If cannot fill entirely the order is cancelled and originating branch office is notified

IOC orders- can be filled partially

47
Q

All or None AON

A

Executed entirely or not at all. Can be day or GTC orders

Do not have to be filled immediately like an FOK

48
Q

Alternative Orders (OCO)

A

One cancels the other

If stock is at $50 and customer wants to protect gain but doesn’t believe it will go much higher he might:

Sell a limit order of 53
Sell a stop Order of 48

49
Q

Do Not Ship (DNS)

A

Do not execute on exchange other than NYSE

50
Q

NYSE policy on orders

A

Does not accept:
GTC or Stop Orders or All or None or fill-or-kill orders

Broker dealer may, but NYSE will not

51
Q

Regulation SHO

A

The SEC in 2004 did a pilot program suspending the tick rule and bid test rule

2007- voted to end price restrictions on short selling

However, the locate requirement (finding the shares attributed to a short sale) is still in place

52
Q

SEC 1934 regulation on short sales

A

Prohibits directors, officers and principal stockholders from selling short

53
Q

Sell Order SEC

A

SEC requires that all sell orders be identified as long or short

Person is long if:

  1. Has title to it
  2. Has purchased or is going to purchase
  3. Owns a security convertible into or exchangeable for it and has tendered it for conversion
  4. Has an option to purchase
54
Q

Regional Exchanges

A

Tend to focus on securities within the region

Also offer trading in many securities of NYSE

Usually list smallest and newest company’s in their industry

55
Q

Nasdaq OMX PHLX

A

Floor based and electronic trading due to NASDAQ taking over Philly exchange

56
Q

Super Display Book (SDBK)

A

Used to route an order directly to the appropriate equity post

Can be sent preopening or post opening

The computer matches trades before the opening and leaves the rest on the computer for the Designated Market Makers to trade

All NYSE stocks are eligible

57
Q

Consolidated Tape System (CTS)

A

Receives, validates, and sequences last sale price and size of all equity transactions in listed securities

Distributed over two networks:
Network A- Trades on NYSE floor, regional exchange, third market and the ECN

Network B- Last sales for securities listed on NYSE AMEX, trading solely by regional exchanges, local issues and bonds

Two Tapes
High Speed- Prints market identifiers, letters of security, price and number of shares
Low Speed- tradition right to left

Do not include commissions, markups and markdowns

58
Q

Active Market Ticket

A

May signify the deleting of info

Digits and Vol Deleted: instead of 200 shares of IBM at 92.50, IBM2.50

Repeat prices omitted: only show different prices

SLD: means the exchange missed a trade and a higher price is not a sign of market rise

OPD: Initial transaction in which an opening was delayed

HALT: Means that trading halted for the security

59
Q

The Over the counter market

A

Broker dealers negotiate trades directly with one another

Competitive computer network trading system

Trading includes but not limited to:
ADRs
Common stock
Most corp bonds typically convertibles
Munis
US gov
Preferred stock
Equipment trust certs
Closed end invest
Warrants

Market Makers must be registered with both SEC and FINRA

Traded across the country

Market Makers must be registered with FINRA and SEC, where as NYSE only have to be with SEC

60
Q

FINRA

A

Self regulatory organization for the OTC market

61
Q

NASDAQ

A

Tracks OTC equities trading

Includes:
Common stock
Warrants
LPs
ADR 
Convertible bonds

Not nonconvertibles

62
Q

Order Audit Trail System

A

Automated system created to record information relating to orders, quotes and other trade info from all equities

Tracks order from time of entry until execution or cancelation

Reports order by order to FINRA

63
Q

OTC market Makers

A

OTC does not have specialists

Firms must register with FINRA to buy and sell

Buy and sell from own inventories, for own profit and own risk

Act as a principle in most cases

64
Q

Current Bid, Current Offer and Spread

A

Bid- Highest price at which dealer will buy

Offer- lowest price it will sell

Spread- difference

Customer flips

Short hand quote 43.25 to .50 (43.25-43.50)

Does not include mark up or mark down

Net prices do

65
Q

Firm Quotation

A

Price at which a market maker stands ready to buy and sell one trading unit (100 shares)

All quotes are firm unless otherwise stated

Can make counter offer but only way to guarantee execution is to buy at market

Market maker can revise in response to market conditions, but cannot back away (trading violation)

66
Q

Recognized quotation

A

Any public bid or offer for one or more round lots

Must state amount of securities if under a round lot

Bid must be good to split apart

67
Q

Subject Quote

A

Price is tentative

Subject quotes are hedged and not absolute

Firmed up after transaction size is known

68
Q

Qualified Quotes

A

Phrases used to allow broker/dealer to back away if Market conditions change

69
Q

Two Types of Qualified Quotes

A

Workout Quote- if an offering is too large, it might be used

Approximate figure used to provide buyer seller with indication of price, not a firm quote

Nominal Quote- Someone’s assessment of where a stock might trade, must be marked not actual price

70
Q

Factors effecting spread

A

Issues size
Issuers financial condition
Amount of market activity
Market conditions

71
Q

Size of a quote

A

Will always be one round lot (100 shares)

72
Q

Non-Nasdaq Pricing

A

Securities quoted on OTC Pink or OTC bulletin, three Quote rule

Broker/dealers receiving orders to buy and sell must contact 3 dealers for a prevailing price

73
Q

Important Test Points on OTC Quotes

A

Markups and Mark downs are charged when a market maker is acting as principal

Firm quotes are one round lot only

11-11.50 3x5 is firm for 300 shares at a bid of 11 and 500 shares at 11.50

Nominal quotes can be given for informational purposes only

Wide spread indicates thin trading market

74
Q

The 5% Markup Policy

A

Guideline only and not a firm rule

Above or below may be in violation of fair and equitable trade practices

5% markup based on price of inside market price

Applies to all nonexempt listed or unlisted securities or OTC

Policy applies to commissions as well

Does not apply to mutual funds, variable annuity contracts or securities sold in public offerings or municipal securities

All of which are being sold by prospectus

75
Q

Dealers inventory costs

A

If a customer order is filled from inventory, the net price is based on the current market price

Cannot take into account what the security was acquired for

76
Q

Riskless and Simultaneous Transactions

A

Order to buy or sell stock in which firm is not a market maker

Dealer has two options:
Buy as an agent and charge the customer a commission

Buy or sell for its riskless principal account

Must disclose markup to customer if acting as a principals

77
Q

Proceeds from Transactions

A

If a customer sells securities and uses the proceeds to buy something else, must considered it one transaction

Only allowed to charge a total of 5%

78
Q

Factors to be considered in markup mark down

A

Type of security- More risk is a greater justification for charging higher markup

Inactively traded stocks- thinner the market, the more volatile

Selling price of security- commission and markup rates should decrease as stock prices increase

Dollar amount of transaction- lower dollar amount = higher transaction fee

Type of broker

Pattern of markups

Markups on Inactive stocks

Markup may be okay if reasonable

79
Q

Nasdaq Quotation Service

A

Nasdaq level 1- available to registered reps.
Displays inside market price only
Cannot guarentee a price due to fluctuations

Nasdaq level 2- approved subscribers only. Current quote and size available from each market maker. Must be guaranteed for 100 shares

Nasdaq 3: subscribers access to level 1 and 2 and allows registered market Makers to input and update quotes in all securities they make a market

80
Q

Market maker Transaction Requirements for NASDAQ

A

Must include symbol, number of share, transaction price and whether trade was a buy sell or cross
10 seconds to report

Must make daily report of volume trades

81
Q

Inside market

A

Represents best bid and best ask

Four Bid Asks
10-11
10.13-10.75
10.25-11
10.13-10.88

Inside market is 10.25-10.75

82
Q

Nasdaq market maker reporting

A

Must report within 10 seconds

Registered market Makers must make daily report of volume

83
Q

One sided quotes

A

Only allowed on the OTC Bulletin Board

84
Q

A short sale can be executed on

A

Plus tick
Zero plus tick
Minus tick
Zero minus tick basis

85
Q

Who sets the opening quote for issues listed on the NYSE

A

The specialist (designated market Makers)

Who is employed by a member of the Exchange

86
Q

A customers order to sell for the week only is entered

A

GTC

The broker dealer is responsible for closing out the position

87
Q

OTC Pink

A

Quotes are not firm and updates may not be current or made intraday

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