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SERIES 7 TOPOFF -- SANDBOX > The Secondary Market, Equity Trading, & Dispute Resolution > Flashcards

The Secondary Market, Equity Trading, & Dispute Resolution Flashcards

This deck focuses on terms and concepts relating to the secondary market, equity trading, and industry dispute resolution.

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Series 7 Top-off Exam flashcards
1
Q

By what date are member firms required to send trade confirmations?

A

Either on the day of or prior to trade settlement.

This includes trades that settle the same day (cash settlement.)

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2
Q

Within brokerage operations, what is the old name for the location where retail stock orders would be received?

A

Wire room

From here, the operations group would transmit orders to the right markets. With electronic trading, this largely has been superceded.

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3
Q

Within brokerage operations, what group calculates settlement dates, records all client transactions, and confirms statement printing?

A

Purchase and sales department

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4
Q

What specialized part of a dealer operation handles all stock splits, redemptions, mergers, and tender offers?

A

Re-org department

The reorganization department and clearing firms are the two elements of broker operations that technology hasn’t made obsolete.

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5
Q

Define:

Disclosure of Capacity

A

On every trade confirmation, the dealer has to indicate if he acted as an agent only, meaning he took the order from the customer, or as a principal, meaning he acted on behalf of a customer in a discretionary account.

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6
Q

On what schedule are firms required to send customer statements?

A

At least quarterly if no trades have taken place, and monthly when there is trading activity.

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7
Q

Who can request a firm’s most recent balance sheet?

A

A financial condition disclosure can be requested by any customer of the firm or any other dealer who does business with the firm.

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8
Q

Which member department handles all applications for credit?

A

Margin department

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9
Q

Which department actually prints and mails the confirmation to the customer?

A

Purchase and sales

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10
Q

What is a reclamation?

A

A reclamation occurs if a dealer accepts a delivery as good, only later to find out it was a bad delivery. In this situation the securities can be sent back to the selling broker-dealer in order to fix the issue.

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11
Q

What type of open orders will be reduced on the morning of the ex-dividend date?

A

Buy Limits, Sell Stops, and Sell Stop Limits

All orders that are entered at or below the market are adjusted downwards on the morning of the ex-dividend date.

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12
Q

Regular way settlement for corporate bonds

A

T + 1

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13
Q

Regular way settlement for municipal bonds

A

T + 1

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14
Q

Regular way settlement for agency securities

A

T + 1

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15
Q

Regular way settlement for equities

A

T + 1

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16
Q

Regular way settlement for Treasuries

A

T + 1

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17
Q

Regular way settlement for listed option contracts

A

T + 1

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18
Q

When a written trade confirmation must be given or sent to a customer

A

At or before the completion of the transaction (settlement)

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19
Q

The capacity shown on a confirmation when the shares are sold from the inventory of the broker-dealer

A

Principal

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20
Q

The capacity shown on a confirmation when the broker has arranged a trade between a buyer and seller

A

Agent

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21
Q

Compensation charged when a dealer sells shares from inventory

A

Mark-up

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22
Q

Compensation charged when a dealer purchases shares for inventory

A

Mark-down

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23
Q

Compensation charged when a broker transacts an order on a client’s behalf

A

Commission

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24
Q

Standard trading unit of equity securities

A

Round lot (100 shares)

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25
Q

Securities that have met the minimum requirements to trade on an exchange

A

Listed securities

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26
Q

Responsible for maintaining an orderly market in the stocks for which he is responsible on the NYSE floor. Also referred to as the specialist.

A

Designated Market Maker

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27
Q

Order that is executed immediately at the current price, and has priority over all other orders

A

Market order

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28
Q

An order that is entered to protect a profit or prevent a loss

A

Stop order

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29
Q

Can be executed only at the specified price or better

A

Limit order

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30
Q

Regulates short-selling of equity securities; mandates a locate requirement

A

Regulation SHO

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31
Q

The trading volume from institutional orders executed on private exchanges that are unavailable to the public

A

Dark pool liquidity

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32
Q

Prohibited practice of not doing business at the quoted price

A

Backing away

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33
Q

The approximate value of a security, provided for information only

A

Nominal quotation

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34
Q

A price at which a municipal securities dealer states its potential willingness to purchase securities

A

Workable bid

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35
Q

The FINRA policy that serves as a guideline for fair markups, markdowns and commissions

A

5% Markup Policy

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36
Q

The best bid and best asked price in Nasdaq

A

The inside market

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37
Q

A market that matches buyers and sellers, as on the floor of the NYSE

A

Auction market

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38
Q

The process of acting as dealer by standing ready to buy or sell securities from inventory and making money from the spread, as on NASDAQ

A

Market making

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39
Q

Over-the-counter, negotiated-price trading of exchange-traded securities

A

Third market trade

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40
Q

A type of alternative trading system (ATS) that trades listed stocks and other exchange-traded products, generally between broker dealers and institutions

A

ECN (Electronic Communications Network)

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41
Q

The U.S. stock exchange where trades are completed over-the-counter through a network of dealers with no physical location in place

A

NASDAQ

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42
Q

Quoting service for securities that do not meet listing requirements of other exchanges; has no listing standards

A

Over-the-Counter Bulletin Board

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43
Q

Occurs when a company no longer meets the listing standards of an exchange

A

De-listing

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44
Q

An interdealer electronic quotation system for stocks that are not listed on national securities exchanges and do not report to the Consolidated Tape

A

Bulletin Board

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45
Q

The first day that a buyer buys stock without a dividend

A

Ex-dividend date

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46
Q

The date on which a corporation pays a dividend to shareholders of record

A

Payable date

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47
Q

The last day a buyer can buy stock and receive the dividend

A

Business day before the ex-date

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48
Q

When the ex-dividend date happens relative to the record date for regular way trades

A

1 business day before record date updated for Sept. 5, 2017, rule amendment

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49
Q

Order that protects a profit or limits a loss in a short stock position

A

Buy stop order

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50
Q

Order that protects a profit or limits a loss in a long stock position

A

Sell stop order

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51
Q

Orders that are entered below the current market price

A

Buy limits, sell stops and sell stop limit orders

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52
Q

Orders that are entered above the current market price

A

Sell limits, buy stops and buy stop limit orders

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53
Q

Becomes a market order when triggered

A

Stop order

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54
Q

The transaction that activates a stop order

A

Trigger

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55
Q

The price after the trigger in a stop order

A

Execution or market price

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56
Q

Orders that are not to be reduced by a cash dividend

A

DNR

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57
Q

Order that is to be executed immediately in its entirety

A

Fill-or-Kill

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58
Q

Order that is to be executed immediately; partial execution is acceptable, remainder is canceled

A

Immediate-or-cancel

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59
Q

Execute the entire order or none of it; does not require an immediate fill

A

All-or-none

60
Q

Order used in anticipation of a breakout of the level of resistance

A

Buy stop order

61
Q

Order used in anticipation of a breakout of the level of support

A

Sell stop order

62
Q

Requires that specialists and market makers publicly display customer limit orders that are better than the specialist’s or market maker’s quote

A

Limit Order Display Rule

63
Q

Two parts of a stop order

A

Trigger (also called Election) and Execution

64
Q

Employed by an exchange member firm to execute trades on the exchange floor on behalf of the firm’s clients

A

Floor broker

65
Q

Member of the exchange that trades on the exchange floor for his own account

A

Floor trader

66
Q

Order ticket must be filled out prior to

A

order execution

67
Q

Types of quotes permitted for equities on OTCBB

A

unpriced indications or firm quotes

68
Q

Published daily by the National Quotation Service to provide bid and ask prices and market makers for unlisted and thinly traded stocks

A

OTC Pink Sheet

69
Q

FINRA rules that standardize trade practices between firms

A

Uniform Practice Code

70
Q

FINRA rules that address violations of Conduct Rules

A

Code of Procedure

71
Q

FINRA rules that address the settlement of monetary claims between firms, representatives and the public

A

Code of Arbitration Procedure

72
Q

Regulates the exchanges and over-the-counter market

A

Securities Act of 1934

73
Q

What happens if one firm disagrees with or does not recognize the terms (i.e. price, number of shares, etc.) of a transaction?

A

In this circumstance, the firm will submit a DK, “don’t know.” This doesn’t mean the trade is rejected, it just means the other side has to confirm details. If there is a genuine error, the trade may be rejected.

74
Q

In order for stock shares to be in good delivery, the certificates

A
  • Must be delivered in round lots of 100 shares -or-
  • Must be stackable into piles of 100 shares.

For example: to transfer 300 shares, five certificates of 60 shares each would not constitute good delivery because no share could be combined into 100-share units. However, three certificates of 100 shares each and six certificates of 50 shares each would be considered good delivery.

75
Q

When a market maker fails to honor a firm quote, it is a violation referred to as

A

Backing away

76
Q

Trades in NYSE securities must be reported to

A

The Consolidated Tape

77
Q

What is the purpose of a trading halt?

A

An exchange or regulator can halt trading in a security or an entire market. Typically this happens for pending news or some other potential market-moving event.

78
Q

When quoting a stock price, where will a dealer buy or sell a security from the public?

A

The dealer will buy on the bid side of the market and sell to customers on the offered side.

The difference between the two is the amount that would be earned by the market maker. If acting in the capacity of a broker, only a commission would be earned, not the bid/ask spread.

79
Q

What is the relationship between liquidity and bid/ask spreads?

A

As stocks trade less frequently, dealers will charge a wider spread between the bid and the ask. This action is to increase the compensation to the dealer for holding inventory they may not be able to sell right away.

80
Q

What are the three levels of trading halt the NYSE can implement?

A

For a trading decline of 7%, 13%, or 20%, a level 1, 2, or 3 trading halt will be triggered. Level 1 and 2 both trigger 15-minute trading halts, unless after 3:25 p.m. when no halt is placed, and a level 3 will halt trading the remainder of the day.

81
Q

Orders can be placed with several modifiers. However, most orders typically remain good for how long?

A

A day

82
Q

What type of order will be held until executed?

A

Good Until Canceled

A GTC order is good until the order is executed or cancelled.

83
Q

What type of order gives a trader discretion over time of execution and price?

A

Not Held

This means the trader is not held to a specific price and can execute when he thinks best, based on his view of market conditions.

84
Q

What type of order will instruct the trader to execute the entire size of the order right now or cancel the trade?

A

Fill or Kill

85
Q

What type of order modifier will tell the trader to execute what shares he can right now, but cancel the unfilled balance?

A

Immediate or Cancel

86
Q

What type of order modifier will specify a particular price?

A

Limit Orders

These place a price limitation on the execution of the order. There can be a buy limit order to establish a new purchase, which will be below the current market price, and sell limit to close a long position. A sell limit would be placed above the current market price.

87
Q

What is a key risk when placing a limit order?

A

Because investors guarantee themselves a price with a limit order, they cannot guarantee order execution.

88
Q

What type of order can be used for risk management?

A

Stop Orders

89
Q

Where are buy and sell stop orders placed relative to the current market?

A

Buy stop orders are placed above the market in order to protect a short position in case of a price increase. Sell stop orders are placed below the market to protect a long position in case of a price decrease.

90
Q

When a stop order is triggered, how does it differ from a limit order in the order of execution?

A

Limit orders will be executed at the first trade that satisfies the investors limit. However, for stop orders, once the order is activated, it becomes a market order, which will be executed at the best available price. This means a stop order could be executed significantly away from the stop price. A limit order, if executed, will only be executed at the limit price or better.

91
Q

What type of analyst might use stop orders in anticipation of a breakout above a resistance level or below a support level?

A

Technical traders, or those who trade on chart patterns, often will place stop orders around what they think are key price levels for a stock.

92
Q

A technical investor has been charting a stock for almost five months and sees the stock trading in a six-point range between 20 and 26.

The investor believes that if the stock breaks out above the trading range it will go up at least 20 points. Therefore, the investor enters a buy stop @26. Based on the below trades, where will the stop order be activated and executed?

Trading Tape: 23.5, 24.15, 25, 25.50, 26.75, 27, 26.75, 27.87

A

$26.75, $27

A buy stop will be activated at the first trade at or above the stop price of $26 - in this case $26.75. Once activated, it becomes a market order which is executed at the next price - in this case $27.

93
Q

Goals of a buy stop order include:

A
  • Protect against a loss in a short stock position
  • Lock in a profit from a short stock position
  • Establish a long position when a breakout occurs above a resistance level
94
Q

Goals of sell stop orders include:** **

A
  • Protect against loss in a long stock position
  • Lock in a gain from a long stock position
  • Establish a short position when a breakout occurs below the line of support
95
Q

What type of order might be activated without being executed?

A

Stop Limit Order

For a stop limit order, once the order is activated it becomes a limit order rather than a market order. However, if the limit price is not satisfied, then the order will not be executed.

96
Q

If a customer wants to sell stock once it hits $40 or below, while making sure to sell for at least $35, what order can they place?

A

Sell @ 40 stop limit @ 35

Once the stop order is activated at 40 or below, it will become a sell limit at 35, which means the investor will only sell at $35 or higher.

97
Q

In a falling market, types of limit and stop orders will be executed?

A

Buy limit and Sell Stop Orders

Orders that are entered at or below the market will be executed in a falling market.

98
Q

An order to sell at 38.65 stop limit is entered before the opening of the market. The subsequent trades are 39, 38.75, 38.12, 38, 39, and 39.12. On which of the trades is the order triggered and executed?

A

38.12, 39

A sell stop will be triggered at the first trade at below the stop price of $38.65 - in this case $38.12. Once triggered, it becomes a sell limit at $38.65, which means the investor wants to sell for $38.65 of better. The trade of $39 is the first trade that satisfies the investor’s limit.

99
Q

What type of order will reduce the exposure of a short seller to unlimited risk?

A

Buy stop

100
Q

Define:

The three levels of NASDAQ

A
  • Level 1: Includes the best bid and offer for a security, also known as the inside market
  • Level 2: Includes a complete list of all bids and offers from all NASDAQ market makers in a particular issue
  • Level 3: Includes all the information from level 2 and also allows market makers to update and change their quotes
101
Q

What is the minimum size a market maker must be willing to buy and sell on Nasdaq?

A

The minimum quote size on Nasdaq is one round lot, which is the equivalent of 100 shares.

102
Q

In the event of a destroyed or torn certificate, who is the arbiter of authenticity?

A

The Transfer Agent

103
Q

The large bid-ask spread for a security typically reflects

A

A lack of liquidity

104
Q

What term best describes an order to buy or sell a stock at the immediately at the best available price

A

market order

105
Q

An investor has just placed a “market order” to buy Intel stock. His broker will:

A

buy Intel stock immediately at the best price currently available

106
Q

If an investor is concerned that their stock might decline in value, which order can they place to protect their position.

A

Sell Stop Order

With a sell stop order, if the price of the shares decline to or below the stop price, the order will be activated and the stock will then be sold immediately allowing the investor to cut their losses.

107
Q

Stocks that are not listed on a national exchange are referred to as

A

OTC Securities

108
Q

Market makers on the NYSE are referred to as

A

Designated market makers (DMM)

The DMM is the one firm who makes a market for that stock on the floor of the NYSE. It matches buy and sell orders for the stock and also adds liquidity, when necessary, by purchasing or selling stocks for its own account.

109
Q

How many levels are part of the Nasdaq quotation system?

A

three

Level 1: provides the inside market (highest bid and lowest ask) for each Nasdaq stock

Level 2: Shows all quotes for all Nasdaq stocks

Level 3: Includes all the information from Level 2 and also allows a market maker to enter and update quotations.

110
Q

What information is found on Nasdaq Level 1?

A

Level 1 includes the inside market (highest bid and lowest ask) for each Nasdaq stock

111
Q

How many designated market makers exist for each stock on the NYSE?

A

One per security

112
Q

The OTC market is an example of a

A

negotiated market

113
Q

What kind of markets are the NYSE and Nasdaq?

A

Auction and Negotiated respectively

114
Q

A sell stop order might be used by an investor to open a short position in antcipation

A

of a breakthrough below a support level

115
Q

A buy stop order might be used by an investor to open a long position in antcipation

A

of a breakthrough above a resistance level

116
Q

An investor sold a stock short and wants to limit the losses that may arise if the market moves against her. Which two of the following actions would protect her position?

  1. Buy a put on the stock
  2. Buy a call on the stock
  3. Place a buy stop order
  4. Place a sell stop order
A

II and III

Because the investor sold the stock short, they have unlimited risk if the stock price increases. To protect against an increase in the price, the investor can either buy a call option, as that will lock in a purchase price on the stock, or they can place a buy stop order as it will activate and then allow the investor to cover their short once the price hits a certain threshold.

117
Q

An investor owns stock and wants to limit the losses that may arise if the market moves against her. Which two of the following actions would protect herposition?

  1. Buy a put on the stock
  2. Buy a call on the stock
  3. Place a buy stop order
  4. Place a sell stop order
A

I and IV

Because the investor owns stock, they are concerned that the price of their shares will fall in value. To protect against a decrease in price, the investor can either buy a put option, as that will lock in a sale price on the stock, or they can place a sell stop order as it will activate and then allow the investor to sell their long position and cut their losses once the stock price falls below a certain threshold.

118
Q

An investor is interested in buying ABC stock, but does not want to pay more than $50. What type of order should they place?

A

Buy limit @50

119
Q

An investor is looking to sell their ABC stock if the price dips below $40, but does not want to sell it for less than $39. What order should they place?

A

Sell stop @40 limit @39

120
Q

An investor is short XYZ stock and wishes to cover their position if the price increases above $65, but does not want to pay more than $70 to repurchase the shares. What order should they place?

A

Buy stop @65 limit @70

121
Q

What is a risk of stop limit orders?

A

The order will never be executed

Because limit orders guarantee a price, there is a chance that they will not be executed. Therefore, it is possible for a stop limit order to be activated, but not executed if the stock price never satisfies the limit.

122
Q

What type of order requires the investor to specify their price?

A

limit order

123
Q

An investor wishes to ensure their stock is sold regardless of the price they receive. Which order should they enter?

A

Market order

Market orders are executed immediately at the best available price.

124
Q

How does a fill-or-kill order differ from an all-or-none order?

A

Both orders must executed in their entirety or not at all. However, fill-or-kill orders must be executed immediately, whereas all-or-none can have multiple attempts to get filled.

125
Q

How does a fill-or-kill order differ from an immediate-or-cancel order?

A

Both orders must executed immediately. However, fill-or-kill orders must also be executed in their entirety whereas an investor who places an immediate-or-cancel will accept partial execution.

126
Q

An investor sees stock trading in a range between $30 - $40. They believe an increase above $40 is a bullish sign to buy, whereas a decrease below $30 reflects a bearish sign to sell. However, they are not sure which direction the stock will go. What order should they place?

A

One cancels the other (OCO)

In an OCO, two orders are placed and the execution of one trade will cancel the other.

127
Q

An investor owns DEF stock. They want to hold on the stock for long term appreciation, but have the option to sell if the price falls drastically. What order should they place?

A

Sell stop

128
Q

An investor has just placed a buy stop order on ABC stock with his broker. The broker will:

A

buy ABC if the price rises at or above the stop price

129
Q

Define:

not held order

A

An order type that gives the customer’s broker the flexibility to choose the best time and price of execution. The broker is “not held” to a particular time or price.

130
Q

Define:

All-or-None order

A

A customer order that must be executed in its entirety or not at all.

131
Q

Define:

breakout

A

A technical analysis term that identifies price changes through particular points of resistance or support levels.

132
Q

Define:

fill or kill

A

A customer order that instructs the broker to fill the entire order immediately or else it is cancelled.

133
Q

Define:

GTC Order

A

A customer order that remains on the books until it is filled or cancelled by the customer.

134
Q

Define:

Trading halt

A

A period of time that a stock cannot be traded typically due to pending release of newsworthy information.

135
Q

Define:

immediate or cancel

A

A type of customer order where the firm will fill as much of the order as they can immediately and everything not filled is cancelled.

136
Q

Define:

FINRA 5% policy

A

A guideline, not a rule, that states that the maximum amount of mark-up, or commission, that should be applied to a trade is 5%. Because it is not a hard-and-fast rule, a firm can charge more than 5% as long as it has good reason based on the specific circumstances of the trade.

137
Q

Define:

proceeds transaction

A

A type of transaction governed by the FINRA 5% rule, which states that when an investor sells securities and uses the proceeds to purchase other securities, the combined commissions and markups should not exceed 5%.

138
Q

Sanctions that may be imposed by FINRA when member firms or associated persons violate FINRA rules

A

Censures, fines, suspensions, expulsions, bars from activity or association with member firms, cease and desist orders (no jail sentences)

139
Q

Standard method of dispute resolution for securities industry

A

Arbitration

140
Q

Required from customers to permit arbitration as means of dispute resolution

A

Prior written permission

141
Q

Maximum dollar amount of claims eligible for settlement through simplified arbitration proceedings

A

$50,000

142
Q

Time frame for payment of monetary awards determined by arbitration

A

30 business days

143
Q

Efficient, less expensive alternative to arbitration for settlement of disputes

A

Mediation

144
Q

Define:

arbitration

A

A means of settling business diputes within the security industry.

145
Q

Define:

National Adjudicatory Council

A

A council within FINRA that handles appeals of rule violations by firm’s and registered reps.

SERIES 7 TOPOFF -- SANDBOX (8 decks)

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