Securities Markets Flashcards
An investor sold short 100 shares of XYZ @ 60 and placed an open buy stop @ 62.50. Later the market price of XYZ declined to 42 and the customer covered the short position with a market order. The open stop order:
[A] will remain open until executed or canceled by the customer.
[B] will be canceled by the specialist.
[C] will be superseded by the market order to buy.
[D] will be canceled by your firm.
[A] will remain open until executed or canceled by the customer.
The buy stop would remain entered until it is activated or canceled. The customer must cancel a previous order. It is not canceled automatically by an order at a different price for the same security.
Ch7 Sec2A
If an investor borrows a stock from a broker-dealer on a short sale, the borrowed stock
[A] must be returned by settlement date.
[B] may be borrowed for an indefinite period, but the broker-dealer has the right to demand the return of the security at any time.
[C] must be returned at month end.
[D] may be borrowed until the investor decides to return the stock.
[B] may be borrowed for an indefinite period, but the broker-dealer has the right to demand the return of the security at any time.
When an investor sells stock short, they are allowed to maintain that position indefinitely - but also needs to know that the broker-dealer could require the customer to “cover the short” at any time.
Ch7 Sec3
An open buy order entered above the current market price of a security would be a:
[A] Limit order
[B] Not held order
[C] All or none order
[D] Stop order
[D] Stop order
The only buy orders entered above the current market price are Buy Stops. Refer to the BLSS chart.
Ch7 Sec2
Which of the following is NOT affiliated with the Depository Trust Clearing Company (DTCC)?
[A] The National Securities Clearing Corporation (NSCC)
[B] Continuous Net Settlement (CNS)
[C] Federal Deposit Insurance Corporation (FDIC)
[D] Fixed Income Clearing Corporation (FICC)
[C] Federal Deposit Insurance Corporation (FDIC)
The FDIC is an independent agency of the federal government which insures deposits in banks and thrift institutions for at least $250,000. Each of the other entities is either a subsidiary of (NSCC, FICC) or an automated system used by (CNS) the Depository Trust Clearing Company (DTCC).
Ch7 Sec6
In accepting an order to sell securities for a customer, a registered representative should be reasonably assured
[A] of the present location of the security.
[B] that the securities are in good deliverable form.
[C] that the securities are deliverable within two business days.
[D] All of the above
[D] All of the above
Ch7 Sec6A
Your customer, Mr. Smith, is short 100 shares of XYZ stock. He has placed an open buy stop at 62.50. Exciting news is released about the XYZ Corporation and the stock’s price rallies sharply. Mr. Smith instructs you, his registered representative, to cover his position. The order you should place is:
[A] Buy 100 XYZ at the market: Cancel buy 100 XYZ at 62.50 GTC.
[B] Sell 100 XYZ at the market: Cancel buy 100 XYZ at 62.50 GTC.
[C] Buy 100 XYZ at the market: Cancel buy 100 XYZ at 62.50 stop.
[D] Sell 100 XYZ at the market: Cancel buy 100 XYZ at 62.50 Stop.
[C] Buy 100 XYZ at the market: Cancel buy 100 XYZ at 62.50 stop.
The registered representative would enter a buy at the market order and simultaneously cancel the stop, to avoid duplicate trades being executed.
Ch7 Sec2A
FINRA 5% Markup Policy would apply to which of the following transactions?
I. Transactions in exempted securities.
II. Transactions executed in OTC Securities in the Secondary market as agent.
III. Transactions executed in OTC Securities in the secondary market as principal.
IV. Transactions requiring a prospectus.
[A] I and III
[B] II and IV
[C] II and III
[D] I and IV
[C] II and III
FINRA Markup Policy applies only to OTC agency and OTC principal transactions - not to transactions on the exchanges and not to transactions where an offering circular or prospectus is distributed
Ch7 Sec5A
A _______ is an order to be executed at once as soon as it reaches the floor and may be filled in its entirety or partially.
[A] Stop Order
[B] Limit Order
[C] Fill or Kill Order
[D] Immediate or Cancel Order
[D] Immediate or Cancel Order
Immediate or Cancel Orders pertain to orders that are to be filled immediately, either fully or partially. If the order is filled only partially, then the remaining portion of the order will be cancelled.
Ch7 Sec2A
Settlement date for a cash transaction is
[A] on the same day as the transaction.
[B] on the next business day after the transaction.
[C] on the second business day after the transaction.
[D] on the fourth business day after the transaction.
[A] on the same day as the transaction.
CASH transactions settle on the same day as trade date.
Ch7 Sec6
The FINRA 5% markup policy applies to a FINRA Member when that member acts as:
[A] Seller of mutual fund shares to a client.
[B] A broker-dealer of OTC securities.
[C] A trader of U.S. government securities.
[D] A selling group member in a primary distribution.
[B] A broker-dealer of OTC securities.
The FINRA 5% markup policy applies to transactions in the OTC market only, and does not apply to U.S. Government securities, or any other securities sold by prospectus (new issues, mutual funds shares).
Ch7 Sec5
Which of the following is the name for the subsidiary of the Depository Trust Clearing Company (DTCC) that provides centralized clearing, information, and settlement services to the financial industry?
[A] National Securities Clearing Corporation (NSCC)
[B] Trade Reporting Facility (TRF)
[C] Federal Deposit Insurance Corporation (FDIC)
[D] Fixed Income Clearing Corporation (FICC)
[A] National Securities Clearing Corporation (NSCC)
NSCC is a subsidiary of the DTCC that provides centralized clearing, information, and settlement services to the financial industry. FICC is also a subsidiary of DTCC, but they provide for centralized clearing, information, and settlement for Government Securities. FDIC is an independent agency of the federal government, and not a subsidiary of the DTCC. TRF is an execution and reporting system.
Ch7 Sec6
All of the following transactions executed through NASDAQ in listed securities are reported on the Consolidated Tape EXCEPT:
[A] Agency transactions without a markup.
[B] Odd lot transactions without differentials.
[C] Principal transactions with a markup.
[D] Principal transactions with a markdown.
[B] Odd lot transactions without differentials.
Odd lot transactions of any sort are never reported on the tape.
7 Sec4B
Which of the following are true when the designated market maker engages in the practice of stopping stock?
I. He may stop stock for customer orders from NYSE member firms.
II. The designated market maker guarantees a specific price while the broker tries to do better.
III. The designated market maker guarantees the purchase or sale of a specific number of shares at a given price.
IV. A Floor Governor’s permission is necessary before the designated market maker can grant a stop.
[A] I and II
[B] I, III, and IV
[C] I, II, and III
[D] All of the above
[C] I, II, and III
All choices are correct with the exception of IV, because the floor broker’s permission is NOT required.
Ch7 Sec4
Orders entered or noted in the designated market maker’s book include
[A] market orders to buy.
[B] limit.
[C] market order to sell.
[D] not held.
[B] limit.
The designated market maker enters limit orders on the book. The market maker can accept market orders and day orders. Market orders fill immediately, so they are no put on the books, but the DMM can accept those orders.
Ch7 Sec4A
All of the following responses by a market maker reflect a firm quote, except
[A] “It is 5 - 5 1/4.”
[B] “We’ll do it 5 - 5 1/4.”
[C] “5 - 5 1/4 firm.”
[D] “It is quoted 5 - 5 1/2.”
[D] “It is quoted 5 - 5 1/2.”
“It is quoted” would represent a subject quote.
Ch7 Sec5
Which of the following responses by a market maker do NOT represent a firm quote?
[A] It is 25 – 25.05.
[B] The market is 25 – 25.05.
[C] We can trade it 25 – 25.05.
[D] Last I saw was 25 – 25.05.
[D] Last I saw was 25 – 25.05.
“Last I saw was 25 – 25.05” is considered a subject quote. Subject quotes are for information only, and are not firm. “It is” “The market is” and “We can trade it” are all examples of firm quotes.
Ch7 Sec5
All of the following are true with regard to a short against box position except:
[A] The strategy can be used as a hedge.
[B] The strategy can be used to lock in a profit on an established long position.
[C] investors could arbitrage between two markets by going long in one market and short in another.
[D] Investors can postpone taxation on positions by going short against the box.
[D] Investors can postpone taxation on positions by going short against the box.
Answer “D” is false and therefore the correct answer. Investors cannot postpone taxation by going short against the box. Rather, holding periods on long positions can be put on hold or even eliminated by going short against the box.
Going short against the box can be used for hedging purposes, to lock in a profit on an existing long position in anticipation of a potential decline in a stock’s value, or as an arbitrage (historically).
Ch7 Sec3
When a market maker is asked for a quote, prices quoted are assumed to be:
[A] firm for 1,000 shares.
[B] subject quotes.
[C] firm for 1 to 99 shares.
[D] firm for 100 shares.
[D] firm for 100 shares.
When a market maker is asked for a quote, prices quoted are assumed to be firm for 100 shares.
Ch7 Sec5
Which of the following are uses of a stop order?
I. To assure an execution at a specific price
II. To protect the profit on a long position of a customer
III. To limit the loss on a short position for a customer
[A] I and II
[B] II and III
[C] I and III
[D] All
[B] II and III
Choices II and III are correct. Choice I is incorrect because stop orders become market orders and cannot be guaranteed a specific price of execution.
Ch7 Sec2
Which of the following orders will be reduced on the ex-date for a cash dividend?
I. Open order to buy 100 CNN at 34.50
II. Order to sell 100 NBC at 18 Stop
III. Day order to sell 100 TBS at 13.13
IV. Open order to buy 100 CBN at 16 stop 16.25 limit.
[A] I and II
[B] I and III
[C] II and IV
[D] III and IV
[A] I and II
Buy Limit and Sell Stop orders are reduced by the amount of the dividend on the morning of the ex-date. In choice I the order is a Buy limit because the investor wants to buy 100 CCN @34.50 - @ 34.50 is the set limit price. In II the order is a Sell Stop Limit, but remember that when you enter a Stop/Limit it is first always a Stop. Therefore, since it will be a Sell Stop it will be reduced on the morning of the the Ex-date. Choice III is a Sell Limit which is entered above the current market price. Choice IV is Buy Stop Limit; therefore, it is first a Buy Stop, which is entered above the current market price.
Ch7 Sec2A
A customer at a broker-dealer wishes to sell a security short. Prior to allowing the customer to sell the security short, the broker-dealer must
[A] confirm that this customer has never received a margin call related to their account and previous short sales.
[B] ensure that the short sale is recommended by the customer’s registered representative.
[C] receive FINRA approval.
[D] locate the securities to ensure that the firm has adequate inventory to lend for short selling.
[D] locate the securities to ensure that the firm has adequate inventory to lend for short selling.
Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date that delivery is due before effecting a short sale in any equity security. This “locate” must be made and documented prior to effecting the short sale. There is no requirement to ensure that no margin call has occurred in the customer’s account. A registered representative does not have to recommend the short sale as the short sale could be unsolicited. Suitability would be a consideration. There is no need for a FINRA approval to allow a short sale in a customer’s account.
Ch7 Sec3
For which of the following markets do listed security transactions that have occurred appear on the consolidated tape?
I. Fourth market.
II. Third market.
III. Foreign market.
IV. Primary market.
[A] I and II
[B] I and III
[C] II and III
[D] II and IV
[A] I and II
New issues and foreign markets are not reported to the consolidated tape. The third market (listed securities traded on the OTC market) and the fourth market (trades directly between two institutions) are reported on the tape.
Ch7 Sec4B
Mrs. Melody Grace has a stock certificate. Her name appears on it as Mrs. Melody Grace. She endorses this certificate exactly as her name appears on it and sends it to the transfer agent for transfer to her husband’s name. The transfer agent returns the certificate and says that the signature was not guaranteed. Before returning the certificate for transfer, Mrs. Grace must:
[A] Appear before the transfer agent in person and endorse it again in his presence.
[B] Have a broker-dealer or a national bank guarantee the signature.
[C] Endorse the certificate again in front of a witness.
[D] Go to a notary public and sign an affidavit that she actually made the endorsement.
[B] Have a broker-dealer or a national bank guarantee the signature.
Broker-dealers and national banks guarantee signatures so the client does not have to travel to the transfer agent personally.
Ch7 Sec6B
Which of the following is not permitted during a tender offer?
[A] Buy the stock and tender it two days after trade date.
[B] Exercise a call option on that stock and tender the shares.
[C] Tender shares held in account which has an offsetting short position (short against the box).
[D] Issue irrevocable instructions to convert a bond which is convertible into the stock and tender the converted shares.
[C] Tender shares held in account which has an offsetting short position (short against the box).
Shares that offset a short position cannot be tendered because should they be used to close the short position, the client would no longer own them. Shares must be held long in an account and be fully paid for before they can be tendered.
Ch7 Sec3
