Secondary Markets

Question 1

what are pre-emption rights

Answer 1

Preemptive rights are a contractual clause giving a shareholder the right to buy additional shares in any future issue of the company’s common stock before the shares are available to the general public.

Question 2

what is the established trading record

Answer 2

typically three years in Europe

Question 3

what are the typical conditions for listing on a main market

Answer 3

public traded company (PLC, freely transferable shares, minimum free float),
protection against dilution of ownership (eg pre-emption rights and restriction on shares issued through warrants and convertibles),
minimum market value and/or number of shares brought to market,
established trading record (three years in europe),
production of prospectus,
ability to meet ongoing requirements (eg disclosure requirements around price sensitive information)

Question 4

what is a quote-driven market

Answer 4

price controlled by price-makers (market makers)

Question 5

what is an order driven market

Answer 5

prices determined by buy orders and sell orders,
orders awaiting execution placed on order book,
electronic trading allows automatic execution, matching and reporting

Question 6

who are the market participants on secondary markets

Answer 6

broker (act as agent for client),
dealers (act as principal for own account),
dual capacity (broker dealer, act as agent and principal),
market makers

Question 7

what is a SBLI and what is its function

Answer 7

stock borrowing and lending intermediary,

when market maker forced to go short, call up bank providing SBLI, find someone willing to lend (PF),
legal change of title to market maker (no stamp duty) (no reporting obligations) (can be settled T+0) (borrower has to compensate lender for dividend payments etc (manufactured dividend)) (lender cannot attend meeting or vote) 🗳

Question 8

what is an execute and eliminate order

Answer 8

similar to limit order,

if partially filled, remainder is cancelled

Question 9

what is a fill or kill order

Answer 9

volume and limit price,

all or nothing, no partial fills

Question 10

what are the benefits of a central counterparty (CCP)

Answer 10

reduced counterparty risk,
providing total anonymity,
reduced administration (all with same counterparty),
facilitates netting,
improved pricing (due to anonymity)

Question 11

how does the dealing of corporate bonds work

Answer 11

typically decentralised (OTC),
B2B - BrokerTec, eSpeed and MTS Cash
B2C - MTS BondVision and TradeWeb
OTC ‘request for quote’ systems - investors request quotes from number of dealers

Question 12

If a limit order is entered into an order book during the opening auction call period, what price will it be executed at:
AThe limit price BThe uncrossing price CThe best price DThe premium price

Answer 12

The uncrossing price,

The uncrossing price is calculated as the price at which the maximum VOLUME of shares can be uncrossed.

Question 13

Which of the following would be a difference between quote-driven and order-driven systems?
APrice transparency; there is no obligation under MiFID for quote-driven systems to show pre-trade information BA marketplace that brings together buyers and sellers CQuote-driven screens are not required to have a touch strip; the quotes are ordered alphabetically by the market maker DMarket makers giving bid/offer spread during the MQP

Answer 13

Market makers giving bid/offer spread during the MQP

Question 14

Which of the following statements does not apply to both limit orders and execute and eliminate orders?
ASpecify a volume BSet a ‘no worse than’ price CParticipate in the opening auction DMay be entered during continuous trading

Answer 14

Participate in the opening auction,

Only limit and market orders are available for input during the opening auction.

Question 15

What are the uncrossing periods on hybrid exchange execution platform also known as?
AEnd of liquidity auctions BPrice auctions CEnd of order auctions DPeriodic auctions

Answer 15

Periodic auctions,

The uncrossing periods on hybrid systems are also known as periodic auctions.

Question 16

In which situation is trading in an order book traded security NOT permitted away from the order book?
APre-offer period BSuspension of listing CSuspension of automatic execution DDisorderly market

Answer 16

Suspension of listing,

When the exchange calls a halt to automatic execution, non-order book trading is still permitted.

Question 17

To whom must primary dealers in the government bond market quote firm two-way prices?
AAnyone on request BOther primary dealers CInvestors known directly to them DAll stock exchange member firms

Answer 17

Investors known directly to them ,

Primary dealers e.g. GEMMs are not required to quote firm two-way prices to other GEMMs.

Question 18

When assets have been rehypothecated, to whom do they then belong?
APrime broker BCustomer CHedge fund DMortgage company

Answer 18

Prime broker

Question 19

A broker who offers little or no advice, such as a internet dealing service provider, would be best described as which of the following?
ARetail broker BDiscount broker CRemote access broker DFull service broker

Answer 19

Discount broker,

If the broker is offering little or no investment advice, perhaps providing their services over the internet, the firm is described as a discount broker and the fees will be lower.