Trading Securities

Question 1

GTC Order

Answer 1

“Good ‘Til Cancel” - specifying that the order remains active until canceled (beyond one day).

Question 2

Market Order

Answer 2

Will guarantee that the investor’s order is executed as soon as it is presented to the market. It guarantees the execution but not the price at which the order will be executed. As such, the investor does not know the exact price at which the order will be executed.

Question 3

Buy Limit Order

Answer 3

Sets the maximum price that the investor will pay for the security. The order may never be executed at a price higher than the investor’s limit price. Although this guarantees that the investor will not pay over a certain price, it does not guarantee them an execution. If the stock continues to trade higher away from the investor’s limit price, the investor will not purchase the stock and may miss a chance to realize a profit.

Question 4

Sell Limit Order

Answer 4

Sets the minimum price that the investor will accept for the security. The order may never be executed at a price lower than the investor’s limit price. Although a sell limit order guarantees that the investor will not receive less than a certain price, it does not guarantee them an execution. If the stock continues to trade lower away from the investor’s limit price, the investor will not sell the stock and may miss a chance to realize a profit or may realize a loss as a result.

Question 5

Stop Order / Stop Loss Order

Answer 5

Used by investors to limit or guard against a loss or to protect a profit. Will be placed away from the market in case the stock starts to move against the investor. It is not a live order, it has to be elected. Is elected and becomes a live order when the stock trades at or through the stop price. The stop price is known as the trigger price. The order then becomes a market order to either buy or sell the stock depending on the type of order that was placed.

Question 6

Buy Stop Order

Answer 6

Placed above the market and is used to protect against a loss or to protect a profit on a short sale of stock. Could also be used by a technical analyst to get long after the stock breaks through resistance.

Question 7

Sell Stop Order

Answer 7

Placed below the market and is used to protect against a loss or to protect a profit on the purchase of a stock. A sell stop order also could be used by a technical analyst to get short the stock after the stock breaks through support.

Question 8

Stop Limit Order

Answer 8

Used for the same purpose as a sell stop order. Only difference is that once the order has been elected, the order becomes a limit order instead of a market order. If the stock continues to trade away from the investor’s limit, they could give back all of their profits or suffer large losses.

Question 9

All or None Order (AON)

Answer 9

May be entered as day orders or GTC. Indicate that the investor wants to buy or sell all of the securities or none of them. AON orders are not displayed in the market because the required special handling and the investor will not accept a partial execution.

Question 10

Immediate or Cancel Order (IOC)

Answer 10

The investor wants to buy or sell whatever they can immediately and whatever is not filled is canceled.

Question 11

Not Held Order (NH)

Answer 11

The investor gives discretion to the floor broker as to the time and price of execution. All retail not held orders given to a representative are considered day orders unless the order is received in writing from the customer and entered GTC.

Question 12

Market Open / Market Close Order

Answer 12

The investor wants their order executed on the opening or closing of the market or as reasonably close to the opening or closing as practical. If the order is not executed, it is canceled.

Question 13

Fill or Kill Order

Answer 13

The investor wants the entire order executed immediately or the entire order is canceled.

Question 14

Priority of Exchange Orders

Answer 14

Orders that are routed to the trading post for execution are prioritized according to price and time. If the price of more than one order is the same, orders will be filled as follows. Priority: the order that was received first gets filled first. Precedence: if the time and price are the same, the larger order gets filled. Parity: If all conditions are the same, the orders are matched in the crowd and the shares are split among the orders.

Question 15

The Role of the Designated Market Maker (DMM)

Answer 15

The DMM is an independent exchange member who has been assigned a stock or group of stocks for which they are the designated market maker (DMM). They are responsible for maintaining a fair and orderly market for the securities, buying for their own account in the absence of public buy orders, selling from their own account in the absence of public sell orders, acting as an agent by executing public orders left with them. Most DMMs are employees of specialist firms. Every transaction for a security that is executed on an exchange must take place in front of the DMM.

Question 16

Crossing Stock

Answer 16

A floor broker from time to time may get an order from both a buyer and a seller in the same security. The floor broker may be allowed to pair off or cross the orders and execute both orders simultaneously. In order for the floor broker to cross the stock, the DMM must allow it and the floor broker must announce the orders in an effort to obtain price improvement for the orders. The floor broker must offer the stock for sale at a price above the current best bid and may purchase the stock using the buy order if no price improvement has been offered. This then will complete the cross and both orders will be filled.

Question 17

Stopping Stock

Answer 17

As a courtesy to a public customer, a DMM may guarantee an execution price while trying to fid an improved or better price for the public customer.

Question 18

Commission House Broker

Answer 18

A commission house broker is an employee of a member organization and will execute orders for the member’s customers and for the member’s own account.

Question 19

Two-Dollar Broker

Answer 19

A two-dollar broker is an independent member who will execute orders for commission house brokers when they are too busy managing other orders.

Question 20

Registered Traders

Answer 20

A registered trader is an exchange member who trades for their own account and for their own profit and loss. Order may not originate on the floor of the NYSE. A supplemental liquidity provider/SLP is an off-the-floor market maker that directs orders to the floor of the NYSE for its own account. The SLP may compete with the DMM for order execution and must display a bid or offer at least 5% of the time. The SLP will receive a rebate from the NYSE when an order is executed against the SLP’s quote that added liquidity to the market. Allied members of the NYSE are given direct phone and electronic access to the trading floor but may not trade on the floor itself.

Question 21

Regulation of Short Sales/Regulation SHO

Answer 21

The SEC continues to adopt new rules relating to the short sale of securities. Regulation SHO has been adopted to update prior short sale regulations and covers: definitions and order marking, suspension of uptick and plus bid requirements, borrowing and delivery requirements for securities.

Question 22

Over the Counter / Nasdaq

Answer 22

Securities that are not listed on any of the centralized exchanges trade over the counter or on the Nasdaq. Nasdaq stands for National Association of Securities Dealers Automated Quotation System. It is the interdealer network of computers and phone lines that allows securities to be traded between broker dealers. Nasdaq is not an auction market but has been granted exchange status by the SEC. It is a negotiated market. One broker dealer negotiates a price directly with another broker dealer. None of the other interested parties for that particular security have any idea what terms are being proposed. The broker dealers may communicate over their Nasdaq workstations or can speak directly to one another over the phone.

Question 23

Market Makers

Answer 23

Because there are no specialist for the over-the-counter markets, bids and offers are displayed by broker dealers known as market makers. A market maker is a firm that is required to display a two-sided market. A two-sided market consists of a simultaneous bid and offer for the security quoted through the Nasdaq workstation. The market maker must be willing to buy the security at the offering price, which they have displayed. These are known as firm quotes. Market makers purchase the security at the bid price and sell the security at the offering price.

Question 24

Nasdaq Quotes

Answer 24

Most actively traded Nasdaq stocks are quoted by a large number of market makers. As market makers enter their quotes, some will be above or below the inside market. A market maker whose quote is above or below the inside market is said to be away from the market. As the market makers adjust their quotes, the market maker who is publishing the highest bid for the security has their bid displayed at the top of the list and their bid is published as the best bid to anyone with a Nasdaq Level I subscription. The market maker publishing the lowest offer will have their offer listed at the top of the list and published as the lowest offer to anyone with a Nasdaq Level I subscription. As a result, the best bid and offer from any two market makers will make up the inside market.

Question 25

Nominal Nasdaq Quotes

Answer 25

All quotes published over the Nasdaq workstation are firm quotes. A dealer who fails to honor their quotes has committed a violation known as backing away. Dealers who provide quotes over the phone that are clearly indicated as being subject or nominal cannot be held to trade at those prices.

Question 26

Nasdaq Execution Systems

Answer 26

Most Nasdaq trades are executed over the Nasdaq workstation using one of its automated execution systems. These systems allow dealers to execute orders without having to speak with one another on the phone.

Question 27

Nasdaq Market Center Execution System (NMCES)

Answer 27

The NMCES accepts market orders and immediately executable limit orders for both customer and firm accounts. Orders may be entered for up to 999,999 shares per order. The orders will immediately be routed to dealers on the inside market for automatic execution. Larger orders may be split up to meet the maximum order volume. However, a broker dealer may not split orders that would otherwise be able to be entered into the Nasdaq system in an effort to increase fees or rebates. This would be considered order shredding and is a violation. Orders executed through the Nasdaq execution system are automatically reported to ACT.

Question 28

Nasdaq Opening Cross

Answer 28

The Nasdaq opening cross begins at 9:28 AM. At this time, the Nasdaq execution system automatically executes orders. Orders placed after 9:28 AM may not be canceled. Orders placed after 9:28 AM may be changed only if the change to the order makes the order more aggressive. A change that increases the size of the order or improves the price would make the order more aggressive. For a buy order, an improved price would be a higher limit price; for a sell order, an improved price would be a lower limit price. The opening cross creates the Nasdaq official opening price (NOOP). Like the opening cross, Nasdaq has developed the closing cross to determine the Nasdaq official closing price.

Question 29

Non-NASDAQ OTCBB

Answer 29

The OTC bulletin board provides two-sided electronic quotes for OTC securities that cannot meet the listing standard of an exchange or NASDAQ. DPPs and ADRs will often be quotes on the OTCBB.

Question 30

Pink OTC

Answer 30

Securities that do not qualify for listing on the Nasdaq, or that have been delisted from Nasdaq or one of the exchanges, may be quoted on the Pink OTC. The Pink OTC market is operated as an electronic marketplace. The Pink Sheets displayed in the Pink OTC Market are firm quotes. The Pink OTC Market also provides a list of phone numbers for market makers who display subject quotes. Stocks quotes on the Pink OTC Market trading at under $5 per share are known as penny stocks. A firm that executes a customer’s order for a Pink OTC security is required to make a reasonable effort to obtain the best price for the customer. The firm is required to obtain quotes from at least three market makers for the security prior to executing the customer’s order. If the security has less than three market makers, the firm is required to obtain a quote from all market makers.

Question 31

Third Market

Answer 31

The third market consists of transactions in exchange-listed securities executed over the counter through the NASDAQ workstation. A broker dealer may wish to simply purchase or sell an exchange-listed security directly with another brokerage firm instead of executing the order on the floor of the exchange. These transactions are known as third-market transactions. All third-market transactions are reported through TRF to the consolidated tape for display.

Question 32

Fourth Market

Answer 32

A fourth market transaction is a transaction between two large institutions without the use of a broker dealer. The computer network that facilitates these transactions is known as INSTINET. Large blocks of stock, both listed and unlisted trade between large institutional investors in the fourth market. While many trades in the fourth market are executed through the INSTINET system, many large portfolio managers execute internal crosses that go unreported. Proprietary trading systems are not considered part of the fourth market because these systems are either registered as broker dealers or are operated by broker dealers.