ch 16

Question 1

market order

Answer 1

• immediate execution at market price
• have priority over all other types of orders
• market order to buy is executed at the lowest price available
• market order to sell is executed at the highest price available
• guarantees execution

Question 2

limit order

Answer 2

• limits the amount paid or received for securities
• can only executed at the specified price or better
• if it cannot be executed immediately, it is place on the DMM’s book and executed when and if the market price meets the order limit price
• buy limit orders are placed BELOW the market price
  
  • used by investors who think stock is overpriced
• sell limit order are placed ABOVE the market price
  - used by investors who think the stock is undervalued
• can be day order or good until canceled
• time priority: filled based on when they were entered

Question 3

stop order

Answer 3

• becomes a market order if the stock reaches or goes through the stop (trigger or election) price
• stop loss order
• designed to protect a profit or prevent a loss if the stock begins to move in the wrong direction
• left with and executed by the DMM
• no guarantee the executed price will be the stop price
• buy stop orders are entered ABOVE the current market
• sell stop orders are entered BELOW the current market
• needs 2 trades to execute
  
  1. trigger: trigger transaction at or through the stop price activates the trade
     2. execution: stop order becomes a market order and is executed at the next price, completing the trade

Question 4

stop limit order

Answer 4

• entered as a stop order and changed to a limit order if the stock hits or goes through the stop (trigger or election) price

Question 5

good until canceled (GTC)

Answer 5

• valid until executed or canceled
• automatically canceled if unexecuted for the number if days (30-90) set by the individual broker dealer

Question 6

risks of limit orders

Answer 6

• risk missing the change to buy or sell
• sometimes not executed, even if the stock trades at the limit price (stock ahead)

Question 7

stock ahead

Answer 7

• inability to fill a limit order at a specific prices because other orders at the same price were entered previously

Question 8

buy stop order

Answer 8

• protects a profit or limits a loss in a short position
• establishes a long position when a breakout occurs above the line of resistance
• entered at a price ABOVE the current market and is triggered when the market prices touches or goes through the buy stop price

Question 9

sell stop order

Answer 9

• protects a profit or limits a loss in a long position
• establishes a long position when a breakout occurs below the line of resistance
• entered at a price BELOW the current market and is triggered when the market prices touches or goes through the sell stop price

Question 10

stop limit orders

Answer 10

• a stop order that once triggered becomes a limit order

Question 11

SLoBS over BLiSS

Answer 11

• sell limits and buy stops over buy limits and sell stops
• sell limits and buy stops are OVER market prices
• buy limits and sell stops are UNDER market price

Question 12

reducing orders

Answer 12

• certain orders on the DMM’s book are reduced when the stock goes ex-dividend
• all orders entered below the market are reduced on the ex-dividend fate
• first date on which a new owner (purchaser) of stock does not qualify for the first dividend.
• on the ex-date the stock price opens LOWER by the amount of the distribution
• buy limits and sell stops are reduced by their dividend amount and are reduced by this amount, otherwise there might be an inadvertent execution

Question 13

do not reduce (DNR)

Answer 13

• is not reduced by an ordinary cash dividend

Question 14

reduction for stock splits

Answer 14

• DMM will adjust all open orders

Question 15

day orders

Answer 15

• an open order (stop or limit) is assumed to be a day order valid only until the close of trading on the dat it is entered
• if the order has not been filled. it is canceled at the close of the day’s trading

Question 16

at the open and market on close orders

Answer 16

• at the open order are executed at the opening of the market
• market on close orders are executed at or near the closing price (on NYSE must be entered before 3:40pm ET)
• partial executions are allowed

Question 17

not held (NH) orders

Answer 17

• indicates that the customer agrees to not hold the floor broker or the broker dealer to a particular time of price of execution.
• provides floor broker the authority to deiced the best time or price at which to execute the trade
• may not be place with NYSE DMM
• FINRA rule 3260, NH orders are limited to the day the order is given (unless customer in writing says GTC)

Question 18

fill or kill orders (FOK)

Answer 18

• fill an entire order immediately at the limit price or better, or cancel it

Question 19

immediate or cancel order (IOC)

Answer 19

• like FOK but partial execution is OK
• portion not executed is canceled

Question 20

all or none (AON) orders

Answer 20

• must be executed in their entirety or not at all
• day or GTC
• differ from FOK - they do not need to filled immediately

Question 21

one cancels the other (OCO)

Answer 21

-two orders are entered, if one is executed the other is immediately canceled

Question 22

quotations

Answer 22

• available for listed and unlisted securities
• NYSE quotes are from the DDM
• OTC there is no DDM, but market makers

Question 23

OTC market makers

Answer 23

• firms must register with and get approval from FINRA
• buy/sell for their own inventories, for their own profit and at their own risk
• proprietary trading

Question 24

special memorandum account (SMA)

Answer 24

• Whenever stock is sold, half of the sales proceeds are credited to SMA. Nonrequired cash deposits are credited to SMA in full. SMA only declines when a customer uses it to borrow from the account or to purchase securities; it is not affected by declines in market value or by interest charges.
• is a line of credit that a customer can borrow from or use to purchase securtities
• for ever $1 increase in market value, $0.50 of SMA is created
• excess equity creates SMA or buying power
• SMA is = to the greater of the EE or the amt already in the SMA

Question 25

long margin account

Answer 25

• customers purchase securities and pay interest on the money borrowed until the loan is repaid

Question 26

short margin account

Answer 26

• stock is borrowed and then sold short, enabling the customer to profit if the value declines

Question 27

margin agreement

Answer 27

• customers who open margin accounts must sign margin agreement before trading can begin
• 3 parts: credit agreement, hypothecation agreement and loan consent form

Question 28

credit agreement

Answer 28

• discloses terms of the credit extended by the BD
• includes method of interest computation and situations under which interest rates would change

Question 29

hypothecation agreement

Answer 29

• give BD permission to pledge customer margin securities as collateral
• firm hypothecates customer securities to a bank, and the bank loans money to BD
• all customer securities must be held in street name (registered name of the firm)
• BD is the nominal or named owner
• customer is the beneficial owner
• regulation U
• BDs are limited to pledging 140% of a customers debit balance as collateral, anything more than this must be segregated

Question 30

Marking to the market

Answer 30

Marking to the market means adjusting cost to current market value. All margin account positions are adjusted daily.
- use to adjust the positions in margin accounts based upon current market prices.