Unit 8

Question 1

Types of Trading

Answer 1

A fill-or-kill (FOK) order designates that the customer wants the order to be filled in its entirety in one attempt or be canceled. With an all-or-none (AON) order, the broker/dealer can make numerous attempts to fill the order in its entirety. With an immediate-or-cancel (IOC) order, the broker/dealer can make only one attempt to fill the order, but a partial fill is acceptable.

Question 2

Found/not found on issued confirmation

Answer 2

Information that does not appear on a when-issued confirmation can easily be remembered as SAT (settlement date, accrued interest, and total amount due). The trade date and price per bond are included on the when-issued confirmation.

Question 3

Cash dividend impact on order book

Answer 3

Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.

Question 4

Nasdaq Level 3

Answer 4

Ability for registered MM to input and update their quote

Question 5

Nasdaq Level I

Answer 5

Displays the inside market only, highest Bid and lowest ask

Question 6

Nasdaq Level II

Answer 6

Inside quote plus quote from all MM. MM must guarantee 100 share s

Question 7

Disputes

Answer 7

Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory.

Question 8

Gov agency securities settlement

Answer 8

T+2

Question 9

Sell limit order

Answer 9

A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is rising. If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the limit price or higher.

Question 10

OTC Market

Answer 10

The OTC market is a negotiated market (not an auction market as is the case with an exchange) in which dealers negotiate stock trades with each other.
Dealer market

Question 11

Buy stop order

Answer 11

A buy stop order is placed above the prevailing market price and is elected (triggered), becoming a market order to buy when the stock trades at or through (above) the stop price.
Used to protect gains from short sale

Question 12

Listings for trading

Answer 12

NYSE-listed securities can be listed on and trade on other U.S. exchanges. Listed securities can also be traded in the OTC market and when they do, are known to be trading in the third market. Nasdaq is for unlisted securities, whereas the CBOE trades listed options, not stock.

Question 13

How diff securities settle (federal vs. non federal)

Answer 13

Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.

Question 14

How to change existing order

Answer 14

The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a GTC order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a GTC order the next morning.

Question 15

Securities that trade OTC

Answer 15

Municipal bonds, government and agency securities, and corporate securities (listed and unlisted) all trade in the OTC market

Question 16

Don’t Know (DK)

Answer 16

If # of shares or price wrong, will electronically DK the trade
used interdealer traders
Could be used by BD when doesn’t recognize account #

Question 17

Solving Stock dividend problems

Answer 17

For stock dividends, all buy limit orders on the book are adjusted and the order value must be the same before and after the adjustment. Before the adjustment, 400 ABC at 60 Stop = $24,000 total value. After the adjustment, total shares on the buy order will be 500 (400 × 25% = 100 new shares, 400 + 100 = 500). To arrive at the new price, divide the total order value by the new number of shares ($24,000 / 500 shares = 48). After the adjustment the new order will read; buy 500 shares at 48

Question 18

Price used for mark up problems

Answer 18

FINRA rules require that a dealer’s markup to a customer be based on the current market rather than the dealer’s cost in an active, competitive market. The dealer’s potential loss on inventory is considered to be a risk of making a market.

Question 19

Reducing order (ex dividend)- if stock dividend

Answer 19

Buy limits, sell stops, and sell stop limits
on ex div date- keep share count the same, reduce stock price by dividend
Stock Price/(1+ stock dividend)
BLISS- reduced cash dividend
Change shares if round lots

Question 20

Failure to deliver

Answer 20

The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form. The buyer or the selling BD can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver.

Question 21

Broker to broker confirmation time

Answer 21

Confirmations between brokers (broker to broker confirms) must be sent no later than the next business day following the transaction (T + 1).

Question 22

Nasdaq

Answer 22

Nasdaq is an equity market and includes common stock, preferred stock, ADRs, and convertible bonds. Publicly traded funds can be quoted over Nasdaq. U.S. government securities are not part of Nasdaq, although they do trade OTC.

Question 23

Buy stop order/ Sell Limit order

Answer 23

Both entered above the stock price. “Bliss”

Question 24

Reducing orders for cash dividend

Answer 24

Only those placed below the market price are automatically reduced (ie. BLISS, buy lims and sell stops)

Question 25

Reg SHO

Answer 25

Mandates locate requirement, before short sale of any equity, firm must locate securities for borrowing

Question 26

Securities not on Nasdaq

Answer 26

Gov securities not on Nasdaq

Question 27

OATS

Answer 27

automated computer system created to record info related to orders, quotes and other trade info from all equities trading on Nasdaq

Question 28

TRACE

Answer 28

FINRA approved trade reporting system for corporate and government agency bonds trading in the OTC
Trade reporting system only
Debt of foreign securities, MM insturments and debt not despoitory eligble excluded
Muni+ asset backed security excluded

Question 29

Nominal quote

Answer 29

assessment of where a stock may trade in an active market

Can be printed only if clearly labeled

Question 30

5% market up

Answer 30

Applies to mark ups,s markdowns and commissions
Does not apply to MF, variable annuity contracts or securities sold in public offerings
5% not the limit
The 5% policy is a guideline, not a rule. Over-the-counter (OTC) broker-dealers shouldn’t charge more than 5 percent on normal-size trades with customers. Statement I is false because the type of security is significant: This policy is for non-exempt OTC securities. Statement II is false because the policy does cover riskless transactions (purchases of securities for the broker-dealer’s inventory for immediate resale to a customer). Statement III is correct because securities sold through a prospectus (new securities) are exempt from the 5% policy. Statement IV is false because open-end investment companies (mutual funds) may charge up to 8½ percent of the amount invested.

Question 31

Regular Way T+2

Answer 31

equity, corporate and muni bonds, US government agencies

Question 32

Regular Way T+1

Answer 32

US Gov T bills, T Notes, T Bonds, equity and index options

Question 33

Reg T settlement date

Answer 33

2 days after regular way

Question 34

When issued securities transactions MUST INCLUDE

Answer 34

a description of the security with contract price and the trade date
SAT- NOT INCLUDED; Settlement date, accrued interest, and total dollar amount due at settlement

Question 35

Handling of complaints

Answer 35

Respondent has 25 days after receiving compliant to file an answer, admit/deny etc, record kept for four years,
Appeal may me made to the NAC, must be made with 25 days of decision

Question 36

Seller option trade

Answer 36

In a seller’s option trade, the seller may (at his option) give the buyer written notice 1 day before making delivery.
Used if seller cannot deliver physical certificate in time

Question 37

TRF

Answer 37

FINRA’s Trade Reporting Facility (TRF) is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

Question 38

Arbitration vs. mediation

Answer 38

Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.

Question 39

DMM

Answer 39

A. (Chapter 14) DMMs (Designated Market Makers) create a trading platform for particular securities on an exchange. DMMs not only trade out of their own inventory as dealers but also execute trades for others as a broker.

R

Question 40

Day Trading

Answer 40

A day-trading account requires an initial margin of $25,000, and the investor must keep $25,000 minimum equity in the account to keep trading. A portfolio margin account is relatively new and looks at the risk of the portfolio as a whole to determine the margin requirement. Only certain investors are able to take advantage of portfolio margin because it requires a certain degree of sophistication and a minimum equity of around $150,000.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 332). Wiley. Kindle Edition.

Question 41

NYSE

Answer 41

Priority, precedence, and parity rules of bids and offers dictate trading activity on the

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 314). Wiley. Kindle Edition.

Question 42

ACAT

Answer 42

To process an ACAT (Automated Customer Account Transfer), a brokerage firm must be a member of the NSCC (National Securities Clearing Corporation). When a brokerage firm is a clearing firm, the firm is assuming financial responsibility if a customer does not pay for a trade or does not deliver certificates that are sold.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 334). Wiley. Kindle Edition.

Question 43

Good delivery

Answer 43

Certificates must be in multiples of 100 and divsors of 100 shares
Odd lots excluded

Question 44

Mutilated certificate

Answer 44

Broker-dealers cannot validate mutilated certificates. Mutilated certificates must be validated by entities directly associated with the issuer. (Registar, paying agent)

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 365). Wiley. Kindle Edition.

Question 45

Closing accounts

Answer 45

Broker-dealers must keep records of customer accounts at least 6 years after the customer closes his account.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 366). Wiley. Kindle Edition.

Question 46

Three contact rule

Answer 46

Exclusion if at least 2 electronic orders

Must contact 3 dealers to determine prevailing price

Question 47

Ruley G-39 cold calling

Answer 47

Rule G-39 is a Municipal Securities Rulemaking Board (MSRB) rule. The rule has to do with cold-calling potential customers; it doesn’t cover existing customers or communications with other brokers or dealers. As a registered representative, you have to make all cold calls between 8:00 a.m. and 9:00 p.m. local time of the potential customer. The registered representative needs to reveal that the call is a sales call and disclose his or her name, the firm’s name, and the firm’s phone number and/or address.