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Series 62 > Equity Trading > Flashcards

Equity Trading Flashcards

1
Q

Non-exchange trade securities are known as…

A

OTC equities - they are not listed on a physical or electronic exchange

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2
Q

Five stages an order normally goes through…

A
  1. Order entry
  2. Execution
  3. Clearing
  4. Settlement
  5. Custody and safekeeping
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3
Q

List five things on an order ticket other than date, security name and quantity…

A
  1. Long or short
  2. Type (market, limit etc)
  3. Cash or margin account
  4. Whether discretion exercised
  5. Solicited or unsolicited
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4
Q

What’s the spread in a quote?

A

Difference between bid (highest price a buyer will pay) and ask (lowest price a seller will accept)

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5
Q

What’s a market order and when used?

A

No price specified in order, so executed at market price.

Used for liquid stocks where the trade won’t impact the price.

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6
Q

What’s a limit order?

A

Specific price.
May only be exercised at limit price or better.
Buy limit - placed below current market price
Sell limit - placed above current market price

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7
Q

What’s the ranking of orders for execution?

A
  1. Market orders
  2. Limit orders ranked by price (buy limit orders: high to low / sell limit orders: low to high)
  3. Limit orders at same price ranked by time of entry
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8
Q

What’s the difference between a sell stop order and sell stop limit order?

A

Sell stop order activates at stop price and becomes a market order (no guarantee of execution price)
Sell stop-limit order activates at stop price and only executed at stop price or better.

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9
Q

When would a buy stop order be used?

A

To limit loss/protect profit on a short sale.
Once activated, price is not guaranteed, but execution is guaranteed.
Always placed above current market price (as short sellers want price to fall).

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10
Q

What happens to open orders in a reverse split?

A

All cancelled.

On a forward split or stick dividend, they are adjusted

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11
Q

What type of orders are adjusted for a cash dividend on the ex-dividend date?

A

Orders entered below the market - price reduced to reflect dividend for:

  • Buy limit
  • Sell stop
  • Sell stop limit
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12
Q

Three types of orders entered above the market…

A
  1. Buy Stop-Limit
  2. Buy-stop
  3. Sell limit
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13
Q

Three types of orders entered below the market…

A
  • Buy limit
  • Sell stop
  • Sell stop-limit
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14
Q

What’s the difference between Day Order, GTC, Open and At-the-Open orders?

A

Day Order - every order is day order unless specified, automatically cancelled if not executed by end of day
GTC or Open orders - remains on books until executed or cancelled
At-the-Open - buy or sell at opening price. If not executed then it is cancelled.

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15
Q

What must a BD do prior to a customer engaging in extended hours trading?

A

Give a risk disclosure document summarising risk from lower liquidity, higher volatility, unlinked markets, news announcements, price changing from close, wider spreads.

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16
Q

What defines a market maker in a particular stock?

A

Always stands ready to buy and sell shares in that stock

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17
Q

What price does a customer pay when buying/selling stock directly to a market maker?

A

Adjusted price on the spread: markup or markdown in the quoted price.

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18
Q

In context of determining BD role, what to ABC and PDM mean?

A

Agency Broker Commission

Principal Dealer Markup

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19
Q

What’s a Designated Market Maker?

A

Also known as Specialist

  • Must buy and sell for own account (acting as dealer) to make market fair and orderly
  • Provides liquidity: buys when no buyers (and vice versa) to keep spread narrow
  • Only member allowed to continuously buy and sell on principal basis
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20
Q

What does DMM’s obligation of “No Competition with Public Orders” entail?

A

Only bid higher or offer lower than prevailing market price.
This way their trades narrow the spread.

21
Q

Dealer to dealer settings are known as…

A

OTC markets

Most debt securities including US Treasuries trade in these markets

22
Q

How does market making differ between NYSE and Nasdaq?

A

NYSE: one DMM per security
Nasdaq: competing market makers (required to trade a minimum number of shares dependent on security and the OTC requirement)

23
Q

A quote of 16.20 - 16.40, 10x5 means…

A

Offer to buy 10 round lots of 100 shares at 16.20 and

Sell 5 round lots of 100 shares at 16.40

24
Q

Nasdaq is registered with SEC as a securities exchange. What is requirement for initial listing?

A
  • Fully registered securities
  • Assets of a defined level
  • Number of shareholders and outstanding shares
  • Corporate governance standards
  • At least three market makers
25
Q

What are the Nasdaq system levels?

A
  • Level I: inside market providing highest bid and lowest offed of at least two market makers
  • Level II: bids / offers
    from all market makers
  • Level III: allows market maker to enter bids and offers
26
Q

What must a market maker do if a customer order improves its quote?

A

Display in its quote within 30 seconds even if it does not improve the inside market - but only if it accepts the order.
If quote is 20.25 - 20.85, then a buy order at 20.30 will narrow the spread.

27
Q

What are the Third and Fourth Markets?

A

Third: OTC trading of exchange-listed securities

Fourth: direct institution-to-institution trading without a BD

28
Q

What’s an ECN?

A

Market centre allowing quoting and trading of exchange-listed securities.
Must register with FINRA as BD and act only in agent capacity.

29
Q

What’s the CQS?

A

Consolidated Quotation System providing quotations for NYSE listed securities trading in marketplaces outside the primary location where listed.

30
Q

When must transactions in equity securities be reported?

A

Within 30 seconds (to TRG, ORF, TRACS or exchange)

[corporate debt to TRACE within 15 mins]

31
Q

What size must a transaction be if deemed a block-sized order?

A

At least 10,000 Shares or $200k in market value.

Market maker under no obligation to display in its quote when order is at the inside.

32
Q

What’s the Manning Rule?

A

Market maker must protect an accepted order – must fulfil the order immediately upon executing a trade for its own account that would fill the order.
Must do for client at least what it did for its own account.

33
Q

What are restrictions on pricing increments for NMS stocks?

A

Stocks priced at $1 or more - increments of a penny

Stocks at less than $1 - increments of hundredth of a penny.

34
Q

For an unexcused withdrawal, what’s the lockout period?

A

Nasdaq or ADF market maker: 20 business days

CQS security: one business day

(Excused withdrawal: same business day)

35
Q

What are the levels that trigger circuit breakers to halt trading?

A

Level 1: 7% between 9.30-15.25 / 15 minute halt
Level 2: 13% between 9.39-15.25 / 15 minute halt
Level 3: 20% decline any time / remainder of day
- All on S&P500

36
Q

If a quote is 16 - 16.15, how many shares is a MM obligated to buy at 16?

A

100 - if no size is displayed a round lot is the minimum quantity (a quote without qualification)

37
Q

What is stopping stock?

A

DMM guaranteeing a price to a floor broker, and allowing broker to seek a better deal. Can only do for a public order and not for its own account

38
Q

What does OATS track?

A

Life of an order from entry to execution

39
Q

What do FINRA best execution rules require?

A

Reasonable diligence to obtain the best price possible

40
Q

If a market maker has a fail to deliver with its clearing firm and security cannot be borrowed… It’s what type of withdrawal?

A

An excused withdrawal

41
Q

Two exceptions to the Limit Order Display Rule?

A
  1. Customer request (documentation of request highly recommended)
  2. Block sized orders
42
Q

What’s the broadest index?

A

Wilshire 5000 index

43
Q

What’s interpositioning?

A

Putting a third party between customer and best market to customer’s detriment

44
Q

An order entered at a specific price is a…

A

Limit order.
May be partially completed unless marked AON (all or none).
May be held unless marked IOC (immediate or cancel)

45
Q

Rule 611 of NMS prevents trade throughs of protected quotations on an inter market basis. What’s a trade-through?

A

A market participant receiving an inferior price to best bid/offer on all market centres within NMS

46
Q

What does the OTCBB require to display an inside market?

A

Two sided quotes from at least two market makers

47
Q

What’s NOT a factor in obtaining best execution?

A

Number of market makers

48
Q

What’s NOT a factor in obtaining best execution?

A

Number of market makers

Series 62 (16 decks)

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