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Series 7 > Trading - Secondary Market 6% > Flashcards

Trading - Secondary Market 6% Flashcards

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Series 7 Top-off Exam flashcards
0
Q

What risk is involved with a long or short position?

A

Long has limited risk, can lose investment

Short has potential unlimited risk, as if the stock goes up, they will owe more than they did

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1
Q

Difference between a bull and a bear

A

a bear sells first, buys second

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2
Q

Capacity of Broker/Dealer

A

Acts as either one or the other, never both.

as a broker when matching of a buyer and a seller

- said to be acting in an agent capacity
- firm charges a commission, think ABC (agent, broker, commission)
- involves no risk to the broker/dealer

as a dealer, it is using its own inventory, acting as a principal

 - selling, charges a markup
 - buying, charges a markdown
 - involves risk, as no assurance to sell security quickly or at a profit

as a

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3
Q

Trade Ticket - information required

A
  • name of security
  • Quantity
  • Whether the trade is solicited, unsolicited or discretionary
  • Long or short (if the trade is a sell); and
  • Time Stamps
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4
Q

Trade Ticket

A

Original Document that documents the buy or sell transaction, goes to the margin department, purchase and sales, and order or wire department

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5
Q

Ticket for a sell

A

Must be marked:
-long if closing a long position
-if b/d is not holding the securities in street name, RR must
receive affirmation from the customer that the customer can
deliver the securities by settlement date
-short if opening a short position
-if not in street name, rr must receive affirmation from the
customer concerning the source of borrowed securities

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6
Q

Street Name

A

a brokerage account, where the customer’s securities and assets are held under the name of the brokerage firm, rather than the name of the individual who purchased the the security or asset. The individual is listed as the real and beneficial owner.

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7
Q

Regulation SHO

A

If the b/d misses 13 consecutive settlement dates on a threshold security, the b/d is required to perform a mandatory buy in.

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8
Q

Threshold security

A

a security with a large short position where the b/d might be at risk of covering the short

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9
Q

Trade Ticket - Time Stamps

A

Three time stamps are required on the trade ticket

 1. when the order is received
 2. when the ticket hits the trading desk
 3. when it is executed

provides an audit trail of best execution and to confirm b/d did not trade ahead of customer’s order

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10
Q

Trade Confirmations

A

Must be sent to customer no later than the completion of the trade

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11
Q

Trade Confirmation - Required information

A
  1. B/D name and address
  2. Whether the trade was a purchase or sale
  3. Complete Security Description
  4. Quantity
  5. Trade Date and Settlement Date
  6. Delivery and Payment Instructions
  7. Capacity of the B/D (agent or principal)
  8. Commission (if acted as agent); and
  9. Markup or Markdown (if firm acted as a principal in a NASDAQ or
    riskless principal trade)
    when the firm is acting in an agency capacity, the contra broker must be disclosed on the trade confirmation, or stated that the name can be available upon request
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12
Q

The Trading Spread (or the inside market)

A

difference between the bid and offer(ask)

the market for a security is always the highest bid and lowest ask

a narrow spread indicates active trading in a security

a wider spread indicates sluggish or thin spread

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13
Q

Bid

A

price at which investors can sell shares and purchasing dealer can buy shares - always lower than the offer

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14
Q

Offer (or ask)

A

price at which investors can buy shares and the lowest price a dealer is willing to accept

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15
Q

Five Percent Policy

A

FINRA says markups/markdowns in the secondary market must be fair and reasonable, generally to to exceed 5%. It is a guideline, as fairness can vary depending on the type of transaction.

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16
Q

Five percent policy - applies to:

A

-nonexempt (corporate) securities traded in the OTC secondary market;
-pink sheets
-yellow sheets (lists corporate bonds)
-the Bulletin Board
-NASDAQ
-all nonexempt securities which trade OTC, including ADR’s
-securities listed on the exchange such as NYSE.
-misc bond wire services
-proceeds trades
-agency cross trades
-riskless and simultaneous principal transactions
-other nonexempt stock and bond trades.
-third market - listed equities trading OTC
does not apply to exempt securities, nor to prospectus offerings

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17
Q

Securities Market

A

Primary Market = New Issue Market

Secondary Market = Trading of Outstanding (previously issued) Securities

 - First Market 
 - Second Market
 - Third Market
 - Fourth Market
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18
Q

First Market

A

Trading of securities listed on the exchange

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19
Q

Second Market

A

Trading of unlisted Securities OTC

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20
Q

Third Market

A

Listed Securities Trading OTC

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21
Q

Fourth Market

A

Electronic Trading of large blocks between institutional investors (Instinet)

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22
Q

Exchanges vs OTC

A

Exchanges represent an auction market with competitive buyers and competitive sellers

OTC market is a negotiated market where one buyer negotiates with one buyer

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23
Q

Exchange

A

a stock exchange is a physical location where “listed” securities trade.

NYSE, founded in 1792, most active of the world’s stock exchanges, trading more than 1 billion shares average daily volume.

NYSE Euronext (NYSE/New York and Euronet/Paris: NYX), NYS/ARCA and NYSE/AMEX have all combined to create the NYSE

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24
Q

Requirements to be listed on the exchangea

A
  • Min Shares outstanding = 1.1 million
  • Min Market Value of shares = $140 million
  • Aggregate pre tax earnings over the last 3 years of $10 million
  • Not less the $500 million in global capitalization and $100 million in revenues during the most recent 12 months
  • Min share price at listing $4
  • Majority of board of Directors must be independent or outside directors
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25
Q

NYSE Member

A

An individual who has a seat on the exchange. Each firm that is an NYSE member firm must have an individual employee who owns a seat on the exchange.

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26
Q

NYSE Member Categories

A
  1. Commission House Broker or Floor Broker
  2. Two Dollar Broker
  3. Registered Competitive Traders
  4. Specialist
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27
Q

Commission House Broker or Floor Broker

A

executes orders for clients of the broker’s firm. Members firms charge a commission to their clients

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28
Q

Two dollar broker

A

executes orders for floor brokers when they are too busy to execute all of their firm’s orders. They charge each broker a commission

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29
Q

Registered Competitive Traders

A

orders for their own accounts. seldom work for clients, but if they have clients, they must give them priority

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30
Q

Specialist

A

responsibility of maintaining a fair and orderly market. must buy when no buyers exist and sell when no sellers exists and hold these orders in his or her own account. May act as an agent for a floor broker. When a floor broker cannot execute a client’s order , the broker gives the order to the specialist, who records it in the specialist book. the order is held until it can be executed. if the order is executed, the specialist charges a commission. The specialist also is permitted to stop the stock for public orders. By stopping the stock, the trader guarantees an order fill at a specified price for a period of time.

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31
Q

Wire Orders - DOT Systems

A
  • orders that are electronically sent directly to the exchange floor from a member firm’s office.
  • DOT (designated order turnaround)
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32
Q

Specialists - dual capacity

A
  1. Principal - trade in their own account as a principals, designated to keep a fair and orderly market
  2. Agency - act in an agency capacity on behalf of other member firms
33
Q

Specialists - As Market Makers

A
  • committed to making an orderly market.
  • when buying for their own account, must buy higher than the highest bid
  • when selling from their own account, must sell lower than the lowest offered(asked).
  • this is to narrow the spread.
  • specialists are not forced to go into default supporting a market in a security that is dropping so rapidly
34
Q

Size of the Market

A
  • based on the best price, highest bid and lowest ask, narrows the spread.
35
Q

Consolidated Tape

A

The ticker symbols

36
Q

Dark pool of liquidity

A
  • public cannot see the trade

- transactions come from large institutional investors

37
Q

Order Flow

A
  • orders begin and are generated by the order or wire department
  • then the purchase or sales department process orders
  • then the margin department reviews all orders
38
Q

Order Flow - The Front Office managed by

A

-managed by a series 24 general securities principal or series 9/10 or branch manager and is concerned with customer accounts and orders

39
Q

Order Flow - The Back Office Managed by

A
  • Clearing firms or larger retail houses
  • consists of operations
  • principal is the series 27, financial operations principal or Fin-op
40
Q

Order Flow - Back office - Cash and Cage

A
  • receiving and delivering
  • concern is payment and receipt or delivery of securities, as well as confirmations
  • responsible for rejection or reclamation
41
Q

Order Flow - Rejection or Reclamation

A
  • Rejection is a fail to deliver
    • Issues a DK (don’t know) to the contra-broker who
      sent the securities
    • and a fail to receive
    • the security must be resubmitted
  • Reclamation means deliver was accepted
    • but problems occurred with particular securities
      meaning a certificate is not in deliverable form.
    • corrected with a letter of attestation from the transfer
      agent or issuer
      -Neither of these cancel the trade, it is simply a message to the contra party to deliver the securities in good deliverable form.
42
Q

Order Types - Block Order

A
  • Block order
    • 10,000 or more shares (assuming it is not a penny
      stock)
    • or $200,000 worth of bonds
    • NYSE Rule 127
      • member firm must explore the depth of the floor,
        including checking with the specialist. After the
        member firm has exhausted all its resources, it is
        allowed to announce a cleanup sale on the floor,
        soliciting someone to buy the entire order
43
Q

Order Type - Crossing the Market

A
  • When an order to buy and an order to sell come in at the same time from two different customers for the same stock and amount.
  • Must be first offered on the exchange floor for at least 16 seconds before the b/d may cross the transaction with its own client base.
  • Both orders should be executed at the current market price
44
Q

Stocks Trading Range

A
  • if range is 35 to 40
    • 35 is the support
    • 40 is the resistance
45
Q

Sell Limit

A

entered at or above stated price, used to take short positions or close out long positions

46
Q

Sell stop limit

A

Entered at or below stated price, when stop is off, the order is a sell limit order to be filled at or above the stated price.

Protect a long position(buys)
Take a short position(opening sales)

47
Q

Buy stop limit

A

entered at or above the state price. When the stop is off, the order is a buy limit order to be filled at or below the state

48
Q

Buy Stop

A

entered at or above the stated price. When the stop is off, the order is executed at market, most bullish of all orders

49
Q

All or None

A

Quantity is top priority, time is secondary. Considered a day order unless entered as GTC. GTC are canceled twice a year on last trading day of April or October.

50
Q

How dividends being paid affect orders

A
  • When dividends are paid, stock prices adjust down to reflect the payment.
  • Orders on the specialist book that are placed at or below the market are adjusted automatically, unless a DNR (do not reduce instruction is given)
  • Buy limits, sell stops and sell stop limits are adjusted for dividends (except when the dividend is 25% or more)
  • Buy stops, buy stop limits and sell limits are not adjusted for dividends
51
Q

Fill or Kill

A

Quantity and Time are priorities. Must be executed in full at the time of order entry. Not placed in the Specialists Book

52
Q

Immediate or Cancel

A

Time is top priority. When order is placed, it must be filled with as many shares as are available. If the order is only partially filled, then the unfilled amount is canceled

53
Q

Market on Close (MOC)

A

Filled at the close of trading. NYSE MOC placed not later than 3:45ET, unless order imbalance, then placed no later than 3:50ET. NASDAQ MOD by 3:50ET

54
Q

Block order - Specialist Block

A

done off floor and off tape. an endeavor to maintain an orderly market. Involves taking a block trade on a low-priced, comparatively thinly traded stock into the Third Market, and dribbling the order in slowly throughout the day, to quietly preserve the price of the stock.

55
Q

Block Order - Exchange Distributions (or stock cross trade)

A

one or two specialists involved. large sell order is crossed with a large buy order, handled on the floor and recorded on the tape

56
Q

Block Trade - Special Offer

A

attempt to stabilize a falling stock price, with announcement made prior to execution. If effective, the whole block need not be filled as the word goes out that “the big boys are supporting the stock”. on the floor and on the tape

57
Q

OTC

A

there is no physical location. It is a decentralized, global, 24-hour market that takes place over telephone lines and the internet. The world’s largest market and the largest debt market.

58
Q

What trades on the OTC

A

corporate debt, all government, government agency, municipal debt trade here.

59
Q

How are trades handled on the OTC

A

it is a negotiated market between two parties, either online or on the telephone

60
Q

NASDAQ

A

where the largest corporations with stock trade. these are the biggest and most actively traded OTC securities

61
Q

Market Makers

A

All Market Makers are B/D, but not all B/D are market makers, they may not have the size nor risk tolerance.

62
Q

Riskless and Simultaneous

A

buying or selling by a b/d from its own account to fill an ordered previously received from a customer. Subject to the FINRA Five percent markup rule

63
Q

NASDAQ Level 1

A

shows the inside market. shows information needed by a registered representative to report the market to customers. At least two market makers must enter a quote in order for the system to show a quotation

64
Q

NASDAQ Level 2

A

shows all market makers for a given security. each market makes bid and ask is firm for 100 shares. level used by a trader.

65
Q

NASDAQ Level 3

A

same info as level 2, but gives market makers the ability to enter and change their quotes. may not withdraw a quote without being assessed a penalty. if quote is withdrawn w/o permission, they can’t reenter quote for 20 days.

66
Q

NON-NASDAQ

A

OTC stocks too small to meet the listing requirements of NASDAQ. these are pink sheets.

67
Q

OTCBB

A

OTC Bulletin board. to display, must be reporting companies and file reports with the SEC, such as 10ks.

68
Q

CQS Third Market

A

Consolidated Quote System. any listed stock, ADR, rights or warrants. Where trades that would create an order imbalance are done. can be done after hours.

69
Q

DRM

A

Designated Reporting members. third market makers.

70
Q

ECN Fourth Market

A 
Electronic Communication Network.  
institutional buyers
     - Mutual Funds
     - pension funds
     - big blocks
system provides agency cross trades, no human labor is involved
71
Q

Order Routing and Best Execution

A

SEC requires a national best bid and offer (NBBO) be published.
- Inter Positioning - SEC violation that puts another
firm before it’s customer

72
Q

ACES

A
  • Advanced Computerized Execution System

- routes orders for b/d

73
Q

Trade Reporting and Audit Systems

A
  • ECN’s use TRF’s (trade reporting facilities) to report their trades.
  • ADF (alternative display facility) uses TRACE(trade reporting and compliance engine) to report their trades
  • OATS(order audit tracking system) tracks orders placed by b/d
74
Q

RTRS

A
  • Real Time transaction reporting system

- the msrb (municipal securities rule making board) system that tracks municipal bonds

75
Q

Front Running

A

trader takes a position in an equity in advance of a trade they know about

77
Q

Last Sale

A

Real Time security transaction, only true for exchange listed stocks and NASDAQ national major market. Seller must report in 90 seconds

78
Q

A broker goes to a specialist to sell 100 XYZ. The specialist stops the broker at 31. Which of the following is true?

A

the specialist has guaranteed the broker a price of 31 or better

79
Q

Not Held

A

held by the floor broker until the floor broker judges the best time to submit the order to the specialist.

80
Q

Order Flow of stock in NYSE margin account

A
  1. Wire Room
  2. P&S
  3. Margin Department
  4. Cashiering
81
Q

Sell Stop

A

order placed at or below support level in order to catch a “falling star”

82
Q

NASDAQ NMS

A

National Market System

Series 7 (12 decks)

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