NASDAQ Market/OTC Market

Question 1

Which two of the following are securities that TRADE in the over-the-counter market?

I Mutual Funds
II Government Bonds
III Variable Annuities
IV Master Limited Partnership Direct Participation Programs

A. I and II
B. III and IV
C. I and III
D. II and IV

Answer 1

The best answer is D.

Mutual funds and variable annuities are redeemable securities - they are non-negotiable and cannot trade. Redeemable securities are issued by the sponsor and are redeemed with the sponsor at Net Asset Value. Government bonds are negotiable, and are the most actively traded security. Do not confuse government bonds with so-called “savings bonds” - Series EE and HH issues. Savings bonds are non-negotiable. In regard to Direct Participation Programs, limited partnership interests are rarely traded because the market is very thin. However, they are negotiable. Certain limited partnerships (so-called “Master Limited Partnerships”) are exchange listed and trade actively like any other listed security.

Question 2

All of the following securities are generally traded “over-the-counter” EXCEPT:

A. Options
B. Corporate debt issues
C. Municipal debt issues
D. Treasury debt issues

Answer 2

The best answer is A.

The vast majority of corporate debt trades “OTC,” with the exception of a small amount of bond trading performed on the NYSE. All trades in Treasury issues and municipal bonds are effected “over-the-counter.” However, all options trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange).

Question 3

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

A. I and III
B. II and IV
C. I, II, III
D. I, II, III, IV

Answer 3

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.

Question 4

All of the following statements are true about the second market for equity securities EXCEPT:

A. companies that are traded must meet listing standards
B. FINRA regulates the over-the-counter market
C. a greater number of companies trade over-the-counter than trade on any single exchange
D. the over-the-counter market is a negotiated market

Answer 4

The best answer is A.

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.

Question 5

Comparing the first and second markets, which statement is FALSE?

A. The First Market is an auction market
B. The Second Market is a negotiated market
C. The First Market has listing standards
D. The Second Market has listing standards

Answer 5

The best answer is D.

Each exchange with a trading floor is an auction market (First Market). The over-the-counter market (Second Market) is a negotiated market. 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.

Question 6

Which of the following persons trades securities over-the-counter?

A. Two dollar broker
B. Market maker
C. Specialist (DMM)
D. Registered Representative

Answer 6

The best answer is B.

Over-the-counter dealers are called market makers. Two dollar brokers and Specialists (now renamed DMMs - Designated Market Makers) trade on stock exchanges. Registered representatives cannot trade securities - they can enter orders on behalf of customers to be executed by traders in the market.

Question 7

When comparing Specialists (DMMs) on the NYSE to market makers on NASDAQ, which statements are TRUE?

I The Specialist/DMM is obligated to make a continuous competitive market in the stock
II The Specialist/DMM is not obligated to make a continuous competitive market in the stock
III The market maker is obligated to make a continuous competitive market in the stock
IV The market maker is not obligated to make a continuous competitive market in the stock

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 7

The best answer is B.

Specialists (now renamed DMMs - Designated Market Makers) are obligated, under NYSE rules, to make a continuous competitive market in the assigned stock during the entire trading session. NASDAQ Market Makers, on the other hand, once they have traded the amount that they show in the market at a competitive firm price, are not obligated to renew that quote at the current market. They can renew at a price that is “away” from the current market, thus assuring that they will not have to trade! (Of course, it is in their best interests to actively trade that stock and maintain competitive quotes - that is how NASDAQ market makers maintain a good reputation that attracts future business.)

Question 8

If a member firm routes a customer market order for a Global Market listed issue to NASDAQ’s automated trading system, the order will be sent to:

A. Super Display Book
B. the NASDAQ Market Center Execution System (Single Book)
C. OTCBB
D. Order Support System

Answer 8

The best answer is B.

The automated order execution system for NASDAQ issues is now called the NASDAQ Market Center Execution System, or simply, the “System.” The previous name, now obsolete, was Single Book. Super Display Book is the NYSE’s automated trading system. The Order Support System (OSS) is the CBOE’s automated trading system. The OTCBB (Over-The-Counter Bulletin Board) gives dealer offerings of stocks that are not listed on an exchange.

Question 9

Which statements are TRUE?

I NASDAQ Global Market stocks have more stringent listing standards
II NASDAQ Global Market stocks have less stringent listing standards
III NASDAQ Capital Market stocks have more stringent listing standards
IV NASDAQ Capital Market stocks have less stringent listing standards

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 9

The best answer is B.

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 the Pink OTC Markets.

Question 10

NASDAQ Level I shows:

I Lowest Bid
II Lowest Offer
III Highest Bid
IV Highest Offer

A. I and II
B. III and IV
C. I and IV
D. II and III

Answer 10

The best answer is D.

NASDAQ Level I shows the “inside market” - 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.

Question 11

All of the following statements are true regarding quotes provided on NASDAQ Level II EXCEPT:

A. bid and ask quotes are shown
B. the size of the quote is shown
C. quotes are shown for NYSE listed issues
D. quotes are shown for round lots and mixed lots

Answer 11

The best answer is C.

NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot). Quotes for odd lots (less than 100 shares) can be entered into the system, but are not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or over. A mixed lot is an order that has both a round lot and an odd lot component (such as an order for 143 shares - which is composed of a 100 share round lot and a 43 share odd lot). Just like odd lots, any portion of the order that is less than 100 shares is not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or more.Quotes for NYSE listed issues are not found on NASDAQ - rather they are found on CQS - the Consolidated Quotations Service.

Question 12

Which of the following statements are TRUE regarding NASDAQ Level II?

I Each market maker posting a quote must be willing to trade at least 1 round lot of 100 shares
II Each market maker posting a quote must be willing to trade at least 10 round lots of 100 shares
III If a market maker refuses to honor a quote, this is called “backing away”
IV If a market maker refuses to honor a quote, this is called “selling away”

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 12

The best answer is A.

NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size in the System is 1 round lot of 100 shares. If a market maker shows a larger size, it must be willing to trade up to this amount at the quote. If a market maker refuses to honor a quote, this is called “backing away;” and is a prohibited practice. “Selling away” is another prohibited practice where a registered representative “sells away” from his firm - that is, sells a customer a security that is not offered through that firm.

Question 13

Which statements are TRUE regarding the NASDAQ System (Single Book)?

I The System handles trades up to a maximum size of 999,999 shares
II The System handles trades of any size
III The System handles both agency and proprietary orders
IV The System handles customer agency orders only

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 13

The best answer is A.

The automated system for trades of NASDAQ issues is the NASDAQ System (previously called Single Book). It accepts orders up to 999,999 shares. Orders can be split for entry into the system; and can be aggregated and executed as a single order (cheaper than multiple orders) within the system size limit. Both agency and principal transactions can be effected through the System.

Question 14

All of the following orders can be placed in the NASDAQ System (Single Book) EXCEPT:

A. market order
B. marketable limit order
C. limit order
D. not held order

Answer 14

The best answer is D.

Single Book is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders (a limit order at the current inside price) and limit orders that are away from the market. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the NASDAQ system does not accept stop orders, as is the case with the NYSE DisplayBook system. Member firms take stop orders into their internal systems and feed them to the appropriate exchange if they are triggered.

Question 15

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

Answer 15

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

Question 16

A market maker enters a quote of $20.50 Bid; $21.00 Ask; with a size of “5 x 5” into the NASDAQ System. If a market order to buy is entered into the system for 1,500 shares, and this dealer’s quote is matched, the market maker will be obligated to sell:

A. 500 shares at $20.50
B. 500 shares at $21.00
C. 1,500 shares at $20.50
D. 1,500 shares at $21.50

Answer 16

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 $21.00 is only for 500 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 1,500 shares

Question 17

Which statement is TRUE about the NASDAQ Regular Market trading session?

A. The session starts earlier than the NYSE opening
B. The session ends later than the NYSE closing
C. The session coincides with NYSE trading hours
D. The session starts later than the NYSE opening and closes later than the NYSE closing

Answer 17

The best answer is C.

NASDAQ’s Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time - the same as NYSE hours.

Question 18

Which of the following are entered into OATS?

I Orders to buy NASDAQ issues
II Orders to sell NASDAQ issues
III Orders to buy OTC issues
IV Order to sell OTC issues

A. I and II only
B. III and IV only
C. II and IV only
D. I, II, III, IV

Answer 18

The best answer is D.

OATS stands for “Order Audit Trail System.” It electronically captures order information for equity securities (no more paper order tickets). 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.

The “idea” is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered.

Question 19

Which statements are TRUE?

I OATS intakes orders for NASDAQ issues
II ACT intakes orders for all NASDAQ issues
III OATS matches and reports completed trades of NASDAQ issues
IV ACT matches and reports completed trades of NASDAQ issues

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 19

The best answer is B.

The ACT system takes the details of completed trades and reports the trade to the Network C (NASDAQ) Tape; to the contra-party to the trade for comparison; and to the clearing corporation for settlement. OATS is the Order Audit Trail System - which automates order entry for NYSE, NYSE American (AMEX), NASDAQ and OTC issues.

Question 20

Which of the following statements are TRUE regarding market makers who trade on NASDAQ?

I Changes in quotes are reported to the tape within 10 seconds
II Trades are reported to the tape within 10 seconds
III The initiating member reports
IV The executing member reports

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 20

The best answer is D.

Trades of NASDAQ stocks must be reported by the executing member within 10 seconds of execution to the Network C tape. This is FINRA’s reporting rule for trades of NASDAQ stocks and all OTC equity trades, including OTC trades of NYSE-listed issues (Third Market trades), OTCBB trades and trades of Pink Sheet issues. Note that the NYSE operates under the same rule.

Question 21

Which of the following trades are reported through ACT’s Trade Reporting Facilities (TRFs)?

I NASDAQ Market Center trade of a NASDAQ listed stock
II Super Display Book trade of an NYSE listed issue
III Trade of an NYSE listed issue in the Third Market
IV Trade of a listed option contract on the CBOE

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 21

The best answer is A.

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 is a big source of revenue for the exchange). The TRFs run by ACT include:

NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape);
NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own);
ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues;
TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate Network A, B or C Tape.

Any trade that takes place on the NYSE (which owns and runs Super Display Book) is reported to the Network A Tape by the NYSE. Options trades occurring on exchanges such as the CBOE are reported through “OPRA” - the Options Price Reporting Authority - which is not covered on Series 7.

Question 22

A NASDAQ security is bid at $30.25 and offered at $30.75. An over-the-counter trader effects a trade at $30.75 and charges a commission of $.50 to the customer. The price that will show on the tape is:

A. $30.25
B. $30.50
C. $30.75
D. $31.25

Answer 22

The best answer is C.

Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $30.75, and this is the price that will show on the tape.

Question 23

Quotes placed by market participants in unlinked ECNs can be accessed through:

A. ATS
B. ADF
C. ACES
D. ACT

Answer 23

The best answer is B.

An unlinked ECN is one that is not placing its quotes into Single Book. The SEC mandated that the FINRA provide an Alternate Display Facility (“ADF”) to publicly display these quotes. Thus, to find the best market for a NASDAQ stock, both NASDAQ and the ADF must be checked.

Question 24

Dark Pools are:

I sources of displayed liquidity
II sources of undisplayed liquidity
III regulated
IV unregulated

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 24

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.

The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such).

Question 25

Dark Pools are:

I regulated as broker-dealers
II regulated as exchanges
III subject to Regulation ATS
IV not subject to Regulation ATS

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 25

The best answer is A.

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.

The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such).

Question 26

Dark Pools:

I display their quotes with size
II do not display their quotes with size
III are obligated to report completed trades to the tape
IV are not obligated to report completed trades to the tape

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 26

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.

Question 27

Over-the-counter stocks that are too small to be included on NASDAQ would be found in:

A. Single Book
B. the Yellow Sheets
C. the OTCBB
D. Super Display Book

Answer 27

The best answer is C.

Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the “Over-The-Counter Bulletin Board” (run by FINRA) or in the privately run “Pink Sheets” - now renamed the Pink OTC Markets.

Question 28

Over-the-Counter price quotes for equity securities can be found in which of the following?

I Pink Sheets
II Black List
III Yellow Sheets

A. I only
B. II only
C. III only
D. I, II, III

Answer 28

The best answer is A.

Over-the-counter “penny” stock price quotes can be found in the Pink Sheets which are now only on the Internet. The Yellow Sheets, now out of business, used to contain corporate bond quotes. The “Black List” is a generic term for a listing of undesirables.

Question 29

The Pink Sheets show:

A. corporate bond quotes
B. completed over-the-counter trades
C. retail over-the-counter stock quotes
D. wholesale over-the-counter stock quotes

Answer 29

The best answer is D.

The “Pink Sheets” show dealer to dealer over-the-counter stock quotes for issues that cannot meet exchange listing standards. These are mainly penny stocks. The Pink OTC Market does not show completed trades. It includes bid and ask quotes, along with “BW” (Bids Wanted) and “OW” (Offers Wanted) quotes. BW and OW are used in illiquid markets.

Question 30

All of the following quotes would be found in the Pink Sheets EXCEPT:

A. BW
B. OW
C. AON
D. DNR

Answer 30

The best answer is D.

In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found. An offer made AON in the Pink Sheets is “All or None” - either the whole size stated is traded or the quote is invalid. DNR means “Do Not Reduce” and is a designation on an order placed “below the market” if the customer does not want the price reduced automatically on ex date.

Question 31

Which of the following quotes are found in the Pink Sheets?

I Firm Bid
II Firm Ask
III Bids Wanted (BW)
IV Offers Wanted (OW)

A. I and II only
B. III and IV only
C. I and III only
D. I, II, III, IV

Answer 31

The best answer is D.

In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found.