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Investments (securities) > Unit 8 > Flashcards

Unit 8 Flashcards

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SIE Exam flashcards
1
Q

When a broker-dealer MAINTAINS AN INVENTORY in a particular stock and trades that
stock in the OTC market, it is acting as

A. an agent.
B. a market maker.
C. a broker.
D. an underwriter.

A

B. a market maker.

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2
Q

To FILL a customer buy order OTC, your broker requests a QUOTE from a MARKET MAKER.

That dealer responds, ‘15 bid, ask 15W’.

If the trade order is entered, the market maker must

A. sell the shares for 515.
B. buy the shares for 515.
C. sell the shares for 515.25.
D. buy the shares for 515.25.

A

C. sell the shares for 515.25.

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3
Q

All of the following are true for a designated market maker EXCEPT

A. is a member of an exchange.
B. is charged with maintaining a fair and orderly market.
C. maintains an inventory of the assigned stock.
D. guarantees the customer will get a profitable trade.

A

Not true

D. guarantees the customer will get a profitable trade.

—-
True

A. is a member of an exchange.
B. is charged with maintaining a fair and orderly market.
C. maintains an inventory of the assigned stock.

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4
Q

Why are there secondary markets?

A

they provide a place for the buyers and the sellers of securities to connect and transact business

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5
Q

The secondary markets provide ________ to investors

A

liquidity

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6
Q

What is the meaning of “very liquid” and what are some examples of very liquid securities?

A

A security that is EASILY SOLD (liquidated) is said to be very liquid, or have LITTLE liquidity risk.

TREASURY BILLS and STOCKS listed on exchanges are examples of securities that are VERY liquid.

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7
Q

What is liquidity?

A

The ability to buy or sell a security easily is called liquidity

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8
Q

TRUE OR FALSE

Limited partnership units are extremely difficult to liquidate .

A

True

Limited partnership units are extremely difficult to liquidate and are called illiquid

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9
Q

What are MARKET CENTERS?

A

The LOCATIONS, both physical and electronic, where buyers and sellers may GATHER and PLACE TRADES

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10
Q

What are the 4 types MARKET CENTERS in America?

A

Exchanges
OTC market
Nasdaq market
ECN market

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11
Q

What is the EXCHANGE MARKET of the U.S COMPOSED of?

A

composed of the

New York Stock Exchange (NYSE) and

other exchanges on which listed securities are traded

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12
Q

What is ANOTHER NAME of EXCHANGE MARKET?

A

auction market

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13
Q

What is a LISTED SECURITY?

A

refers to any security LISTED FOR TRADING ON AN EXCHANGE

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14
Q

Describe exchange market requirement PHYSICAL location?

A

Listed markets, such as the NYSE and other exchanges, have CENTRAL MARKETPLACES and TRADING FLOOR FACILITIES.

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15
Q

What are Over-the-counter market?

A

also have criteria that a company must meet to be traded on a particular OTC venue, just as exchanges do.

While historically these criteria were not as stringent as those imposed by the exchanges, over time the quality of issues-traded OTC closed the gap and today equal exchange-traded issues.

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16
Q

Describe NASDAQ MARKET

A

is a TRADING MARKET in which EXCHANGE-LISTED securities are traded in the OTC market.

Broker-dealers registered as OTC market makers in listed securities can do transactions in the THIRD MARKET

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17
Q

Describe EXCHANGE MARKET REQUIREMENT PRICING SYSTEM

A

Listed markets operate as DOUBLE-AUCTION.

Floor participants COMPETE among themselves to execute trades at prices most FAVORABLE to the public.

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18
Q

What is the OTC MARKET REQUIREMENT PRICING SYSTEM?

A

The OTC market works through an INTERDEALER NETWORK.

Registered market makers COMPETE among themselves to post the BEST bid and ask prices.

The OTC market is a NEGOTIATED market.

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19
Q

What is the OTC market requirement LOCATION?

A

NO CENTRAL marketplace facilitates OTC trading.

Trading takes place over the phone, over computer networks, and in trading rooms across the country.

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20
Q

Describe ECN markets

A

is a market for INSTITUTIONAL investors in which LARGE BLOCKS of stock, both listed and unlisted, trade in transactions UNASSISTED by broker-dealers.

These transactions take place through electronic communications networks (ECNs).

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21
Q

What is DARK POOL?

A

is trading volume that occurs or liquidity that is NOT openly available to the public.

The bulk of this volume represents trades engaged in by institutional traders and trading desks AWAY from the exchange markets.

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22
Q

How are institutional trading desks that choose to use dark pools able to execute large block orders?

A

without impacting PUBLIC QUOTES or PRICE, or revealing their investment STRATEGY regarding any of their holding accumulations or divestitures.

Additionally, orders can be placed ANONYMOUSLY so that the identity of the entity placing the order is unknown to the general investing public, along with the volume and price for the transaction.

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23
Q

What is MAIN concern about DARK POOLS?

A

is that some market participants are left DISADVANTAGED because they cannot see the trades, volume, or prices agreed upon within the pools, and thus MARKET TRANSPARENCY is darkened.

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24
Q

What are the trading hours?

NYSE
OTC

A

The NYSE trades between 9:30 am and 4:00 pm ET each business day.

Normal hours for retail OTC trading are the same as those of the NYSE, although many market makers remain open until 6:30 pm in extended hours trading.

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25
Q

True or False

ECNs are open 24 hours a day and act solely as agents.

A

True

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26
Q

The_________ market is much less liquid because order flow is limited

A

after-hours

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27
Q

Which of the following statements regarding the THIRD market is TRUE?

A. It is composed of listed securities traded OTC.
B. It is composed only of unlisted securities.
C. The services of a brokerage firm are not used.
D. It refers to the block trading of unlisted securities.

A

A. It is composed of LISTED securities traded OTC.

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28
Q

A large-volume transaction for an institutional investor has occurred on an alternative trading system or network.

Entered anonymously, the general public will see no information regarding the volume, price, or who the institutional investor was. This transaction scenario is generally referred to as having occurred

A. on a U.S. exchange.
B. in a dark pool.
C. in the over-the-counter (OTC) market.
D. in the third market.

A

B. in a dark pool.

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29
Q

The SEC regulates the trading of all of the following except

A. the New York Stock Exchange.
B. the Chicago Board of Options Exchange.
C. the London Stock Exchange.
D. the U.S. over-the-counter market.

A

C. the London Stock Exchange.

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30
Q

What are the TWO BROAD CATEGORIES of those who engage in SECONDARY market?

A

investors and facilitators.

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31
Q

Who are investors?

A

are the persons who are buying and selling securities in the secondary markets

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32
Q

Describe RETAIL investors

A

are the NORMAL people who are investing THEIR OWN MONEY to accomplish their OWN OBJECTIVES

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33
Q

WHY do investors trade?

A

They are trading in order to accomplish their objectives, whatever they may be.

In the secondary markets, the seller of a security is NOT the issuer.

34
Q

What are DAY TRADERS?

A

is generally a type of RETAIL investor that trades RAPIDLY in and out of positions.

MOST day traders will have ALL positions closed and will close the day “flat” (no open positions).

35
Q

Who are Institutional investors?

A

is a LARGE investor such as a mutual fund, a pension fund, a bank, an insurance company, or some other financial service organization.

36
Q

WHO makes the investment decisions in Institutional investors?

A

often made by a PROFESSIONAL, such as an investment adviser, who is paid by the institution to manage the institution’s portfolio.

37
Q

Who is a CUSTODIAN?

A

refers to a custodian on a minor’s account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA).

Custodian may also refer to a FIRM that holds assets in a qualified retirement account such as an IRA.

38
Q

Describe an accredited investor

A

The classification of accredited is used in primary market transactions, particularly for Regulation A+ and Regulation D private placements.

The term has NO specific use in SECONDARY markets, but it is SOMETIMES used to identify a wealthier or more sophisticated retail investor.

39
Q

Who is a trustee?

A

is a fiduciary that oversees a trust.

This might be a living trust, a pension trust, or any other sort of trust.

If there is a trust, there will be a trustee.

A trustee is a trustee of a trust.

40
Q

Who are investment advisors?

A

Anyone who
■ gives investment advice
■ as a regular part of their business,
■ for compensation, must register as an investment adviser (IA) under the Investment Advisers Act of 1940

41
Q

Describe a guardian or executer

A

These persons are normally court-appointed custodians over a minor, an incapacitated adult, or an estate (executor in that case).

These roles might appear on the exam but are less common.

42
Q

True or False

A fiduciary must be a professional.

A

False

A fiduciary may or may not be a professional, depending on the role and the type of account he oversees.

Note that an investment adviser is ALWAYS a fiduciary.

43
Q

Who are facilitators?

A

help customers in performing transactions in the secondary markets.

There are a number of different types of companies involved in the process of buying and selling securities.

44
Q

Who are broker dealers?

A

perform securities transactions for their own accounts or for their customers

45
Q

Where does trading in the secondary markets take place?

A

Either an exchange (listed) or in the OTC market (nonlisted)

46
Q

What are the main sources of revenue for broker-dealers?

A

is from TRANSACTION FEES like commissions and loads.

47
Q

Who is a floor broker?

A

represent their firms and their firm’s clients on the floor.

If your customer places a trade that will execute on an exchange, a floor broker will handle it.

48
Q

Agents of investment advisers must register and pass the

A

Series 65 exam or Series 66 exam (for representatives with a Series 7)

49
Q

Describe exchanges

A

One of the defining characteristics of exchanges is that they have a PHYSICAL location, often called a FLOOR.

This is NOT as universally true as it was in the past, but it is still a point of difference from the OTC market.

Members (not employees) of the exchanges transact business (trades) on the floor of the exchange.

50
Q

What is a designated market maker?

A

The DMM (sometimes called a specialist) is the member that acts as the dealer on the floor for a specific security.

51
Q

What is the function of a DESIGNATED MARKET MAKER (DMM)?

A

The DMM maintains an INVENTORY of the security and guarantees LIQUIDITY.

The DMM is responsible for maintaining a “FAIR AND ORDERLY” market in the assigned security.

52
Q

What are DOUBLE AUCTION MARKETS?

A

Another name for EXCHANGE because both buyers and sellers call out their best bids and offers in an attempt to transact business at the best possible price.

53
Q

WHO are the members of the double auction market?

A

designated market maker

Floor broker

54
Q

Who is a TWO DOLLAR BROKER?

A

If the floor brokers become overwhelmed by trades, they enlist the services of the $2 brokers.

These members place trades for the floor brokers and receive a fee for performing the service.

55
Q

Describe FLOOR TRADERS

A

are members that buy and sell on the floor for their firm’s accounts (not outside customers).

They help MAINTAIN LIQUIDITY on the exchange.

56
Q

Trading on an exchange happens between

A

the members, not employees

57
Q

What are the 3 broker dealer firms?

A

carrying firms

fully disclosed firms

58
Q

What are CARRYING FIRMS?

A

carries CUSTOMER ACCOUNTS and ACCEPTS FUNDS and securities from customers

59
Q

What capabilities do carrying firms have ?

A

to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements.

60
Q

What is the role of clearing firms ?

A

holds funds and securities of the introducing firm’s customers and performs related functions, such as sending confirmations and statements for its correspondent firms. Essentially, the clearing firm acts as the introducing firm’s back office.

61
Q

True or False

Carrying firms must segregate customer funds and securities

A

True
Carrying firms must segregate (hold separately) customer funds and securities held in their custody from the firm’s capital and securities. They may not comingle the firm’s assets with client assets.

62
Q

What is a prime account?

A

This type of account allows a customer—generally, an institution—to select one member firm (the prime broker) to provide custody and other services, while other firms—called executing brokers—handle all trades placed by the customer

63
Q

Describe a Fully disclosed (introducing) firms

A

is one that introduces its customers to a clearing firm

64
Q

What is the advantage of a prime brokerage account?

A

is that it usually provides a client with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client’s cash and securities.

65
Q

the risk associated with holding customer funds and securities is not present, net capital requirements are lower for introducing BDs than they are for self-clearing or carrying BDs.
This describes which firm?

A

Fully disclosed (introducing) firms

66
Q

How can someone open a prime account?

A

To open a prime brokerage account for a customer, a member (the prime broker) must sign an agreement with the customer, spelling out the terms of the agreement, as well as names of all executing brokers the customer has contracted with. The prime broker will then enter into written agreements with each executing broker named by the customer. The customer receives trade confirmations and account statements from the prime broker, who facilitates the clearance and settlement of the securities transactions.

67
Q

Prime brokerage accounts are likely to be offered to a BD’s more active trading clients, such as

A

hedge funds, who may require a number of executing broker outlets to conduct their transactions and who can benefit by having margin requirements that are netted across all of the prime broker’s positions.

68
Q

What is the transfer agent for a corporation responsible for ?

A

■ ensuring that its securities are issued in the correct owner’s name;
■ canceling old and issuing new certificates;
■ maintaining records of ownership; and
■ handling problems relating to lost, stolen, or destroyed certificates.

69
Q

What is the role of the registrar?

A

are licensed by the states and provide audit and oversight services for the transfer agents

70
Q

A BD is both a

A

broker and a dealer, but may not act in both capacities on the same transactions.

71
Q

How do broker dealers make money?

A

Broker-dealers make money from processing transactions. A BD may act as a broker or as a dealer on a transaction, but may never be both on the same transaction.

72
Q

A prime brokerage account often includes

A

a list of specialized services, such as securities lending, margin financing, trade processing, cash management, and operational support

73
Q

What is a clearing agency ?

A

is an intermediary between the buy and the sell sides of a transaction

74
Q

Who is considered a clearing agency

A

receives and delivers payments and securities on behalf of both parties. If a business has this function business , it is considered a clearing agency

75
Q

What is the registrar?

A

The registrar is always a separate firm than the issuer or a transfer agent.

76
Q

What is the role of a clearing agency?

A

receives and delivers payments and securities on behalf of both parties.

77
Q

What is the role of Depository Trust & Clearing Corporation (DTCC)?

A

It provides custody services for virtually all securities except those subject to transfer or ownership restrictions (restricted securities).

78
Q

What is Options Clearing Corporation (OCC)?

A

The OCC is the clearing agent for listed options contracts—that is, those listed for trading on U.S. options exchanges.

79
Q

What is the function of Options Clearing Corporation (OCC)?

A

are to standardize, guarantee the performance of, and issue option contracts. The OCC determines when new option contracts should be offered to the market on an underlying security. The OCC also designates the contract specifications, such as strike prices and expiration months.

80
Q

What is over-the-counter market?

A

trades unlisted stocks, as well as most bonds, including municipals and treasury debt that trades in the secondary markets.

Investments (securities) (15 decks)

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