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Quick linksAMEX or NYSE listed securities are found on the: CQS (Consolidated Quotation Services) The NASDAQ issues are found on the: UQDF (UTP Quote Data Feed) When does trading stop on NYSE? Money market instruments mature in: Examples of Money Market instruments: CDs, Commercial paper, Bankers Acceptance, REPOs. a commission and mark up ILLEGAL A person that makes a secondary market in securities is call a: The market makers in a primary market for new issues are: Underwriters. They are NOT in the secondary market. a market in which new issues of securities are offered to the public What are 50 basis points equivalent to? Quotes:Sell at the ___. Buy at the ___. Specialist (DMM) are not permitted to accept what type of orders? Regional exchanges such as PHLX and AMEX are modeled after: NYSE specialist and floor trader system reports trades of NASDAQ listed issues regardless of market center reports trades of AMEX listed issues regardless of market center What is a Network A Tape? A network A tape is a tape that reports all NYSE listed trades . ETN do not have ______ risk. Why? Reinvestment. Interest and dividend payments are not made to them. Floor brokers on the CBOE can not: Maintain bid and ask quotes. the highest bid quotes and the lowest ask quotes for a security Who maintains bid and ask quotes? A riskless principal transaction is? occurs when a dealer
receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer. When a specialist "stops stock" for a floor broker what happens? The specialist is guaranteeing the price of the stock for a short amount of time. This does NOT stop stock trades. What are "odd lots" and who are they handled by? Orders for less than 100 shares (small investors do this as they sometimes do not have the funds to buy round lots). Handled by Specialists or DMM's. What is a proceeds transation? Transation in which a customer sells a security and uses the proceeds to buy another security. An arbitrage transaction is: buying and selling short in the same security in different markets to lock in the price differential. A brokerage firm can not ______ a customers securities with its own stock position. Examples of who trades in the secondary market: Bank dealers, general securities dealers, and municipal brokers-brokers Who does NOT trade in the secondary markets? The standard & poor's 100 index option contract is traded on ____ and is ____ based. traded on the CBOE and it is broad based.
Which of the following is NOT part of the secondary market? A. First Market B. Third Market C. Fourth Market D. Fifth Market The best answer is D. The Secondary Market is categorized into 4 sub-markets: the First; Second; Third; and Fourth Markets. The First Market is trading of exchange listed securities on that exchange floor. The Second Market is trading of securities that are not exchange listed in the over the counter market. The Third Market is trading of exchange listed securities in the over the counter market. The Fourth Market is trading of securities directly between institutions in the over the counter market via ECNs (Electronic Communications networks) such as Instinet. The Third Market trades: The best answer is C. The Third Market is OTC trading of exchange listed securities. Trading of listed securities on an exchange is the First Market. There is no formal name for trading of unlisted securities on an exchange floor, such as trading of OTCBB issues by exchange Specialists (DMMs) under a UTP (Unlisted Trading Privilege)
plan - mainly because the exchanges don't bother to trade these issues (yet). The "after hours" market is characterized by: I Narrow Spreads II Wide Spreads III Low Trading Volume IV High Trading Volume The best answer is C. After hours trading is characterized by much lower trading volumes than during the regular trading day and, correspondingly, dealer bid-ask spreads are much wider. An order to sell 100 shares of ABC at 50 GTC on the Specialist's book (DMM) is a: The best answer is B. A limit order specifies an execution price ("the limit"). An order to sell at 50 is a limit order. Market orders do not specify a price. Stop orders must state "Stop" with a price. Buy limit orders: I used to buy securities at prices that are lower than the current market price II used to buy securities at prices that are higher than the current market III guarantee a specific execution price or better IV do not guarantee a specific execution price or
better The best answer is A. Buy limit orders are used to buy securities at prices that are lower than the current market. They may only be filled at the limit price or lower - so they do guarantee a specific execution price or better. A market or limited price order which is to be
executed in its entirety as soon as it is represented in the Trading Crowd, and, if not executed, is canceled, is a(n): The best answer is B. An "all or none" order requires the trader to execute the order in full on the floor of the exchange, however, if execution cannot be performed, the trader may attempt to fill the order at a later time. This contrasts to a "fill or kill" order, which also requires that the order be executed in full on the exchange floor, but if execution cannot be performed, the order is canceled. Additional execution attempts cannot be made. Finally, an "immediate or cancel" order requires the trader to execute the order in part or in full in one attempt, with the unexecuted portion of the order (if any) canceled. No additional execution attempts are allowed. A sell limit order is executed when the market is: I falling II rising III at or below the limit price IV at or above the limit price The best answer is D. A sell limit order is an order to sell at a price that is higher than the current market. The limit is the minimum price needed to sell (Remember the old adage: Buy Low; Sell High - that's how limit orders are placed in the market) Which orders are lower in price than the current market? I Open Buy Limits II Open Buy Stops III Open Sell Limits IV Open Sell Stops The best answer is B. Buy limits and sell stops are orders that are placed below the current market and are filled as the market drops (remember OBLOSS - Open Buy Limits and Open Sell Stops - as the orders placed below the current market). An institutional customer places a marketable order to buy 10,000 shares of ABCD stock, a NASDAQ listed company. The customer directs that the trade be routed to an ECN for execution and not be sent to the NASDAQ. Which statement is TRUE about this? The best answer is A. If the customer directs that the trade be sent to a different trading venue, follow the customer's instructions. When the ECN gets the order, it must either fill the order at the best price available in all markets; or it must re-route the order to the better-priced market (the "trade-through" rule); so the customer will get the best price, no matter where the order is actually sent! A transaction is mistakenly placed in John Jones' cash account when it should have been recorded in John Jones' margin account. To correct this: The best answer is A. FINRA requires that anytime there is a change of account name or designation relating to an executed order, a written record must be made of the change. This is called a "Cancel-Rebill" record. A branch manager or compliance officer must know the reasons for the change and must approve the change in writing. A floor broker goes to the trading post to buy 10,000 shares of ABC at the market-not held. The Specialist (DMM) says to the trader "One hundred shares are stopped at 19." This means that: A. the trader is stopped from trading with anyone else B. trading has been stopped in the issue C. the Specialist/DMM has guaranteed that the price will not change for a short period D. the Specialist/DMM will not trade with anyone else at the $19 price The best answer is C. When a Specialist (now renamed the DMM - Designated Market Maker) "stops stock," he gives a guaranteed price for a short time period to a floor broker. The floor broker is free to try and get a better price, but if he fails, he can return to the Specialist/DMM for the stock at that price. This can only be done for public orders. A non-regulatory trading halt has been initiated on the NYSE
due to an order imbalance. Which statement is TRUE? The best answer is B. A "regulatory halt" is one imposed by either a regulator (the SEC stops trading in a stock) or one
that occurs because the "circuit breaker" (7% drop in the S&P 500 Index) was tripped. If there is a regulatory halt, all trading in that stock must stop in the U.S. in all markets; and if the circuit breaker is tripped, all stock markets in the U.S. must stop all trading. This is a non-regulatory halt, which is different. Which of the following statements are TRUE about computerized trading of securities on exchanges as compared to manual trading? The best answer is A. Electronic trading systems, such as the NYSE Super Display Book system, are faster, cheaper, and more efficient than manual trading by floor brokers. These systems have size limitations, and cannot handle orders that require human judgment such as a "Not Held" order. It is these systems that allow the NYSE to trade, on average, 1 billion shares a day. Which statements are TRUE about the
Specialist (DMM) on the NYSE? I The Specialist (DMM) has a negative obligation to stand aside from trading for his own account if retail customers are present to trade with each other II The Specialist (DMM) has a positive obligation to interposition itself between retail customers that are present to trade with each other III The Specialist (DMM) has a negative obligation to stand aside from trading with a customer if there are no other retail customers present to trade IV The Specialist (DMM)
has a positive obligation to trade with a customer if there are no other retail customers present to trade The best answer is B. The Specialist (now renamed the Designated Market Maker or DMM), as the assigned market maker in the stock, is obligated to make a continuous market in the stock. If there are customers that wish to sell and there are no other buyers for that stock,
then the Specialist/DMM must "step-in" and buy that stock into its inventory account. If there are customers that wish to buy and there are no other sellers for a stock, then the specialist must "step-in" and sell that stock out of its inventory account. This is called the Specialist's "positive obligation" - that is, the obligation to be the buyer or seller of last resort. The Master Manufacturing Company has just announced a tender
offer for its own common stock. Master is offering to buy up to 100% of the company's stock at $20 per share contingent on at least 64% of the outstanding shares being tendered. After the announcement of the offer, the stock closed on the NYSE up 2.50 at $18.75. If a customer had 100 shares and sold at tomorrow's opening price, what is the price that he would receive per share? A. $18.75 B. $20.00 C. $20.50 D. $21.25 The best answer
is A. If the customer sold at the opening, he would receive $18.75 per share. This deal of $20/share is contingent upon 64% of the shares tendered. Super Display Book is the automated trading system for the: The best answer is C. The NYSE automated trading system is called the Super Display Book. This replaced the previous DOT (Designated Order Turnaround) system in late 2009. All of the following trade securities on the New York Stock Exchange EXCEPT: The best answer is D. Two dollar brokers, Specialists, and Floor brokers execute transactions on the NYSE. The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. The name comes from the fact that they used to charge $2 per trade. Order Book Officials, who solely handle the book of public orders, are only used on the Chicago Board Options Exchange. A member firm may use a third party to execute over-the-counter agency transactions for customer orders: The best answer is D. As a general rule, interpositioning a third firm between the customer and the market maker is prohibited unless it can be demonstrated that the use of the "middleman" firm will result in a better execution for the customer. Which statements are TRUE about trading of stocks
in the Second market? I The OTC market is a negotiated market II A greater number of companies trade OTC than are listed on a single exchange III The OTC market does not have listing standards IV FINRA regulates the OTC market The best answer is D. The over-the-counter market is a negotiated market. A greater number of companies trade OTC (about 6,000 smaller companies) than on any single exchange. For example, the NASDAQ Stock Market has about 3,000 issues; while the NYSE lists about 2,800 issues. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards. FINRA regulates the OTC market. Broker-dealers are permitted to execute all of the following
over-the-counter transactions EXCEPT: The best answer is B. In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction. Which of the following can result in the establishment of a short position? I Arbitrage
transaction II Sale of a security "against the box" III Position trades of borrowed shares The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades (position trading is trading for the firm account, using the firm's "positions") of borrowed shares are short sales. When performing over-the-counter transactions, which of the following statements are TRUE? The best answer is D. It is true that all customer orders have priority over equivalent orders for firm's own account; and that the firm cannot act as both broker and dealer in same trade - it can only act as either a broker, earning a commission or as a dealer, earning a mark-up. On the Chicago Board Options Exchange, the person responsible for holding and executing public orders that are "away from the market"
is the: The best answer is A. The Order Book Official (OBO) is an exchange employee who manages the book of public limit orders for options contracts. OBOs cannot act as market makers. Market makers are separate individuals under the CBOE system. Cabinet trades
effected on the CBOE: The best answer is C. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1! Riskless or simultaneous transactions performed in the over-the-counter market are:
The best answer is B. A riskless or simultaneous transaction, as performed in the "over-the-counter" market occurs when a broker-dealer receives an order to buy a stock from one customer; and then the firm buys the security into its inventory account to sell to that customer. Because the firm did not hold the position in advance, it has no "inventory risk" of falling prices - hence the term "riskless transaction." Under FINRA rules, such transactions must comply with the 5% Policy. Any mark-up must be "fair and reasonable" under the 5% Policy. Which is NOT a good delivery for a 300 share trade of stock? A. One 300 share certificate B. Three 100 share certificates C. Ten 30 share certificates D. Thirty 10 share certificates The best answer is C. To be a good delivery, certificates must be in round multiples of 100 shares on one certificate or must be delivered in certificates that add up to 100 share units. Certificates of 30 shares each are not good because 30 + 30 = 60; 60 + 30 = 90; and 90 + 30 = 120. A round lot of 100 shares cannot be created from these units. A due bill is required when stock is purchased in a regular way trade: The best answer is B. A due bill is required when a stock is purchased in time to receive the dividend (that is, purchased prior to the ex date in a regular way trade); and for some reason, settlement is delayed beyond the normal regular way time frame of 2 business days (so that the trade settles after the record date). When this occurs, the buyer pays for the dividend in the price of the stock; but does not show on the record books to receive the dividend. Instead, the issuer sends the check to the seller - and the seller does not deserve the dividend! When the stock is delivered, a due bill check, payable from seller to buyer, is attached. This gives the dividend to the rightful owner. ABC stock has just closed at $70.50. A customer has an open order on the firm's internal order entry system to sell short 100 shares of ABC at 70 Stop. ABC stock goes ex dividend $.55. The order on the firm's order book the next morning will be: A. Sell short 100 ABC at 69.45 Stop B. Sell short 100 ABC at 69.50 Stop C. Sell short 100 ABC at 69.55 Stop D. Sell short 100 ABC at 70.00 Stop The best answer is A. Orders placed below the market are reduced for cash distributions on ex date. The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The orders below the market are OBLOSS - Open Buy Limits and Open Sell Stops. This is an open sell stop order. $70 - $.55 = $69.45. The adjusted order is: Sell Short 100 ABC at 69.45 Stop.
A municipal dealer purchases securities. The securities are delivered on settlement date and the dealer finds that the wrong securities were delivered. The municipal dealer refuses the delivery of the securities by what action? A. Right of rejection B. Right of reclamation C. Right of arbitration D. Right of reparation The best answer is A. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities not having a proper assignment, or a coupon bond missing coupons, then the buyer may reject the delivery. This is the right of rejection. Which of the following
statements are TRUE about an order to: Buy 100 ABC @ 50 Stop 53 Limit? The best answer is C. This is a Buy Stop Limit order. Buy Stop orders are placed higher than the current market, and are filled as the market rises. The guidelines of the stop price must be adhered to first. A buy stop is elected as the market rises to the stop price ($50) or higher. As soon as the market hits $50 or higher, the order is elected, and turns into a limit order to buy at the limit price of $53. An order to buy at $53 means to buy at $53 or lower. Thus, the order is elected at $50 or higher; and executed at $53 or lower. ECNs
trade securities: I during regular NYSE market hours II 24 hours a day III on an agency basis IV on a principal basis The best answer is C. ECNs - Electronic Communications Networks - only accept orders for actively traded securities - that is, NYSE listed and NASDAQ stocks. Essentially they are electronic matching services, matching customer buy and sell orders for a very low fee (often as low as $1 per trade). ECNs do a lot of their volume when the major exchanges are closed - since they stay open 24 hours a day. ECNs do not act as dealers - only as agents, earning a fee on each successful transaction. ECN volumes have been growing, as institutions use them to reduce trading costs. The major ECNs are Island, Instinet and Archipelago. (Also note that in 2006, the NYSE purchased Archipelago, and NASDAQ purchased Instinet and Island (which had merged into INET), and are running them as separate trading systems). Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose which of the following information? I Fill rates II Speed of executions III Rates of price improvement IV Trading Volumes The best answer is C. SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on: Effective spreads (narrow spreads are better!); How market orders of various sizes were executed relative to the public quote (executions at, or very close to the public quote are better!); Speed of execution (fast execution is better!); Fill rates (a larger percentage of orders being filled is better!); and Price improvement or disimprovement (getting a better price than expected is better!). Trading volumes are not included in the monthly report on execution quality required under Rule 605 because trading volumes are reported every day by the exchanges. All of the following statements are true if a customer places an order for an NYSE listed issue EXCEPT the order: A. must be directed by the member firm to the NYSE trading floor for execution if the customer so requests B. can be directed by the member firm to any trading venue if the customer does not direct the order to a specific market C. can be matched internally by the member firm and is not required to be sent to a public trading venue D. can be directed by the member firm to a trading venue that "pays for order flow" as long as this is disclosed to the customer The best answer is C. FINRA member firms cannot match orders internally and cannot "privatize" their trades. All trades must be effected in a public venue - whether it be on the NYSE floor; in the Third Market; or through an ECN. Member firms are permitted to accept payment for order flow, but this must be disclosed to customers. Also remember that any trade price must be the "best" one available at that moment in the public markets. If an order is placed "immediate or cancel": The best answer is D. If an order is placed "Immediate or Cancel," it can be filled in its entirety or in part at that time, with any unfilled portion being canceled. There can be no attempt at re-execution if the order is not filled immediately. A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $49 and $54 per share for the past 3 months. If the
analyst expects a breakout through the resistance level, which order should be placed? A. Buy ABC @ $48 GTC B. Buy ABC @ $48 Stop GTC C. Buy ABC @ $55 GTC D. Buy ABC @ $55 Stop GTC The best answer is D. If a stock moves through a resistance level, it is breaking out to the upside. In this example, the resistance level is at $54. If the stock moves through this price, it is expected that it will move sharply upward. To buy above the current market, a buy stop order must be used. Therefore, the order to buy ABC @ $55 Stop GTC is appropriate. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit. A buy limit order cannot be used, since these are orders to buy lower than the current market. In an inefficient market: The best answer is B. An inefficient market is the opposite of an efficient one. An "inefficient" market is where there is a low trading volume - meaning there is high liquidity risk. With such light trading volume, dealer spreads will widen. Which of the following individuals trades on the New York Stock Exchange Floor? The best answer is C. The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. Registered representatives cannot trade on the NYSE floor. Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on the exchange floor (also known as "addressing the crowd") must comply with all of the following rules EXCEPT: A. any bid or offer for less than the normal trading unit has no standing in the trading crowd B. the highest bid and the lowest offer have precedence in all cases C. bids and offers must be publicly announced D. bids and offers are set by floor officials during unusual situations The best answer is D. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances. Regulation
SHO requires that if a stock falls by 10% or more: The best answer is B. If an NMS (National Market System stock - NYSE, NYSE American (AMEX), or NASDAQ listed) falls by 10% or more, it can only be sold short on an "up bid" for the remainder of that trading day and the entire next trading day. Thus, it can only be sold short into a rising market. This stops the relentless short selling of stocks with the intent of driving market prices down - a market manipulation. All of the following statements are true about "odd lot" transactions EXCEPT: A. orders for odd lot amounts have no standing on the NYSE trading floor B. an odd lot is an order for less than the normal trading unit of 100 shares C. odd lot transactions are handled by the Specialist (DMM) D. odd lot commissions are set by the NYSE The best answer is D. The NYSE does not set commission rates - these are set by brokers and dealers themselves. Odd lots are transactions for less than the normal trading unit of 100 shares. Odd lot orders are handled by the Specialist (now renamed the DMM - Designated Market Maker), by buying the odd lot into the Specialist's (DMM's) inventory account; or selling the odd lot out of the Specialist's (DMM's) inventory account. Orders for odd lots have no priority on the NYSE trading floor - trading is in round lot units only. Under the provisions of Regulation SHO, before a security can be "sold short," it must be determined that the security: A. can be borrowed and delivered by settlement B. has been traded on an + tick or a 0+ tick C. is not on the threshold list D. is subject to the short interest reporting rule The best answer is A. Regulation SHO (as in SHOrt sale rule) requires that, prior to effecting
a short sale for a customer, it must be affirmatively determined that the security can be borrowed and delivered on settlement. This "locate" requirement must be documented. Which of the following describes a position trade? A. Buying a security into inventory directly from a customer with a mark-down B. After receiving a buy order from a customer, the dealer then purchases the stock into inventory and resells it to the customer C. Simultaneously buying and selling short the same or equivalent security D. Selling stock at the direction of a customer and using the proceeds to buy another stock for that customer The best answer is A. Position trading is trading for a firm's own account. This is either selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down. When the firm "position trades," the firm can take both long and short positions as it speculates in the market. Choice B describes a "riskless principal" transaction; Choice C describes an "arbitrage transaction;" and Choice D describes a "proceeds transaction." Which of the following securities trade on NASDAQ? I Global Market issues II NYSE listed issues III Capital Market
issues IV OTCBB listed issues The best answer is A. NASDAQ is divided into 2 tiers of stock listings. The larger NASDAQ listings such as Microsoft or Intel are included in the "Global Market." The lower tier of smaller stocks is called the NASDAQ Capital Market. NYSE listed issues generally do not trade on NASDAQ; and companies that do not meet NASDAQ listing standards, but which are current in their SEC reports, are quoted in the OTCBB (Over-The-Counter Bulletin Board) or Pink OTC Markets. The ACT system: A. is used to report backing away violations to FINRA for real-time resolution B. permits NASDAQ Order Entry firms to contract with a market maker to enter and maintain its limit orders C. routes market and limit orders electronically to market makers for locked-in
execution and settlement D. intakes entries of completed trades for reporting, matching and clearance The best answer is D. The ACT system is where the details of completed trades are entered by market participants (The NASDAQ System does ACT reporting automatically; the information must be entered manually for OTCBB and Pink Sheet trades). The ACT system then reports the trade to the tape; to the contra-party to the trade for matching; and to the clearing corporation. FQCS - the Firm Quote Compliance System - is used to file reports of backing away violations (this is not tested on Series 7). ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance. The NASDAQ Market Center Execution System is the automated quotations and execution system for trades of NASDAQ issues. Which of the following describes a riskless principal or simultaneous transaction? A. Selling a security and using the proceeds to purchase a different security B. Buying a security into inventory direct from a customer with a mark-down C. Buying and simultaneously selling short the same security in different markets to lock in a price differential D. After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer The best answer is D. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. Choice A describes a "proceeds" transaction; Choice B describes a "principal" transaction; and Choice C describes an "arbitrage" transaction. All of the following are arbitrage transactions EXCEPT: A. Buy a security on the NYSE / Sell that security on the PHLX B. Buy a convertible bond on the NYSE / Sell the common stock of the same issuer on the NYSE C. Buy the stock of one company that is the target of a tender offer / Sell the stock of the company that is
making the offer D. Buy a security on the NYSE / Sell that security on the NYSE The best answer is D. Arbitrage transactions profit from price differences and include; buying and selling the same security simultaneously on two different markets; buying a convertible security and selling the equivalent number of shares of stock that it is convertible into; and buying the stock of a company that is the target of a tender offer while
selling the stock of the acquiring company. The last type of arbitrage is called "risk arbitrage." In a tender offer, often, the acquiring company will pay for the acquired shares with its own stock. An OTC equity trader has received a large influx of sell orders for ABC stock and, to fill them, has taken an extremely large long position in the firm's inventory account. The dealer would most likely: A. decrease the ask price in the OTCBB B. decrease the bid price in the OTCBB C. decrease the mark-down to customers that sell D. place an "OW" in the OTCBB The best answer is B. The dealer's Bid price is too high - that is why the sellers are pouring in! The dealer will
lower the Bid price - this will discourage sellers. On the Chicago Board Options Exchange, bid and ask quotes for options contracts are maintained by the: A. Specialist (DMM) B. Floor Broker C. Market Maker D. Order Book Official (OBO) The best answer is C. The Specialist (now renamed the DMM - Designated Market Maker) function on the NYSE floor is handled by 2 separate individuals on the CBOE. On the NYSE floor, the Specialist/DMM performs 2 functions. The DMM acts as market maker in a specific security, buying and selling for his own account. The DMM also keeps the "book" of limit and
stop orders that are away from the market for other brokers, and executes these orders for a commission. Under FINRA rules, which of the following would be considered when determining a mark-up to a customer in an over-the-counter principal transaction? The best answer is C. Under the FINRA 5% Policy, the basis for computing a fair and reasonable mark-up is the current market price of the security. The cost to the dealer is irrelevant. Also to be considered are the size of the purchase; the ease of performing the trade (more actively traded stocks are easier to trade and get lower mark-ups); the dollar amount involved; and the level of service provided by the firm. A customer owns 1,000 shares of ABC preferred stock trading at $120 per share. Following a 2:1 common stock split, the customer will have: The best answer is B. Be careful! Only common stock is affected by a stock split or stock
dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Which statements are TRUE regarding DK notices? The best answer is D. DK or "Don't Know" notices are sent dealer to dealer to reconcile unmatched trades. The dealer knows that there is a problem when he or she receives a comparison from the contra broker that does not agree with the trading record. Which of the following information is disclosed on an options confirmation? I Strike price II Type of option III Expiration date IV Open interest The best answer is C. Disclosed on an options confirmation are the type of option; the expiration; the strike price; the execution price and any commission; the trade date and settlement date. Open interest figures (the number of contracts that remain open that have yet to be closed by trading or exercise) are not disclosed. A customer places the following instructions with his
registered representative: The best answer is A. This customer wishes to buy the stock if the market rises to $45 per share. The only order that allows the purchase of stock at a
price above the current market is a buy stop order. A buy limit order cannot be used because this type of order is placed below the current market. In a falling market, which orders will be executed? I Open Buy Stops II Open Buy Limits III Open Sell Stops IV Open Sell Limits The best answer is D. The orders that are executed if the market drops are "OBLOSS" - Open Buy Limits and Open Sell Stops. The orders that are executed in a rising market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Quotes from all market centers in AMEX (NYSE American) listed securities are found on (the): A. UQDF (UTP Quote Data Feed) B. ADF (Alternate Display Facility) C. CQS (Consolidated Quotations Service) D. Pink Sheets The best answer is C. CQS (Consolidated Quotations Service) aggregates and displays quotes for all market makers in exchange listed issues - both NYSE and NYSE American (AMEX) listed. These market makers are exchange Specialists/DMMs and Third Market Makers (OTC firms that make markets in exchange listed issues). A person who makes a secondary market in securities is called a(n): A. market maker B. registered representative C. underwriter D. retail broker The best answer is A. The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (dealers). Market makers deal with the public through registered representatives (retail brokers). Underwriters are the market makers in the primary market (new issues), not the secondary market. A market or limited price order which is to be executed in whole or in part as soon as such order is represented in the Trading Crowd, and the portion not so executed is canceled, is a(n): A. All or None B. Fill or Kill C. Immediate or Cancel D. Not Held The best answer is C. An "all or none" order requires the trader to execute the order in full on the floor of the exchange, however, if execution cannot be performed, the trader may attempt to fill the order at a later time. This contrasts to a "fill or kill" order, which also requires that the order be executed in full on the exchange floor, but if execution cannot be performed, the order is canceled. Additional execution attempts cannot be made.
Finally, an "immediate or cancel" order requires the trader to execute the order in part or in full in one attempt, with the unexecuted portion of the order (if any) canceled. No additional execution attempts are allowed. The NYSE Specialist (DMM) and Floor Trader system is the model for trading used by which of the following markets? I NASDAQ II AMEX (NYSE American) III PHLX IV BATS The best answer is C. All of the regional stock exchanges, such as the Philadelphia Stock Exchanges (PHLX), as well as the American Stock Exchange (now renamed the NYSE American), model their trading after the NYSE Specialist/DMM and Floor Trader system. Regulation NMS requires: A. market centers to accept automated executions that do not discriminate against any class of users of their systems B. ECNs to register with FINRA as broker-dealers and to electronically display their quotes if they are responsible for 5% of the trades in that issue C. broker-dealers to charge commissions to customers that are fair and reasonable D. market makers to stop trading all equity securities in the United States if a circuit breaker is triggered The best answer is A. Rule 610 of Regulation NMS requires all market centers to electronically link and provide automated execution within 1 second for orders that are executable. It also mandates that market centers cannot discriminate against customers who access their quotes. Regulation ATS requires ECNs to register with FINRA as broker-dealers and to electronically display their quotes if they are responsible for 5% of the trades in that issue. FINRA sets rules for fair and reasonable commissions. The "circuit breaker" that shuts U.S. securities markets first kicks in if the S&P 500 Index falls by 7%. A Specialist (DMM) "stops stock" for a floor broker. Which of the following statements are TRUE regarding the Specialist's (DMM's) action? The best answer is A. When a Specialist (now renamed the DMM - Designated Market Maker) "stops stock," he gives a guaranteed price for a short time period to a floor trader. The trader is free to try and get a better price, but if he fails, he can return to the Specialist/DMM for the stock at that price. This can only be done for public orders. Odd lot transactions on the NYSE are: The best answer is A. The Specialist (now renamed the DMM - Designated Market Maker) acts as the "odd lot" dealer on the NYSE for orders in the assigned stock that are less than 100 shares. Note that these orders are handled separately from the Specialist's (DMM's) "book." A Specialist (DMM) on the
NYSE is quoting ABC stock as follows: The best answer is C. The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 60 (good for 60 x 100 = 6,000 shares); and $50.06 Ask with a size of 30 (good for 30 x 100 = 3,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to sell for 6,000 shares, the Specialist/DMM will fill that order in full at the current bid price of $50.05. Trades of NYSE listed issues are reported via the: The best answer is A. The Network A Consolidated Tape reports all trades of NYSE listed issues, wherever they occurred. The Network B Consolidated Tape reports all trades of NYSE American (AMEX) and regional exchanged listed issues, wherever they occurred. The Network C tape reports trades of NASDAQ listed issues wherever they occur. There is no Network D tape. Last sale information is available for: The best answer is D. Real time transaction reporting occurs for all exchange trades and for OTC equity trades (OTCBB, and Pink Sheet) trades. Corporate and agency bond trades are reported via TRACE, while municipal bond trades are reported via RTRS. When a firm "position trades," it: The best answer is B. Position trading is trading for a firm's own account. The firm can take both long and short positions as it speculates in the market. Interpositioning is a prohibited practice under FINRA rules. If a customer wishes to buy or sell, a firm is obligated to go directly to the market maker. It cannot interposition another firm (another middleman) between the customer and the best available market. Interdealer transactions in which of the following are reported through ACT? I NASDAQ Global Market Stocks II NASDAQ Capital Market stocks III Listed issues traded in the Third Market IV OTC Bulletin Board Stocks The best answer is D. The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape - it's a big source of revenue for the
exchange). The TRFs run by ACT include: In a riskless principal transaction, the dealer: I has risk II has no risk III earns a mark-up IV does not earn a mark-up The best answer is C. In a riskless principal or simultaneous transaction, a dealer gets an order from a customer to buy a security, and then the dealer buys the stock into his inventory to sell to the customer. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer. A customer directs his broker to "Sell 100 shares of ABCD stock and use the proceeds to buy 100 shares of XPDQ stock."
This is a: The best answer is B. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. Which of the following describes an arbitrage transaction? A. Selling a security and using the proceeds to purchase a different security B. Buying a security into inventory direct from a customer with a mark-down C. Buying and selling short the same security in different markets to lock in a price differential D. After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer The best answer is C. If a security is bought on one market; and simultaneously sold on another market; this is known as an arbitrage transaction and is used to exploit price differences for the same security that may exist in those markets. Choice A describes a "proceeds transaction;" Choice B describes a "principal" transaction, or "position" trade; while Choice D describes a riskless principal transaction. Floor brokers on the Chicago Board Options Exchange: The best answer is B. The floor broker is an individual who executes transactions for retail member firms on the CBOE. The floor broker can trade with another floor broker, a Market Maker or an Order Book Official, earning a fee for each transaction. Floor brokers cannot maintain a bid-ask quote - they cannot be market makers. They can accept all orders, and are obligated to find the best available market. Regarding orders that are "away" from the market, that is, orders that cannot be executed immediately, these orders would be placed on the Order Book Official's book of open orders. A customer owns 500 shares of ABC preferred stock trading at $90 per share. Following a 3:1 common stock split, the customer will have: The best answer is B. Be
careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. A regular way municipal bond trade is performed on Tuesday, January 13th. The interest payment dates are January 15th and July 15th. All of the following statements are true EXCEPT: A. settlement takes place on January 15th B. the trade is "flat" C. the seller must deliver the bonds to the buyer's office D. the buyer must pay accrued interest to the seller The best answer is D. If the municipal bond is traded on Tuesday, January 13th, the trade settles on the Thursday, January 15th. Since the interest payment date is the 15th, the trade is settling on the exact cut off point where the seller gets the six month interest payment from the issuer and the buyer assumes ownership at the exact beginning of the next 6 month period. No accrued interest is due from buyer to seller - this trade will be "flat." Also, note that this can only happen twice per year. All of the following must be disclosed on a municipal agency confirmation EXCEPT: A. commission B. tax equivalent yield C. yield basis D. redemption date used to compute dollar price The best answer is B. There is no requirement that the tax equivalent yield be disclosed on a municipal confirmation. The commission in an agency trade, the yield basis upon which the trade was effected, and the redemption date used to compute the dollar price must all be disclosed. The "right of rejection" in a municipal bond sale refers to the: A. refusal by a municipal dealer to accept a delivery of bonds tendered to that firm by another municipal securities dealer B. return of municipal securities that have been previously accepted on a delivery C. procedure where a municipal dealer that bought securities, but has not yet received them, can close-out the transaction D. settlement method where payment is made on delivery, or, if the dealer does not have the monies, the delivery may be rejected The best answer is A. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that
the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities' not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the right of rejection. Electronic Communications Networks: The best answer is A. ECNs - Electronic Communications Networks - only accept orders for actively traded securities - that is, NYSE listed and NASDAQ stocks. Essentially they are electronic matching services, matching customer buy and sell orders
for a very low fee (often as low as $1 per trade). ECNs do not act as dealers - only as agents, earning a fee on each successful transaction. ECN volumes have been growing, as institutions use them to reduce trading costs. The major ECNs are Island, Instinet and Archipelago. (Also note that in 2006, the NYSE purchased Archipelago, and NASDAQ purchased Instinet and Island (which had merged into INET), and are running them as separate trading systems). A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $56 and $61 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed? A. Sell (Short) ABC @ $62 Stop GTC B. Sell (Short) ABC @ $61 GTC C. Sell (Short) ABC @ $56 Stop GTC D. Sell (Short) ABC @ $55 Stop GTC The best answer is D. If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $56. If the stock moves through this price, it is expected that it will move sharply downward. To sell below the current market, a sell stop order must be used. Therefore, the order to sell (short) ABC @ $55 Stop GTC is appropriate. This would be a short sale (the sale of borrowed shares), so that these shares could be purchased at a lower price after the market drops and used to cover the short position at a profit. A sell limit order cannot be used, since these are orders to sell higher than the current market. Customers who trade NYSE listed securities during extended trading hours are: The best answer is B. The "after hours" trading sessions have much lower investor participation, so trading volumes are very small. Because of the lack of order flow, the market is less liquid; and as a result, few dealers participate in the market. Thus, one may not be able to get an execution; and each trade that is executed can result in a much greater than normal market price movement. Orders that are placed higher than the current market are: I buy limit II buy stop III sell
limit IV sell stop The best answer is C. The orders that are placed higher than the current market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Sell limit orders allow the sale of a security at a price that is higher than the current market; buy stop orders allow the purchase of a security at a price that is higher than the current market. Both of these orders are filled in
rising markets.
Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on the exchange floor (also known as "addressing the crowd") must comply with all of the following rules EXCEPT: A. any bid or offer must be for at least the normal trading unit in that security B. the highest bid and the lowest offer have precedence in all cases C. bids and offers must be publicly announced D. if two bids (or offers) are made at the same time and price, the smaller order has precedence The best answer is D. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). If 2 equivalent price bids (or offers) are made at the same time, the
larger order has precedence and will be filled first. Regulation SHO is a body of rules covering: The best answer is B. Regulation SHO is an SEC rule intended to apply a uniform short sale rule to both exchange listed and OTC equity issues; and to stop the illegal practice of "naked" short selling (selling short a security without the intention to borrow and deliver the securities on settlement). Under Regulation SHO, in order to sell short a stock for a customer, the member firm MUST: The best answer is B. Regulation SHO (as in SHOrt sale rule) prohibits "naked" short selling. Before a short sale can be effected for a customer, the member must make an affirmative determination that the securities can be borrowed and delivered by settlement. If the security is "difficult to borrow," it is placed on the exchange's threshold list. The Specialist (DMM) can stop stock for: The best answer is C. The Specialist (now renamed the DMM - Designated Market Maker) can only stop stock - guaranteeing a price for a brief time period to a floor broker - for public orders. This is a Specialist/DMM courtesy function that allows floor brokers to "shop around" for the best price, knowing that they have a guaranteed price from the Specialist/DMM in hand if they cannot locate a better deal. A market maker enters a quote of $10.50 Bid; $10.75 Ask; with a size of "1 x 1" into the NASDAQ System. If a market order to sell is entered into the system for 500 shares, and this dealer's quote
is matched, the market maker will be obligated to buy: A. 100 shares at $10.50 B. 100 shares at $10.75 C. 500 shares at $10.50 D. 500 shares at $10.75 The best answer is A. A market order to sell will be matched, in sequence, against the "Bid" quotes in the system, from highest to lowest. Such a market order "sweeps" the book from high to low price, until it is filled. Because this dealer's Bid of $10.50 is only for 100 shares, this is the amount that the system will match. It will then move to the next Bid quotes from other dealers, in sequence, until the order is filled for 500 shares The inside market found on NASDAQ Level I, is the: A. lowest bid and lowest ask B. lowest bid and highest ask C. highest bid and lowest ask D. highest bid and highest ask The best answer is C. The "inside market" is the highest bid and lowest ask. These are the best prices at which to trade. (One wants to buy at the lowest price asked by dealers; one wants to sell at the highest price bid by dealers). Another name for the inside market is the "NBBO" - National Best Bid and Offer. The "OATS" system is an: A. automated order routing and execution for customer market orders B. electronic trade negotiation system between dealers C. electronic order record maintenance system D. automated trade reporting and comparison system The best answer is C. OATS stands for "Order Audit Trail System" - it is FINRA's system for electronic capture of order information. This information is later compared to the actual trade execution via the ACT system - Automated Confirmation of Trade system. OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues. A floor broker on the Chicago Board Options Exchange announces, by public outcry, that he is "crossing." This means that the floor broker: A. could not execute an order to buy and sell the same option; and therefore, is crossing the orders off his book B. could not execute an order to buy and sell the same option; and therefore, executed the orders by crossing them C. has declared that the trade is invalid and the trader must publicly announce that the trade is "crossed off" D. as an accommodation, is liquidating a worthless option contract for an aggregate $1 premium The best answer is B. If a floor broker on the CBOE holds an order to buy and another order to sell the same option contract, he must first attempt to trade each order independently on the floor with another trader, Order Book Official or Market Maker. If he cannot execute the trades because their Offer is to high; or their Bid is too low; then he must Offer to sell at the minimum trading increment below that lowest offer; and offer to buy at the minimum trading increment above the highest bid. If there are no takers, he may cross the orders himself at one of these "in-between" prices, and must, by public outcry, announce that he is "crossing," with the size and price of the trade. (Note: If you find this hard to understand, just consider yourself to be normal). An open order is on the member firm's internal order entry system to sell 400 XYZ at 50 Stop GTC. The company has declared a 25% stock dividend. On the morning of the ex date, the order on the book will be: A. Sell 400 XYZ at 50 Stop GTC B. Sell 500 XYZ at 50 Stop GTC C. Sell 400 XYZ at 40 Stop GTC D. Sell 500 XYZ at 40 Stop GTC The best answer is D. To adjust the order for the 25% stock dividend, the number of shares is multiplied by a factor of 1.25 (since there are 25% extra shares) while the order price is divided by a factor of 1.25. A customer places an order to sell 100 ABC at 25 Stop Limit, when ABC stock is trading at $29. The company is restructuring and has announced a special dividend of $1.60 to be paid to shareholders of record. On the ex date, the order will: A. stay the same at $25.00 B. be reduced to $23.40 C. be reduced to $24.60 D. be reduced to $24.40 The best answer is B. On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $25. The adjusted order price is $25 - $1.60 reduction = $23.40 adjusted order price. A buy
limit order is executed when the market is: I falling II rising III at or below the limit price IV at or above the limit price The best answer is A. A buy limit order is an order to buy at a price that is lower than the current market. The limit is the maximum price at which the customer will buy. (Remember the old adage: Buy Low; Sell High - that's how limit orders are placed in the market) An order for a New York Stock Exchange listed issue is routed by the member firm to a Third Market Maker rather than to the exchange floor. This practice is: A. prohibited B. permitted only if the customer consents C. permitted only if an attempt to fill the order on the NYSE fails D. permitted if the price offered by the Third Market Maker is better The best answer is D. SEC rules require that execution must occur at the "best market." If a stock is traded in multiple markets, then the order must be routed by the member firm to the market that is posting the best quote. Under the provisions of Rule 606 of Regulation NMS, which of the following must be disclosed to customers by member firms upon
request? The best answer is C. Rule 606 of Regulation NMS covers reports that broker-dealers must prepare on their order-routing procedures. Under Regulation ATS, any ECN must: The best answer is B. Under Regulation ATS, any ECN (Electronic Communications Network) or ATS (Alternative Trading System) must register with FINRA as a broker/dealer (therefore it comes under some market regulation). Once an ECN is big enough (5% of the trading volume in a given stock in the past 6 months), it must publicly display its orders so that they can be accessed and traded against electronically. Under Regulation SHO, a "threshold" security is one that: The best answer is D. Regulation SHO requires each exchange (NYSE, AMEX (NYSE American), and NASDAQ) to come up with a daily list of threshold securities. These are securities with large outstanding short positions that are "hard to borrow." A customer wishes to place an order to short 50,000 shares of ABC stock. The average daily trading volume (ADTV) in ABC stock is 40,000 shares. The representative: A. should place the order B. cannot accept the order because the order size exceeds the ADTV C. should inform the client that the firm may not be able to borrow the stock D. should inform the client that the order can only be executed on an up-bid The best answer is C. Because the customer wants to short 50,000 shares of the stock and the average daily trading volume is only 40,000
shares per day, this means that there is not much trading activity in the stock relative to the amount of stock this customer wants to short. Proceeds transactions are: The best answer is C. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. Choice I describes an agency cross transaction. Both of these types of transactions are permitted under FINRA rules. Dark Pools
are: I sources of displayed liquidity II sources of undisplayed liquidity III regulated IV unregulated The best answer is C. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without
displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. Which of the following securities can be traded using the NASDAQ Market Center Execution System (Single Book)? A. NASDAQ Global Market issues B. NASDAQ Capital Market issues C. All NASDAQ issues D. All securities trading in the secondary market The best answer is C. The system for automated trading and order maintenance of NASDAQ issues (Global Market and Capital Market stocks) is the NASDAQ Market Center Execution System, or simply, the "System." The predecessor name was Single Book. OTCBB and Pink Sheet issues, which do not have listing standards, cannot be traded through the System. A customer places an order to sell 5 ABC Jan 50 straddles at the market. The CBOE market maker's quotes for ABC 50 contracts are: The best answer is A. An ABC Jan
Straddle consists of: 1 ABC Jan 50 Call 1 ABC Jan 50 Put If a straddle is bought, the buyer pays the "Ask" price of the market maker on the exchange floor. If a straddle is "sold," the seller receives the "Bid" price of the market maker. In this case, the customer is selling the straddle, so the premiums are: A customer places an order to sell 100 ABC at 21 Stop Limit, when ABC stock is trading at $23. The company is restructuring and has announced a special dividend of $.72 to be paid to shareholders of record. On the ex date, the order will: A. stay the same at $21.00 B. be reduced to $19.72 C. be reduced to $20.28 D. be reduced to $20.72 The best answer is C.
On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $21. The adjusted order price is $21 -$ .72 reduction = $20.28 adjusted order price. An investor has 300 shares of stock that have split 3:1. Which statements are TRUE? The best answer is B. Stock splits are mechanically handled by giving the stockholder a new certificate for the additional shares, as well as a sticker to place on his old shares reflecting the reduced par value per share. This is cheaper than having shareholders tender all old shares, canceling them, and issuing all new shares. Since this is a 3 for 1 split, for every share held, after the split, the investor will have 3 shares. Thus, for 300 shares held, after the split, the investor will have 900 shares. He or she will receive a new certificate for the 600 additional shares; and a sticker to place on the original 300 shares, reducing the par value per share. Which of the following securities are actively traded in the secondary market? The best answer is C. Closed end funds and REITs are listed on exchanges and are traded like all other stocks. Open end funds (mutual funds) are redeemable with the sponsor - they do not trade. Direct participation programs (limited partnerships) also do not trade - the investor is in the program for the life of the partnership and is only permitted to sell if the general partner in the venture approves. Retail member firms that route orders to market makers in return for compensation earn: The best answer is D. If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price. Which of the following statements are TRUE about an order to: Buy 100 ABC @ 45 Stop 50 Limit? The best answer is B. This is a Buy Stop Limit order. Buy Stop orders are placed higher than the current market, and are filled as the market rises. The guidelines of the stop price must be adhered to first. A buy stop is elected as the market rises to the stop price ($45) or higher. As soon as the market hits $45 or higher, the order is elected, and turns into a limit order to buy at the limit price of $50. An order to buy at $50 means to buy at $50 or lower. Thus, the order is elected at $45 or higher; and executed at $50 or lower. In a rising market, which orders will be executed? I Open Buy Stops II Open Buy Limits III Open Sell Stops IV Open Sell Limits The best answer is C. The orders that are executed if the market drops are "OBLOSS" - Open Buy Limits and Open Sell Stops. The orders that are executed in a rising market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Which of the following individuals trades on the New York Stock Exchange Floor? The best answer is D. The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. The name comes from the fact that they used to charge $2 per trade. A Competitive Trader is a person that trades for his own account (this really doesn't happen any more, but it is tested). A customer places an order with a registered representative to sell 5,000,000 shares of ABC stock (NYSE listed) "at the market." The registered representative should: A. submit the order B. contact the Specialist/DMM on the trading floor C. contact a Third Market Maker D. contact the firm's large block trading desk The best answer is D. This order is too large to be handled in the regular order flow on the NYSE floor - for example, Super Display Book can only take limit orders up to 3,000,000 shares. Such an order would be submitted to the firm's large block trading desk for execution. It is up to the firm's trading desk to
decide how an order should be handled; this is not the responsibility of the registered representative. The trading desk would probably give the order to one of the firm's floor brokers for execution. Third Market Makers must report their trades of exchange listed stocks to the Consolidated Tape: A. within 10 seconds of execution during all hours of the day B. within 10 seconds of execution during the hours that the NYSE is open C. at the close of the trading day D. at the opening of the trading day The best answer is B. Third market makers are over-the-counter firms who trade exchange listed stocks in competition with the exchange Specialists (now renamed DMMs - Designated Market Makers). A market maker enters a quote of $10.50 Bid; $10.75 Ask; with a size of "1 x 1" into the NASDAQ System. If a market order to buy is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to sell: A. 100 shares at $10.50 The best answer is B. A market order to buy will be matched, in sequence, against the "Ask" quotes in the system, from lowest to highest. Such a market order "sweeps" the book from low to high price, until it is filled. Because this dealer's Ask of $10.75 is only for 100 shares, this is the amount that the system will match. It will then move to the next Ask quotes from other dealers, in sequence, until the order is filled for 500 shares An over-the-counter brokerage firm receives a customer order to buy 100 shares of ABCD stock and another customer order to sell 100 shares of ABCD stock at the same time. If the firm "crosses" the orders, it: The best answer is A. This is an "agency" cross. The broker-dealer acts as agent, earning a commission from both the buyer and seller. There is no need to go to a market maker in this transaction, but the trade must be effected at a price that is reasonably related to the current market. Broker-dealers
are permitted to execute the following over-the-counter transactions? The best answer is B. In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction. Furthermore, it is prohibited to charge both a commission; and a mark-up or mark-down; in any transaction.
All of the following are true about Cabinet trades (accommodation liquidations) effected on the CBOE EXCEPT cabinet trades: A. can be used by customers to close out worthless long positions B. can be used by customers to close out worthless short positions C. result in an aggregate $1 premium per contract as a result of the transaction D. result in an aggregate $1 commission per contract as a result of the transaction The best answer is D. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1! A customer places an order to sell 100 ABC at 12 Stop Limit, when ABC stock is trading at $13. The company is restructuring and has announced a special dividend of $2.85 to be paid to shareholders of record. On the ex date, the order will be: A. canceled B. reduced to $9.00 C. reduced to $9.15 D. executed at $12.00 The best answer is C. On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $12. The adjusted order price is $12 - $2.85 reduction = $9.15 adjusted order price. Which of the following MUST be disclosed on municipal bond trade confirmations? The best answer is D. There is no requirement to disclose the source of income backing a general obligation issue because it must be taxing power. The MSRB does require that the type of revenue backing a revenue bond issue be disclosed, as well as the name of the corporate guarantor for industrial revenue bonds. "In Whole" call dates must also be disclosed on customer confirmations, since they can affect the pricing of the issue under MSRB rules (the
MSRB requires that if a bond quoted on a yield basis is trading at a premium, and if it is callable "in whole" at preset dates and prices, then the dollar price must be computed to the call date rather than to the maturity date, since it will most likely be called). Quotes from all market centers in NYSE listed securities are found on (the): A. CQS (Consolidated Quotations Service) B. UQDF (UTP Quote Data Feed) C. ADF (Alternate Display Facility) D. Pink Sheets The best answer is A. CQS (Consolidated Quotations Service) aggregates and displays quotes for all market makers in exchange listed issues - both NYSE and NYSE American (AMEX) listed. These market makers are exchange Specialists (DMMs) and Third Market Makers (OTC firms that make markets in exchange listed issues). Which of the following statements are TRUE about Fill or Kill orders? I The order can be executed in part or in full II The order must be executed in its entirety III If the order cannot be filled, later execution attempts are permitted IV If the order cannot be filled, later execution attempts are not permitted The best answer is D. A "fill or kill" order is to be executed in full or the order is canceled - only one attempt is made to fill the order. An "all or none" order is to be executed in full, but if the trader can't fill the order, he is free to attempt execution at a later time. These orders cannot be executed in part. Which of the following is a First Market? A. Pink OTC Market B. Primary Market offerings of new issues C. New York Stock Exchange trading D. Trading of U.S. Government securities The best answer is C. The First Market is trading of listed stocks on an organized stock exchange - like the NYSE, AMEX (now renamed the "NYSE American"), or NASDAQ. Exchanges have listing standards for the companies that trade there and accessible order books, where orders can be posted and traded against. All of the following statements are true about computerized trading of securities on exchanges EXCEPT: A. trades can be effected more efficiently and at lower cost B. trades bypass the floor broker C. orders are prioritized with member firm orders having priority over public orders D. orders can be accepted up to certain size limits The best answer is C. Electronic trading systems, such as the NYSE Super Display Book system, are faster, cheaper, and more efficient than manual trading by floor brokers. These systems have size limitations, and cannot handle orders that require human judgment such as a "Not Held" order. It is these systems that allow the NYSE to trade, on average, 1 billion shares a day. FINRA and NYSE rules require that public customer orders get priority over member firm orders. Thus, the statement that member firm orders are given priority over public orders is false. An NMS stock can only be sold short on an up bid if its price falls by at least: A. 1% B. 2% C. 5% D. 10% The best answer is D. If an NMS (National Market System stock - NYSE, NYSE American (AMEX), or NASDAQ listed) falls by 10% or more, it can only be sold short on an "up bid" for the remainder of that trading day and the entire next trading day. Thus, it can only be sold short into a rising market. This stops the relentless short selling of stocks with the intent of driving market prices down - a market manipulation. A floor broker enters the crowd around the Specialist's (DMM's) post to buy 20,000 shares of ABC at the market for a public customer. The Specialist (DMM) tells the trader "20,000 shares of ABC have been stopped at 25." This means that: A. trading in the stock has been completely stopped B. the stock can not trade higher than $25 per share C. the Specialist/DMM has guaranteed a price of $25 to the trader D. the trader is prohibited from buying at any price other than $25 The best answer is C. When a Specialist (now renamed the DMM - Designated Market Maker) "stops stock," he guarantees a price to a floor broker for a short time period. The floor broker is free to try and get a better price in the "crowd," but if he is not successful, he can go back to the Specialist/DMM for the stock at the guaranteed price. Stopping stock is a courtesy function that is only allowed for public orders; stock cannot be stopped for a member's own account. The Network A Consolidated Tape reports all trades of: A. AMEX (NYSE American) Securities B. U.S. Government Securities C. NASDAQ Securities D. NYSE Securities The best answer is D. The Network A Consolidated Tape reports all trades of NYSE listed issues, wherever they occurred. The Network B Consolidated Tape reports all trades of NYSE American (AMEX) and regional exchanged listed issues, wherever they occurred. The Network C tape reports trades of NASDAQ listed issues wherever they occur. What is considered good delivery for stock?Understanding Good Delivery
To qualify for good delivery, stock certificates must be in good physical condition, be endorsed by the seller or seller's agent, and be delivered in the correct denomination that matches the exact number of shares to transfer.
What does good delivery refer to quizlet?Good Delivery. Good Delivery between broker/dealers means that a stock certificate is in a form permitting ownership to be readily transferred.
When a broker dealer makes a market it is acting as?Making markets is a principal activity. The broker/dealer stands ready, willing, and able to buy or sell securities for its own account. A dealer acts as a principal when it owns the securities it trades.
Which of the following describes a quote on Nasdaq Level 1?A) Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market. Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers.
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Which of the following would be the best description of good delivery between broker dealers?
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