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SIE > Unit 8 - Securities Exchange Act of 1934 and the Secondary Market > Flashcards

Unit 8 - Securities Exchange Act of 1934 and the Secondary Market Flashcards

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1
Q

The trading of securities in the secondary market is regulated by the

A

Securities Exchange Act of 1934

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2
Q

This has the authority to regulate securities exchanges on the OTC market

A

Securities and Exchange Commission

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3
Q

This operates as auction markets where stocks listed on the exchange are traded.

A

NYSE

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4
Q

This is an interdealer computer and telephone network where market makers in stocks show the bid and ask price for stocks in which they make a market.

A

OTC market

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5
Q

Why are there secondary markets?

A

Provides a place for the buyers and sellers of securities to connect and transact business.

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6
Q

The secondary market supports the

A

Primary markets

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7
Q

Secondary markets provide ___ to investors.

A

Liquidity

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8
Q

In primary markets, the seller is always the

A

Issuer

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9
Q

In secondary markets, the seller is never the

A

Issuer

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10
Q

An investor ___ securities in the secondary market and ____ the money for its own use.

A
  1. Sells

2. Keeps

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11
Q

The locations, both physical and electronic, where buyers and sellers may gather and place trades are called

A

Market centers

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12
Q

This is composed of the NYSE and other exchanges on which listed securities are traded. It is also known as the auction market.

A

Exchange market

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13
Q

This term refers to any security listed for trading on the exchange.

A

Listed security

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14
Q

What are the requirements companies need to meet before their stock can be listed on the exchange?

A
  1. Physical location - Have central marketplace
  2. Pricing system - Floor participants complete amongst themselves to execute trades at prices most favorable to the public.
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15
Q

Listed markets operate as

A

Double-Auction markets

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16
Q

What are the requirements companies need to meet before their stock can be traded on an OTC venue?

A
  1. Location - No central location. Trading takes place over the phone or via internet
  2. Pricing system - negotiated market
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17
Q

Which market works through an interdealer network?

A

The OTC

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18
Q

This is a trading market in which exchange listed securities are traded in the OTC market.

A

Third market or Nasdaq Intermarket

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19
Q

Broker dealers registered as OTC ___ ____ in listed securities can do transactions in the third market.

A

Market makers

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20
Q

All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported on the ___ ___ within 10 seconds of execution

A

Consolidated Tape

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21
Q

This is a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by BDs.

A

Fourth market

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22
Q

___ are open 24 hours a day and act solely as agents

A

Electronic communications networks (ECN)

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23
Q

This 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. Large volume transactions.

A

Dark pools, dark pools of liquidity, dark liquidity

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24
Q

This is when institutional trading desks are able to execute large block orders without impacting public quotes or price, or revealing their investment strategy regarding any of their holding accumulations or divestitures. Orders can be placed anonymously so that the identity of the entity placed the order is unknown to the general investing public, along with the volume and price for the transaction.

A

Dark pools, dark pools of liquidity, dark liquidity

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25
Q

When does the NYSE trade?

A

Between 9:30am and 4:00pm ET each business day.

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26
Q

When does the OTC trade?

A

Between 9:30am and 4:00pm ET each business day but many remain open until 6:30pm in extended hours trading.

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27
Q

These are the persons who are buying and selling securities in the secondary markets. Are trading in order to accomplish their objective.

A

Investors

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28
Q

In the secondary market, the seller of a security is not the

A

Issuer

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29
Q

This is considered an exception of “no issuers in the secondary market”. Allows the issuer of a security to buy the security from investors through the secondary market.

A

Buyback

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30
Q

These are the normal people who are investing their own money to accomplish their own objectives. They are generally not professional investors.

A

Retail investors

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31
Q

This is a type of retail investor that trades rapidly in and out of positions. Most of them will have all positions closed and will close the day “flat” (no open positions).

A

Day trader

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32
Q

The term ____ ____ has no specific use in secondary markets, but is sometimes used to identify a wealthier or more sophisticated retail investor.

A

Accredited investor

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33
Q

This is a large investor such as a mutual fund, a pension fund, a bank, an insurance company, or some other financial service organization. The investment decisions for these institutions is often made by a professional, such as an investment advisor, who is paid by the institution to manage the institutions portfolio.

A

Institutional investor

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34
Q

These terms are used within the securities industry in difference ways. However, both of these roles are fiduciaries

A

Custodian or a trustee

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35
Q

This is a person that manages assets (usually financial) for another person, a beneficiary. It has a legal and moral obligation to perform her duties in the best interest of the beneficiary.

A

A fiduciary

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36
Q

This refers to a ___ on a minor’s account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minor Act (UGMA). It may also refer to a firm that holds assets in a qualified retirement account such as an IRA.

A

Custodian

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37
Q

This is a fiduciary that oversees a trust.

A

A Trustee

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38
Q

These persons are normally court appointed custodians over a minor, an incapacitated adult, or an estate

A

Guardians and executors

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39
Q

An investor advisor is always a

A

Fiduciary

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40
Q

Anyone who:

  1. Gives investment advice
  2. As a regular part of their business
  3. For compensation
A

Must register as an investment advisor (IA) under the Investment Advisers Act of 1940.

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41
Q

BDs who provide advice for a fee are subject to registration under

A

The Investment Advisers Act of 1940.

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42
Q

Agents of investment advisors must register and pass the _____ or ___ __ exam.

A

Series 65 or Series 66

43
Q

When acting as an IA, the IA represents the

A

Customer

44
Q

If a firm is also a BD, it can also place the trade but is acting in its BD capacity when executing a trade, not an IA. This is known as

A

Switching hats

45
Q

These help customers in performing transactions in the secondary market.

A

Facilitators

46
Q

These perform securities transactions for their own accounts or for their customers. Their primary source of revenue is from transaction fees.

A

Broker Dealers (FINRA member firms)

47
Q

Each member firm BD operates under an

A

Individualized membership agreement with FINRA and possibly SROs

48
Q

What does the membership agreement explain?

A

What lines of business the BD undertakes.

49
Q

Firms and their associated persons may never state that they

A

Endorsed, approved, or recommended by a regulator. This extends to both verbal and written communications.

50
Q

This means to trade the firms own capital

A

Proprietary trading

51
Q

Firms that publish quotes to buy and sell securities are known as

A

Market makers

52
Q

What are the two types of BD firms?

A

Carrying Firms (clearing firms), Fully disclosed (introducing firms) or Introducing BD firms

53
Q

This carries customer accounts and accepts funds and securities from customers. They rank among the larger BDs. They have the capability 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.

A

Carrying firms

54
Q

A firm carrying customer funds and securities clearly has a ___ of ____ that is inherently ____ and it is required to maintain levels of net capital higher than that of firms that do not accept custody of funds or securities

A
  1. Line of business

2. Risky

55
Q

Carrying firms must _____ customer funds and securities held in their custody from the firm’s capital and securities. They may not ____ the firms assets with client assets.

A
  1. Segregate

2. Comingle

56
Q

This is a firm that introduces its customers to a clearing firm. The clearing firm holds funds and securities from this firm and performs related functions, such as sending confirmations and statements for its correspondent firm. The clearing firms acts as this firms back office. Net capital requirements are lower for these firms than they are for self clearing or carrying BDs.

A

Fully disclosed firms or introducing BD

57
Q

These firms may take orders from customers and pass those orders to a clearing firm for execution. They do have the ability to execute trades for its customers, but the settlement of the trade falls to the carrying firm.

A

Fully disclosed firms or introducing BD

58
Q

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

A

Prime account

59
Q

To open a prime account, a member (a prime broker) must sign an agreement with the customer that includes

A
  1. Terms of the agreement

2. The names of all executing brokers the customer has contracted with

60
Q

The ____ ____ will enter into written agreements with each executing broker named by the customer.

A

Prime broker

61
Q

The customer receives ____ ____ and ___ ___ from the prime broker.

A

Trade confirmations and account statements

62
Q

The ___ ___ facilitates the clearance and settlement of the securities transactions.

A

Prime broker

63
Q

This is an advantage of a ___ ____ ___ that 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.

A

Prime brokerage account

64
Q

A prime brokerage account is likely to be offered to a BDs more ___ ____ ____, such as 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.

A

Active trading clients

65
Q

True of False: A BD may act as a broker or as a dealer on a transaction, but may never be both on the same transaction.

A

True

66
Q

The transfer and registration of stock certificates are two distinct functions that, by law, cannot be performed by

A

A single person or department operating within the same institution.

67
Q

What is a transfer agent responsible for?

A
  1. Ensuring that its securities are issued in the correct owner’s name
  2. Canceling old and issuing new certificates
  3. Maintaining records of ownership
  4. Handling problems relating to lost, stolen or destroyed certificates
68
Q

This is always a separate firm than the issuer or a transfer agent. They are licensed by the states and provide audit and oversight services for the transfer agents.

A

Registrars

69
Q

The ____ ____ maintains a count of the total number of shares of a company that are authorized and outstanding.

A

Transfer agent

70
Q

This is an intermediary between the buy and the sell sides of a transaction. It receives and delivers payments and securities on behalf of both parties.

A

Clearing agency

71
Q

This is the world’s largest securities depository. It provides custody services for virtually all securities except those subject to transfer or ownership restrictions (restricted securities)

A

The Depository Trust & Clearing Corporation (DTCC)

72
Q

The DTCC is a member of the ___ ___ ___ and is not in the retail banking business. It provides automated clearing and settlement services in ___ ___ format to banks and BDs for stock and bond trades and employs a continuous net settlement (CNS) system

A
  1. Federal Reserve System

2. Book entry

73
Q

This is the clearing agent for listed options contracts - that is, those listed for trading on US options exchanges.

A

Options Clearing Corporation (OCC)

74
Q

Securities that trade on Nasdaq are considered

A

Listed

75
Q

What is the defining characteristic of exchanges?

A

Have a physical location often called a floor

76
Q

The exchanges are sometimes called double auction markets because

A

Both buyers and sellers call out their best bids and offers in an attempt to transact business at the best possible price.

77
Q

This is the member that acts as the dealer on the floor for a specific security. It maintains an inventory of the security and guarantees liquidity. It is responsible for maintaining a “fair and orderly” market in the assigned security.

A

The DMM (sometimes called a specialist)

78
Q

This represents their firms and their firm’s clients on the floor.

A

Floor brokers

79
Q

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

A

$2 brokers

80
Q

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

A

$2 brokers

81
Q

These are members that buy and sell on the floor for their firm’s accounts (not outside customers). They help maintain liquidity on the exchange.

A

Floor traders (registered floor traders, FT or RFTs)

82
Q

Trading on an exchange happens between members not

A

Employees

83
Q

To establish the best bid, a buying broker-dealer must initiate a bid at least

A

$0.01 higher than the current best bid.

84
Q

The best offer by a selling broker dealer must be at least

A

$0.01 lower than the current best offer

85
Q

____ are a bid and an ask (sometimes called an offer)

A

Quotes

86
Q

This is the price that a seller would receive for his security

A

The bid

87
Q

This is the price a buyer would have to pay to buy that security.

A

The ask

88
Q

The ___ is always lower than the ____.

A
  1. Bid

2. Ask

89
Q

This is the last price a trade took place.

A

The last

90
Q

This represents the number of shares available on a given side of the market.

A

The size

91
Q

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

A

The OTC

92
Q

Most corporate debt issues trade

A

OTC

93
Q

OTC trading occurs between

A

Market makers in a decentralized electronic market

94
Q

There is no ____ in the OTC market

A

Floor

95
Q

A ____ ____ is a broker-dealer that maintains an inventory in a given security and buys and sells the security throughout the day.

A

Market maker

96
Q

In the OTC market, there are ___ ____ ____ dealing in the same security and completing to attract orders from BDs.

A
  1. Multiple market makers
97
Q

When a customer places an order with a broker to purchase an OTC security, the broker

A

Chooses a market maker (called a dealer if a debt security) to complete the trade.

98
Q

The ____ who represents the client, chooses a market maker to get the customer a fair price

A

Broker

99
Q

When a customer sells a security in the OTC market, the customer is

A

Selling to a dealer (with the assistance of the broker) at the bid price. Dealer is purchasing a bid from the customer

100
Q

A customer that buys a security in the OTC market is

A

Buying from a dealer (With the assistance of a broker) at the ask price. The dealer is selling at the ask to the customer

101
Q

What is the difference between the bid and the ask?

A

The spread

102
Q

What represents the market makers income?

A

The spread

103
Q

Quotes in the OTC market represent the

A

Highest bid and the lowest ask posted in the system

SIE (31 decks)

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