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Series 7- Passed with 83% > Chapter 8- Trading securities 20-25 questions > Flashcards

Chapter 8- Trading securities 20-25 questions Flashcards

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1
Q

Basics of The Securities Exchange Act of 1934 (The Exchange Act)

A

Established the SEC and it’s power to regulate broker/dealers, exchange, and OTC markets to maintain fair and orderly market

Requires registration of exchange members and those who trade

Provides for all the following:
Creation of SEC
Regulation of exchanges
Regulation of OTC
Regulation of credit by Fed Reserve Board
Registration of broker/dealers
Net capital rules
Regulation of insider transactions, short sales, and proxies
Regulation of trading activities
Regulation of client accounts
Customer protection rule
Filing of 10 K and Qs
Regulation of officers directors and principal shareholders
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2
Q

Composition of SEC

A

Five commissioners appointed by president of US, approved by senate

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3
Q

Registration of Exchanges and Firms

A

Registration of Exchanges
1934- Requires Exchanges to file with the SEC

Exchanges agree to help enforce act

Copies of the bylaws, constitution, and articles of corporation are required

Must disclose any rule changes to be disclosed

Registration of Firms
Companies trading on exchanges or Some OTC must register with SEC

Must file 10Qs and 10Ks

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4
Q

Exchange Market

A

Composed of the NYSE and other exchanges.

Is referred to as an auction market

Listed security is any security listed on an exchange

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5
Q

Over the counter market

A

Second market

Where Securities not listed on the exchange are traded

Internet based

All Municipals and government bonds trade here

Equities are divided into Nasdaq and non Nasdaq

Nasdaq- Global Select Market, Global Market, and Capital Market

Non-Nasdaq- OTC pink and OTC bulletin board

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6
Q

Third Market (Nasdaq intermarket)

A

Broker dealers must be listed as OTC market makers

Exchange listed securities are traded in OTC as long as they are reported to Consolidated Tape in 10 seconds

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7
Q

Fourth Market

A

Institutional Investors

Large blocks of stock both unlisted and listed

Unassisted by broker dealers

Take place through Electronic Communication Networks and are open 24/7

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8
Q

Trading hours of the four markets

A 
NYSE= 9:30-4pm
OTC= same hours, though market makers remain open till 6:30 in extended hour trading

Larger spreads, Greater volatility due to low amounts of bid and asks in OTC

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9
Q

Trading location and pricing system for listed and OTC

A

Listed markets like NYSE and others have trading floors and central market places. Double auction market, and participants compete for best prices

OTC markets- less stringent trading criteria. Traded over network, no central marketplace.

Interdealer network- compete to post best bid and ask. Negotiated market

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10
Q

Quoted

A

Bid- Market maker willing to buy
Ask- willing to sell

Always spread present, bid below ask

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11
Q

Dark Pools of Liquidity

A

Trading volume or liquidity not openly available to public

Usually occur on crossing networks or Alternative Trading Systems (ATS) that match buy and sell orders without routing order to an exchange

Able to execute large block orders without impacting public prices or exposing investment strategy

Orders Can be placed anonymously

Market transparency is darkened

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12
Q

Trade Reporting Facility

A

FINRA Trade Reporting Facility (TRF)

Automated trade Reporting system operated on (Automated Confirmation Transaction) ATC

Used to report trades off of trade floor and NASDAQ

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13
Q

Broker

A

Agents that arrange trades for clients and charge COMMISIONS

Arrange trades between buyers and sellers

Do not effect trades as principal

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14
Q

Dealers or Principals

A

Buy and sell for own account, called position trading

Charge markups or mark downs to clients from the interdealer price

Trading from own supply

Net price includes the mark upon

Like a car dealer

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15
Q

Filling an Order

A

A broker/dealer can fill an order by:

  1. Acting as an agent by finding a seller and arranging the trade
  2. Buy the securities, mark it up and resell them
  3. Sell shares from inventory

Dealer must disclose amount of mark up if it is a Nasdaq security

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16
Q

Can a firm say as both the broker and the dealer in the same transaction?

A

Heck naaaaa

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17
Q

NYSE listing requirements

A

NYSE is the most widely known and often called the Big Board

Largest exchange

Stocks listed in NYSE can also be listed on regional exchange like Chicago Stock Exchange

Must meet a minimum size and minimum number of shareholders holding 100+ shares

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18
Q

Delisting

A

The NYSE reserves the right to delist a security

Reasons:
Failure to meet the minimum maintenance criteria
Bankruptcy
Abnormally low share price or share volume
Corporate actions not deemed in public interest

BOD of a company would have to vote to delist voluntarily

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19
Q

4 different Personnel (NYSE members) who can trade on floor

A
  1. Commission House Brokers (floor brokers)- Execute for clients and for own accounts
    Now allowed to trade non-NYSE
  2. Two-Dollar Broker- Called on when Commission Brokers are too busy to execute all trades. Charge a commission for services
  3. Registered Trader- Trade primarily for their own account. If they accept a public customer’s order from a floor broker must give that priority.
  4. Specialist or Designated Market Maker- Facilitate trading in specific stocks to maintain fair and orderly market.
    Act as both broker and dealer, as well as a auctioneer
    Receive rebates from trades done whenever their Quotes result in trades
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20
Q

Auction Market (double auction market)

A

Buying and selling of exchange securities

Both buyers and sellers call out bids

Best bid must be at least $.01 higher than current best

Best offer must be $.01 lower

Highest and lowest bid are always given first considerations

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21
Q

More than one order at the same price

A

Specialists award trades in following order

  1. Priority- First order in
  2. Precendence- largest order of those submitted
  3. Parity- Random Drawing
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22
Q

Market Wide Circuit Breaker Rules (MWCB)

A

Protects against volatility

Three Levels of Halt:
Level 1- 7% decline in S&P 500
Before 3:25- 15 minutes
At or after 3:25 pm- Trading continues unless level 3

Level 2 Halt = 13% decline in S&P 500
Before 3:25- 15 minutes
At or after 3:25- Trading continues till level 3

Level 1 and 2 can only happen once a day. So once level 1 is triggered level 2 would be next

Level 3 Halt= 20% decline in S&P 500
Any time- Trading done for the day

Existing orders can be closed during market close

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23
Q

Arbitrage

A

Profiting from temporary price differences

Could be due to Three types:
1. Market Arbitrage- Trading in more than one market

  1. Convertible Security Arbitrage- Converting bonds to stock and selling for profit
  2. Risk Arbitrage- Buying stock in acquired company and selling short the acquiring company’s stock
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24
Q

Additional Roles of the Specialist or Designated Market Maker

A

Try to minimize price disparity at open of trade by buying and selling from own supply when needed

Act as agents: execute all orders other brokers leave with them. Accept certain orders like limit and stop orders.

Act as Principal: Buy and sell in own accounts to make a market. May not buy stock at a price that would compete with current market.

Must avoid transacting business at opening or reopening that would upset public balance

Must file reports for exchange

May trade for his account between the bid and ask

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25
Supplemental Liquidity Providers
Off-Floor Market Maker operates and competes with Designated Market Maker (DMM) Must maintain a bid or an offer for 10% of day Receives rebates as well, but not as large as DMM May not trade for public customer or agency basis
26
Trading Posts
Horseshoe shaped trading center surrounded by computer terminals DMM watches each trade but does not have to participate in all of them Orders can also be submitted on Super Display Book
27
Crossing Orders
Two market orders for same stock, one to buy one to sell Can use one order to fill both Must first be offered in the trading crowd at a price higher than the bid by at least .01
28
4 Price restricted orders
Market Limit Stop Stop Limit
29
Market Orders
Sent immediately to the floor without restrictions or limits Executed immediately at current market price and has priority over all other orders Guarantee of Execution Buy executed at lowest offering price Sell at highest bid price available
30
Limited Order
Limit of acceptable purchase or selling price Executed at specified price or better Placed on book to be executed if and when market price meets order Buy Limit- Placed below current market price Sell Limit- Placed above Sometimes not executed even if Market temporarily hits price (FIFO) Can be handled by specialist as a day order, sometime GTC
31
Order Protection Rule (SEC Regulation NMS)
Firm cannot buy or sell stock at Limit order and not fill a customer Limit order Can execute partial order but may not deviate from price specified Created an obligation for the firm to fill order if buying at that price
32
Stop Order (Stop Loss Order)
Designed to protect a profit or prevent a loss Becomes a market order when a stock hits or moves through the price unlike a limit Left with and executed by DMM No guarantee of execution price Buy stop orders are entered above current market price Sell stop are below CMV Triggered by an order being filled at the price of the Stop
33
Stop Order trades
Takes two trades to execute 1. Trigger- Transaction to activate the trade 2. Execution- Execution at next price available May or may not be accepted depending on Exchange or dealer
34
Buy stop orders
Protects a profit or limits loss of a short position Used by technical traders who track support and resistance levels of stock Support is bottom, resistance is top Would be executed once a stock traded for a specific price
35
Sell stop Order
Protects profit or limits loss of a long position Also used by technical readers Support is bottom line, Resistance is top
36
Stop Limit Order
Stop Order that becomes a Limit order instead of a market order upon hitting a certain price
37
Buy Stop limits and Orders
When would you buy? Buy Limit- Below the market price and purchasing the share Sell Limit- Above Market Price, would sell the share Buy Stop- Entered Above the Market Price, and triggered when the market goes through Sell Stop- entered below the market price and triggered as market order below that price
38
BLISS
Buy Limits and Sell Stops for orders being placed below market price
39
Specialist Display Book
Orders not immediately executed placed on Designated Market Maker book Only rounds lots placed on book Changing an order will result in a cancelation and replace pricess
40
Reducing Orders
All orders entered below market price are reduced on the ex-dividend date Buy limits, sell stops and sell Stop limits are all reduced by the dividend due to the market opening lower Sell Limits and buy stops are not UNLESS ITS A DNR ORDER
41
Reductions for stock splits
If there is a stock dividend or stock split, all open orders are adjusted Ex sell 100 XYZ at 50 Stop after a 2:1 stock split is 200 XYZ at 25 stop If stock dividend makes odd lot, shares are sent to customer account but not included in orders If there is a reverse split, all open orders are canceled
42
Day order
Unless marked otherwise, Stop or limit orders are usually day orders Partially completed orders are acceptable and rest of order is unfilled
43
Good Till Cancelled
Valid until executed or cancelled Automatically canceled if unexecuted on last business day of April or October
44
At the open and Market on close orders
At the open are executed at opening of market Must reach post before time Market on close must be entered before 3:40 pm
45
Not Held Orders
Coded NH Floor broker given ability to decide best time and price to execute May not be placed with the specialist Day order under NYSE rules
46
Fill or kill Orders vs Immediate or cancel
Commission house broker instructed to Fill or Kill order immediately at the limit price or better If cannot fill entirely the order is cancelled and originating branch office is notified IOC orders- can be filled partially
47
All or None AON
Executed entirely or not at all. Can be day or GTC orders Do not have to be filled immediately like an FOK
48
Alternative Orders (OCO)
One cancels the other If stock is at $50 and customer wants to protect gain but doesn't believe it will go much higher he might: Sell a limit order of 53 Sell a stop Order of 48
49
Do Not Ship (DNS)
Do not execute on exchange other than NYSE
50
NYSE policy on orders
Does not accept: GTC or Stop Orders or All or None or fill-or-kill orders Broker dealer may, but NYSE will not
51
Regulation SHO
The SEC in 2004 did a pilot program suspending the tick rule and bid test rule 2007- voted to end price restrictions on short selling However, the locate requirement (finding the shares attributed to a short sale) is still in place
52
SEC 1934 regulation on short sales
Prohibits directors, officers and principal stockholders from selling short
53
Sell Order SEC
SEC requires that all sell orders be identified as long or short Person is long if: 1. Has title to it 2. Has purchased or is going to purchase 3. Owns a security convertible into or exchangeable for it and has tendered it for conversion 4. Has an option to purchase
54
Regional Exchanges
Tend to focus on securities within the region Also offer trading in many securities of NYSE Usually list smallest and newest company's in their industry
55
Nasdaq OMX PHLX
Floor based and electronic trading due to NASDAQ taking over Philly exchange
56
Super Display Book (SDBK)
Used to route an order directly to the appropriate equity post Can be sent preopening or post opening The computer matches trades before the opening and leaves the rest on the computer for the Designated Market Makers to trade All NYSE stocks are eligible
57
Consolidated Tape System (CTS)
Receives, validates, and sequences last sale price and size of all equity transactions in listed securities Distributed over two networks: Network A- Trades on NYSE floor, regional exchange, third market and the ECN Network B- Last sales for securities listed on NYSE AMEX, trading solely by regional exchanges, local issues and bonds Two Tapes High Speed- Prints market identifiers, letters of security, price and number of shares Low Speed- tradition right to left Do not include commissions, markups and markdowns
58
Active Market Ticket
May signify the deleting of info Digits and Vol Deleted: instead of 200 shares of IBM at 92.50, IBM2.50 Repeat prices omitted: only show different prices SLD: means the exchange missed a trade and a higher price is not a sign of market rise OPD: Initial transaction in which an opening was delayed HALT: Means that trading halted for the security
59
The Over the counter market
Broker dealers negotiate trades directly with one another Competitive computer network trading system ``` Trading includes but not limited to: ADRs Common stock Most corp bonds typically convertibles Munis US gov Preferred stock Equipment trust certs Closed end invest Warrants ``` Market Makers must be registered with both SEC and FINRA Traded across the country Market Makers must be registered with FINRA and SEC, where as NYSE only have to be with SEC
60
FINRA
Self regulatory organization for the OTC market
61
NASDAQ
Tracks OTC equities trading ``` Includes: Common stock Warrants LPs ADR Convertible bonds ``` Not nonconvertibles
62
Order Audit Trail System
Automated system created to record information relating to orders, quotes and other trade info from all equities Tracks order from time of entry until execution or cancelation Reports order by order to FINRA
63
OTC market Makers
OTC does not have specialists Firms must register with FINRA to buy and sell Buy and sell from own inventories, for own profit and own risk Act as a principle in most cases
64
Current Bid, Current Offer and Spread
Bid- Highest price at which dealer will buy Offer- lowest price it will sell Spread- difference Customer flips Short hand quote 43.25 to .50 (43.25-43.50) Does not include mark up or mark down Net prices do
65
Firm Quotation
Price at which a market maker stands ready to buy and sell one trading unit (100 shares) All quotes are firm unless otherwise stated Can make counter offer but only way to guarantee execution is to buy at market Market maker can revise in response to market conditions, but cannot back away (trading violation)
66
Recognized quotation
Any public bid or offer for one or more round lots Must state amount of securities if under a round lot Bid must be good to split apart
67
Subject Quote
Price is tentative Subject quotes are hedged and not absolute Firmed up after transaction size is known
68
Qualified Quotes
Phrases used to allow broker/dealer to back away if Market conditions change
69
Two Types of Qualified Quotes
Workout Quote- if an offering is too large, it might be used Approximate figure used to provide buyer seller with indication of price, not a firm quote Nominal Quote- Someone's assessment of where a stock might trade, must be marked not actual price
70
Factors effecting spread
Issues size Issuers financial condition Amount of market activity Market conditions
71
Size of a quote
Will always be one round lot (100 shares)
72
Non-Nasdaq Pricing
Securities quoted on OTC Pink or OTC bulletin, three Quote rule Broker/dealers receiving orders to buy and sell must contact 3 dealers for a prevailing price
73
Important Test Points on OTC Quotes
Markups and Mark downs are charged when a market maker is acting as principal Firm quotes are one round lot only 11-11.50 3x5 is firm for 300 shares at a bid of 11 and 500 shares at 11.50 Nominal quotes can be given for informational purposes only Wide spread indicates thin trading market
74
The 5% Markup Policy
Guideline only and not a firm rule Above or below may be in violation of fair and equitable trade practices 5% markup based on price of inside market price Applies to all nonexempt listed or unlisted securities or OTC Policy applies to commissions as well Does not apply to mutual funds, variable annuity contracts or securities sold in public offerings or municipal securities All of which are being sold by prospectus
75
Dealers inventory costs
If a customer order is filled from inventory, the net price is based on the current market price Cannot take into account what the security was acquired for
76
Riskless and Simultaneous Transactions
Order to buy or sell stock in which firm is not a market maker Dealer has two options: Buy as an agent and charge the customer a commission Buy or sell for its riskless principal account Must disclose markup to customer if acting as a principals
77
Proceeds from Transactions
If a customer sells securities and uses the proceeds to buy something else, must considered it one transaction Only allowed to charge a total of 5%
78
Factors to be considered in markup mark down
Type of security- More risk is a greater justification for charging higher markup Inactively traded stocks- thinner the market, the more volatile Selling price of security- commission and markup rates should decrease as stock prices increase Dollar amount of transaction- lower dollar amount = higher transaction fee Type of broker Pattern of markups Markups on Inactive stocks Markup may be okay if reasonable
79
Nasdaq Quotation Service
Nasdaq level 1- available to registered reps. Displays inside market price only Cannot guarentee a price due to fluctuations Nasdaq level 2- approved subscribers only. Current quote and size available from each market maker. Must be guaranteed for 100 shares Nasdaq 3: subscribers access to level 1 and 2 and allows registered market Makers to input and update quotes in all securities they make a market
80
Market maker Transaction Requirements for NASDAQ
Must include symbol, number of share, transaction price and whether trade was a buy sell or cross 10 seconds to report Must make daily report of volume trades
81
Inside market
Represents best bid and best ask ``` Four Bid Asks 10-11 10.13-10.75 10.25-11 10.13-10.88 ``` Inside market is 10.25-10.75
82
Nasdaq market maker reporting
Must report within 10 seconds Registered market Makers must make daily report of volume
83
One sided quotes
Only allowed on the OTC Bulletin Board
84
A short sale can be executed on
Plus tick Zero plus tick Minus tick Zero minus tick basis
85
Who sets the opening quote for issues listed on the NYSE
The specialist (designated market Makers) Who is employed by a member of the Exchange
86
A customers order to sell for the week only is entered
GTC The broker dealer is responsible for closing out the position
87
OTC Pink
Quotes are not firm and updates may not be current or made intraday

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