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Series 24 Group Share > FC Chapter 11 > Flashcards

FC Chapter 11 Flashcards

1
Q

If the highest bid equals the lowest ask, the market is __________.

A

If the highest bid equals the lowest ask, the market is locked.

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2
Q

ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 14.90 - 15.25?

A

Yes. The market maker would be narrowing the spread to 15.15 - 15.25.

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3
Q

What are some valid reasons for a Nasdaq market maker to obtain an excused withdrawal status?

A

Regulatory issues, religious holidays, vacations, issues beyond control, involuntary termination of clearing arrangement

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4
Q

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

A

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

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5
Q

Ms. Gray places an order to buy 1,000 shares of ABC. What must the BD obtain to fill her order on a net basis capacity?

A

Ms. Gray’s written consent must be obtained prior to executing the trade.

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6
Q

True or False: Some transactions may justify a markup higher than 5%, while for others, 5% may be too high.

A

True

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7
Q

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

A

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

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8
Q

True or False: To be exempt from the debt markup policy, municipal bond trades must involve only investment-grade debt.

A

False. The municipal bond trades may include both investment and non-investment-grade debt.

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9
Q

When is a firm generally prohibited from entering proprietary orders?

A

If the firm knows of an unexecuted client order on the same side of the market that may be executed at the same price

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10
Q

True or False: Proceeds transactions are subject to the 5% Markup Policy.

A

True

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11
Q

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

A

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

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12
Q

An MM withdrawing its quote for legal or regulatory reasons will be excused for up to ____ days.

A

An MM withdrawing its quote for legal or regulatory reasons will be excused for up to 60 days.

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13
Q

If a trading halt is in effect, what may a BD do if it receives an unsolicited client order to sell 100 shares?

A

Nothing, since no transactions may be executed during a trading halt.

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14
Q

What is the penalty if a CQS market maker (third market) has an unexcused withdrawal from publishing a quote?

A

One business day in that stock

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15
Q

_____________________________ routes orders directly to the DMMs on the NYSE floor.

A

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

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16
Q

True or False: After completing a 20-business-day suspension as a MM, a firm may immediately begin quoting the stock.

A

False. The firm must reapply and, once its application is approved, it may begin quoting on the same day.

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17
Q

A short interest report must be filed with FINRA within ____ business days after it is compiled.

A

A short interest report must be filed with FINRA within two business days after it is compiled.

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18
Q

What are some of the factors to be considered when determining the markup on a transaction?

A

The security involved, its availability, its price, the total money involved, and the pattern of markups

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19
Q

What is the penalty for a voluntary withdrawal as a Nasdaq market maker?

A

A 20-business-day suspension from quoting that security

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20
Q

Trades involving U.S. government securities, effected by any type of client, are _______ from the debt markup policy.

A

Trades involving U.S. government securities, effected by any type of client, are exempt from the debt markup policy.

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21
Q

As used in the debt markup policy provisions, define prevailing market (contemporaneous cost).

A

When a trade involving the same security has occurred at a time close to the dealer’s trade

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22
Q

True or False: Since the two legs of a net basis trade have different prices, both sides must be reported as principal.

A

True

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23
Q

In CQS, what is the penalty if a market maker fails to provide timely quotes for a security?

A

A one-business-day suspension from market making in that security

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24
Q

Prior to executing each net basis trade for a noninstitutional client, what must be obtained?

A

Written consent on an order-by-order basis

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25
Q

True or False: A quote on an automated market may NOT lock or cross a quote on another automated market.

A

True. Crossing or locking a market is prohibited.

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26
Q

What happens to a customer’s order if there is a reverse split in the stock?

A

Orders are cancelled if there is a reverse split.

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27
Q

What concern would a firm have if a trader repeatedly requests that the firm’s internal controls be relaxed?

A

That the trader is engaging in rogue trading

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28
Q

Under NYSE Rule 5320, to trade along with a client, a BD’s order must meet one of three conditions. List the conditions.

A

To liquidate a proprietary position, to create/modify a bona fide hedge, to engage in arbitrage or risk arbitrage

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29
Q

Define a riskless principal transaction.

A

One in which a BD buys or sells stock on a principal basis and fills an existing client order at the same price

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30
Q

FINRA’s 5% policy addresses transactions executed in the ___________ market.

A

FINRA’s 5% policy addresses transactions executed in the secondary market.

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31
Q

Unauthorized trading by a registered person is also referred to as ______ trading.

A

Unauthorized trading by a registered person is also referred to as rogue trading.

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32
Q

True or False: A riskless or simultaneous transaction is subject to the 5% Policy.

A

True

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33
Q

Where would a firm disclose whether an order was solicited or unsolicited?

A

On the order ticket (not the confirmation)

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34
Q

True or False: Under Limit Up-Limit Down rules, a trading pause may occur if a security enters a straddle state.

A

True. The primary listing market may declare a trading pause when the security is in a straddle state.

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35
Q

True or False: A Nasdaq market maker can get an excused withdrawal due to excessive volatility in a stock.

A

False

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36
Q

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

A

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

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37
Q

True or False: To effect net basis trades for institutional clients, a BD may depend on a negative consent letter.

A

True

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38
Q

If contemporaneous cost is not used to determine a debt security’s markup, what method would be the least important?

A

An economic model developed by regulators of the bond market (this is a last resort method)

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39
Q

If a new market maker enters a quote with the bid equaling the lowest asked price, the market is ________.

A

If a new market maker enters a quote with the bid equaling the lowest asked price, the market is locked.

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40
Q

For LULD rules, if the NBB is in the upper band or the NBO is in the lower band, the market is in a _____ state.

A

For LULD rules, if the NBB is in the upper band or the NBO is in the lower band, the market is in a limit state.

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41
Q

True or False: Trades in exempt securities are exempt from the debt markup policy only if the client is an institution.

A

False. Trades involving exempt securities (e.g., Treasuries) are exempt from the policy for any type of client.

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42
Q

True or False: The 5% Policy is based on the dealer’s inventory cost on a security.

A

False, it is generally based on the inside market price.

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43
Q

A client sells $10,000 of MBRT and uses the proceeds to buy $10,000 of TNLN and is charged $850. What is the markup?

A

Proceeds transactions are treated as single trades; therefore, the markup is 8.5% ($850 ÷ $10,000 = 8.5%).

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44
Q

Do-not-display requests should be ___________ and the request may be on a _______________ basis.

A

Do-not-display requests should be documented and the request may be on a trade-by-trade basis.

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45
Q

An MM may withdraw its quote for up to _____ business days for issues beyond its control (e.g., a system outage).

A

An MM may withdraw its quote for up to five business days for issues beyond its control (e.g., a system outage).

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46
Q

Bill directs his BD to sell his $10,000 of ABC and use the proceeds to buy $10,000 of XYZ. What type of trade is this?

A

A proceeds transaction

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47
Q

Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?

A

Both

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48
Q

What is the penalty if a Nasdaq market maker has an unexcused withdrawal from publishing a quote?

A

20 business days in that stock

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49
Q

True or False: A memorandum of each trade must show the terms of the transaction along with any modifications.

A

True. Trade tickets will also show the account name or number and the person accepting the order.

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50
Q

True or False: Withdrawal as a Nasdaq market maker due to insufficient staff would be a violation.

A

True. Withdrawal due to insufficient staff, volatility, or increased trading volume would be unexcused.

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51
Q

True or False: For principal trades, commissions must be disclosed.

A

False. For principal trades, a net price (inclusive of any markup) is shown.

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52
Q

True or False: National best offers below the Limit Up-Limit Down upper price band are non-executable.

A

False. An NBO below the Limit Up-Limit Down upper price band is executable.

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53
Q

True or False: Firms are prohibited from acquiring stock at the same price as the client.

A

False. Under NYSE Rule 5320, with client consent, firms may be permitted to trade along with their clients.

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54
Q

True or False: Executing trades at prices that cannot be explained by market forces is prohibited.

A

True

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55
Q

In a proceeds transaction, on how many trades is the markup based?

A

Only one trade (as if the trade was done for cash)

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56
Q

True or False: An order ticket will identify the broker on the other side of the trade (contra broker).

A

False

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57
Q

ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 15.40 - 15.75?

A

No. The high bid (15.40) and the low offer (15.40) would be the same price, resulting in a locked market.

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58
Q

____________________ is the insertion of a third party between a customer and the best market price.

A

Interpositioning is the insertion of a third party between a customer and the best market price.

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59
Q

What is a firm’s DEA?

A

The SRO to whom a firm must report

60
Q

For agency trades, ____________ must be disclosed.

A

For agency trades, commissions must be disclosed.

61
Q

True or False: For a bond trade, the order ticket will include accrued interest information.

A

False. Accrued interest is disclosed on the customer confirmation.

62
Q

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

A

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

63
Q

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

A

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

64
Q

True or False: Having unrealized profits or losses on unsettled trades may indicate rogue trading.

A

True

65
Q

Refusing to trade with another BD that engages in competitive activities is a violation of what FINRA/Nasdaq provision?

A

FINRA/Nasdaq’s Anti-Intimidation and Coordination Interpretation

66
Q

A Nasdaq MM withdraws its quote due to becoming a distribution participant. Would this withdrawal be unexcused?

A

No. This is an excused withdrawal due to Reg. M participation requirements.

67
Q

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

A

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

68
Q

Designated market maker (DMM) is synonymous with what term?

A

Specialist

69
Q

Where would information regarding an order’s time of entry and execution (time stamps) be found?

A

On the order ticket

70
Q

True or False: Accumulating an inventory position based on anticipation of a research report is a prohibited practice.

A

True

71
Q

The Limit Up-Limit Down (LULD) rules address sudden price movements in ____ stocks.

A

The Limit Up-Limit Down (LULD) rules address sudden price movements in NMS stocks.

72
Q

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

A

No

73
Q

A markup is generally based on the _______ market, but not the _____________.

A

A markup is generally based on the inside market, but not the dealer’s cost.

74
Q

If not using contemporaneous cost, put in order the three factors a BD may use to determine fair value on a bond trade?

A

Recent interdealer quotes, recent prices of trades between dealers, and prices of equivalent securities

75
Q

A U.S. BD trades a stock listed in the U.S. and on a foreign exchange. If U.S. trading is halted, what must the BD do?

A

Cease quoting and trading the stock in both U.S. and foreign markets

76
Q

Define net basis trade.

A

One in which a BD buys or sells stock on a principal basis and fills an existing client order at a different price

77
Q

Identify the acronym: LULD

A

Limit UP-Limit Down

78
Q

True or False: National best bids below the Limit Up-Limit Down lower price band are non-executable.

A

True. The stock’s Securities Information Processor (SIP) will identify the NBB as non-executable.

79
Q

According to NYSE Rule 5320, trading along with a client is not permitted when the firm is _________ its own position.

A

According to NYSE Rule 5320, trading along with a client is not permitted when the firm is creating its own position

80
Q

For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s _________ price.

A

For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s reference price.

81
Q

To prevent rogue trading, a BD may limit an employee’s access to only trading systems that are ____________ to his job.

A

To prevent rogue trading, a BD may limit an employee’s access to only trading systems that are appropriate to his job.

82
Q

What is the first priority used by a dealer when determining the markup on debt securities?

A

The contemporaneous cost of the dealer

83
Q

If the highest bid is above the lowest ask, the market is __________.

A

If the highest bid is above the lowest ask, the market is crossed.

84
Q

List some indicators that a BD’s associated persons may be engaging in rogue trading.

A

Trading without approval in a product outside their expertise or an unusual pattern of cancelled trades by traders

85
Q

A ________ state occurs if the NBB is below the lower band or the NBO is above the upper band, but not in a limit state.

A

A straddle state occurs if the NBB is below the lower band or the NBO is above the upper band, but not in a limit state.

86
Q

The 5% policy is a __________, not a _____ for dealing with commissions and markups.

A

The 5% policy is a guideline, not a rule for dealing with commissions and markups.

87
Q

If a company executes a reverse stock split, what happens to all open orders?

A

The open orders will be cancelled.

88
Q

What transactions are exempt from the debt markup policy?

A

Those involving municipals (any grade) or other exempt securities (Treasuries), or QIBs buying non-investment-grade debt

89
Q

True or False: If a trading halt is initiated for an OTC equity, the trading or publishing of a quote is prohibited.

A

True

90
Q

True or False: A client employing a buy-and-hold strategy is most suitable for a wrap account.

A

False. Wrap accounts are suitable for clients who execute several trades a week.

91
Q

Is it a violation for a BD to buy ABC calls for itself before executing a buy order it is holding from an institution?

A

Yes. The violation is referred to as front-running.

92
Q

What trades would be covered by the 5% policy?

A

Secondary market trades of stocks, corporate bonds, and Treasuries

93
Q

Is it possible for a quote on a manual market to lock or cross a quote found on an automated market?

A

Yes, but crossing or locking a market is prohibited.

94
Q

True or False: Once a firm files an application for market making, it may immediately begin to quote specific stocks.

A

False. After filing an application for market making, the firm must be notified by FINRA of its effectiveness.

95
Q

A company makes a payment to a market-making firm as a thank you for publishing quotes. Is the payment permitted?

A

No. Making payments to a market maker creates a conflict of interest.

96
Q

What is interpositioning?

A

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

97
Q

Under LULD rules, failure to exit the limit state within 15 seconds results in a ____ minute trading pause.

A

Under LULD rules, failure to exit the limit state within 15 seconds results in a five minute trading pause.

98
Q

What is exempt from the 5% policy?

A

Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds

99
Q

True or False: An order ticket will indicate if an order was discretionary, solicited, or unsolicited.

A

True

100
Q

Is a market maker permitted to unilaterally set its own bid and ask, dealer spread, quote increment, or share quantity?

A

Yes. These activities are not in violation of FINRA or Nasdaq rules.

101
Q

What may be implemented by a BD to prevent rogue trading?

A

Mandatory vacations for a minimum time for traders or using multiple passwords to gain access to certain systems

102
Q

In absence of a prevailing market price, ____________________ is used in determining the markup on corporate bonds.

A

In absence of a prevailing market price, contemporaneous cost is used in determining the markup on corporate bonds.

103
Q

Sales of new issues and mutual funds and trades between members are _______ from the 5% policy.

A

Sales of new issues and mutual funds and trades between members are exempt from the 5% policy.

104
Q

For debt transactions, how is markup generally determined?

A

It is based on the dealer’s contemporaneous cost.

105
Q

True or False: Traders exceeding the daily parameters set for the value or number of trades may indicate rogue trading.

A

True

106
Q

Define a proceeds transaction.

A

A client directs her BD to liquidate securities and use the proceeds to buy other securities.

107
Q

Executing a series of trades at the end of the day to manipulate the price of a security is called ________________.

A

Executing a series of trades at the end of the day to manipulate the price of a security is called marking-the-close.

108
Q

True or False: After an excused withdrawal, an MM must reapply to Nasdaq Market Operations before resuming its quote.

A

True. A market maker must reapply before resuming its quote after either excused or unexcused (voluntary) withdrawals.

109
Q

True or False: NYSE members may act as agent for both the buyer and seller in a transaction.

A

True. Acting as a dual agent in a cross transaction is acceptable.

110
Q

If a new market maker enters a quote with the asked price lower than the highest bid, the market is _________.

A

If a new market maker enters a quote with the asked price lower than the highest bid, the market is crossed.

111
Q

True or False: Whether the firm will profit on a transaction is a key consideration when determining its markup.

A

False

112
Q

For what type of firm would employee vacations qualify as an excused withdrawal for market-making purposes?

A

A small firm with three or fewer Level III terminals

113
Q

Name 3 factors that may be used when determining the markup of a security under the 5% Policy.

A

1) Type of security, 2) Price of security, 3) Availability of the security in the market

114
Q

A firm splits a 1,000-share order into ten 100-share orders to increase its rebates. What is this called?

A

Trade shredding (a violation)

115
Q

ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 14.40 - 14.90?

A

No. The 14.90 offer would cross the high bid of 15.15.

116
Q

May a BD delay the reporting of trades based on requests made by another market maker?

A

No. The Department of Justice considers this a prohibited practice.

117
Q

Trading will exit the limit state if all limit state quotations are executed or cancelled within ___ seconds.

A

Trading will exit the limit state if all limit state quotations are executed or cancelled within 15 seconds.

118
Q

A BD receives a large buy order from a client. When may the BD execute a trade for the same stock in its own account?

A

After the client’s trade is reported on the Tape

119
Q

According to the Department of Justice, what activities of BDs would not be considered collusive?

A

Executing some trades outside of the inside market or executing large block trades outside of normal hours

120
Q

A BD receives a client order to sell 20,000 ABC at $38. May a trader buy 10,000 ABC at $38 for the BD’s account?

A

Yes. Since the proprietary trader is on the opposite side of the market, no prohibition applies.

121
Q

What must decline by a specific percentage to trigger a trading halt?

A

The S&P 500 Index

122
Q

True or False: An order ticket will indicate the RR responsible for the account and a branch identifier.

A

True

123
Q

Name a type of transaction that is exempt from FINRA’s Debt Markup Policy.

A

Transactions in municipal securities

124
Q

A firm buys 1,000 shares of ABC at $20 as a principal and sells the shares to a client at $20.50. What is this trade?

A

Since the price is the different, it is a net basis trade (the markup is not required to be disclosed).

125
Q

True or False: A 200-share trade of MSFT on Nasdaq is subject to the 5% policy.

A

True, the 5% Policy covers trades executed in the secondary market.

126
Q

Name the two regulators that have the authority to halt trading in a Nasdaq security.

A

The SEC and FINRA

127
Q

A BD buys a security to fill an existing client order. This is called a ___________________________ transaction.

A

A BD buys a security to fill an existing client order. This is called a riskless/simultaneous principal transaction.

128
Q

Define the contemporaneous cost (used when no competitive market exists).

A

The price one BD will pay another BD for a security at the time of a client’s trade

129
Q

True or False: A 500-share trade of an NYSE stock executed in the OTC market is subject to the 5% Policy.

A

True, third market trades (exchange-listed securities traded OTC) are subject to the 5% Policy.

130
Q

To obtain consent for effecting net basis trades for noninstitutional clients, is a negative consent letter allowed?

A

No. Negative consent letters are only allowed for institutional clients. Noninstitutional clients must provide written consent.

131
Q

True or False: If XYXY is currently under a trading halt, a firm may only execute institutional orders for XYXY.

A

False. During a halt, no orders may be executed.

132
Q

What are the different methods of obtaining consent from an institution for executing net basis trades?

A

BDs may obtain oral or written consent prior to each net basis trade, or depend on a negative consent letter.

133
Q

Define trade shredding.

A

Splitting clients’ securities orders into multiple smaller orders to maximize payments or rebates to the member

134
Q

True or False: Regardless of the trading system used, if a regulatory halt/suspension is imposed, trading must cease.

A

True

135
Q

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

A

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

136
Q

True or False: Rogue trading may result in significant financial benefits for a BD.

A

False. Rogue trading may result in large financial losses for a BD.

137
Q

_____________ other market makers from narrowing the spread is a prohibited practice.

A

Discouraging other market makers from narrowing the spread is a prohibited practice.

138
Q

While holding a large block order to buy from a client, what action would be prohibited for the market maker?

A

Executing an order for its own account in an option on the security (front-running violation)

139
Q

True or False: The capacity in which the firm is acting in a transaction is found on the order ticket.

A

False. Firm capacity is found on the confirmation.

140
Q

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

A

Maintaining liquidity and buying and selling from their own account

141
Q

True or False: Crossing or locking a market is an accepted practice employed by market makers.

A

False. Crossing or locking a market is prohibited.

142
Q

When a firm dominates or controls the market for a security, on what is a markup based?

A

The firm’s contemporaneous cost

143
Q

A firm buys 1,000 shares of ABC at $20 as a principal and sells the shares to a client at $20. What is this trade?

A

Since the price is the same, it is a riskless principal trade (the markup is required to be disclosed).

144
Q

What events may cause the prevailing market for a debt security to be different than contemporaneous cost?

A

A change in issuer’s credit rating, a change in market interest rates, or significant news reports about the issuer

145
Q

Give some examples of BD practices that are prohibited according to the Department of Justice.

A

Sharing client order information, selectively backing away from quotes, coordinating prices with other market makers

Series 24 Group Share (42 decks)

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