UNIT 8 CHECKPOINT EXAM Flashcards
A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a
A) transfer agent.
B) depository.
C) clearing agency.
D) broker-dealer.
C) clearing agency.
Explanation
This is the function of a clearing agency. Although there are some broker-dealers that do act as clearing agents, being a broker-dealer does not always include providing the services of a clearing agent. The broker-dealer would need to meet all of the requirements of being a clearing agent.
A central, physical, marketplace where securities are traded through a designated market maker is
A) the pit.
B) an exchange.
C) the third market.
D) the OTC.
B) an exchange.
Explanation
This description most aligns with the exchange model where securities are traded in a central location through a designated market maker.
Secondary markets exist to do all of these except
A) allow investors to easily liquidate securities.
B) decrease liquidity in the national markets.
C) allow individual investors easy access to investment vehicles.
D) support the existence of primary markets.
B) decrease liquidity in the national markets.
Explanation
Secondary markets are focused on providing, not decreasing liquidity. Ultimately, a fair and orderly secondary market makes securities more attractive, supporting the functioning of the primary markets.
Electronic market centers designed primarily for institutional investors describes
A) the fourth market.
B) the exchanges.
C) the third market.
D) the OTC market.
A) the fourth market.
Explanation
The market centers that operate through electronic communication networks are known as the fourth market. These centers were created to serve large institutional investors like mutual funds and pension plans. The fourth market reduces the transparency of trading activity by these organizations and allows them to trade more efficiently.
Great Plains Securities, an OTC market maker, holds inventory and provides liquidity for Modulux Homes, an NYSE listed company. This is an example of
A) the force market.
B) the fourth market.
C) the third market.
D) the primary market.
C) the third market.
Explanation
When an exchange-listed security trades in the OTC market, it is being traded in the third market. The fourth market is composed of electronic communication networks and is primarily used by institutional investors. Primary markets are for raising capital.
Both the individual and institutional investor are able to easily buy and sell securities to meet their objectives through
A) biennial markets.
B) secondary markets.
C) primary markets.
D) outdoor malls.
B) secondary markets.
Explanation
This is the primary purpose of the secondary markets.
Which of these broker-dealers would most likely have correspondent firms?
A) A market maker
B) An introducing broker-dealer
C) A fully disclosed broker-dealer
D) A self-clearing firm
D) A self-clearing firm
Explanation
A self-clearing (or carrying) firm holds funds and securities of the fully-disclosed or introducing firm’s customers and performs related functions, such as sending confirmations and statements for them. Those firms, for whom the carrying firm performs those services, are known as its correspondents.
An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities, as well as other back-office functions, while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders. This account would be known as a
A) fully-disclosed account.
B) clearing account.
C) prime account.
D) self-clearing account.
C) prime account.
Explanation
A broker-dealer that provides custody of securities and other back-office functions but allows the customer to maintain relationships with other broker-dealers who will provide execution services is known as a prime broker-dealer. The account, known as a prime account, is maintained with the prime broker rather than with any executing brokers.
A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as
A) an underwriter.
B) a market maker.
C) an investment banker.
D) an investment adviser.
B) a market maker.
Explanation
When a broker-dealer buys and sells securities for its own account as the major portion of its business model (e.g., proprietary trading), it is functioning primarily as a market maker (i.e., making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Investment advisers sell advice, they do not trade securities.
Which of the following is not part of the secondary markets?
A) Third market
B) The exchanges
C) Mutual fund market
D) Over-the-counter market
C) Mutual fund market
Explanation
Mutual funds, as open-end investment companies, do not trade in the secondary markets.
