Chapter 9 - The Secondary Market and Equity Trading

Question 1

According to industry rules, broker-dealers that act as principals to buy and sell securities are required to buy and sell those securities at what prices?
A) Fair
B) As set by FINRA
C) Competitive
D) Flat

Answer 1

Correct Answer:
A) Fair

Answer Explanation
FINRA rules require member firms acting as a principal or dealer buy and sell securities with a fair and reasonable mark-up or mark-down, after taking into account all relevant circumstances. Likewise, when member firms act as an agent or broker they must charge fair and reasonable commissions. The general guideline is that a mark-up/mark-down or commission in excess of 5% is not reasonable.

Textbook Reference
Please see textbook section 9.2.1.4

Question 2

ABC Co. is seeking to have its securities listed on the OTCBB. In order to accomplish this, ABC must
A) secure an affirmative vote from at least a majority of its shareholders.
B) file current financial reports with the SEC.
C) have a minimum number of shares in the public float.
D) have generated a profit in at least two of its prior three fiscal years.

Answer 2

Correct Answer:
C) have a minimum number of shares in the public float.

Answer Explanation
Companies that wish to list their securities on the OTCBB must file current financial reports with the SEC. There is no requirement that the company be profitable or have a certain number of shares outstanding.

Textbook Reference
Please see textbook section 9.3.4.1

Question 3

Which of the following securities could be quoted on the OTCBB?
A) A stock that trades on Nasdaq, but not on the NYSE
B) A stock that trades on the Chicago Stock Exchange, but not on the NYSE
C) An NYSE stock being examined by the exchange to be delisted
D) An NYSE stock that has voluntarily delisted from the exchange

Answer 3

Correct Answer:
D) An NYSE stock that has voluntarily delisted from the exchange

Answer Explanation
Securities eligible for quotes on the OTC Bulletin Board (OTCBB) include stocks that do not trade on any exchange, including Nasdaq or regional exchanges. Although a stock in the process of being delisted might subsequently be on the OTCBB, until it is removed it could not do so.

Textbook Reference
Please see textbook section 9.3.4.1

Question 4

Under FINRA’s Standards of Commercial Honor and Principles of Trade all of the following may be considered by a firm when charging a commission in an agency transaction, except:
A) market conditions with respect to such security at the time of the transaction
B) the value of any service rendered by reason of the firm’s experience
C) the expense of executing the order
D) the fact that the firm is entitled to a profit

Answer 4

Correct Answer:
D) the fact that the firm is entitled to a profit

Answer Explanation
Commissions charged in agency transactions must be fair and reasonable. In determining fair and reasonable commissions a firm may consider market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service rendered by reason of the firm’s experience in and knowledge of such security and the market therefor. When executing trades in an agency basis, however, the commission does not contemplate the fact that the firm is entitled to a profit.

Textbook Reference
Please see textbook section 9.2.1.4

Question 5

A company that believes its stock is undervalued might take which of the following actions?
A) Share repurchase program
B) Leveraged buy-out
C) Forward stock split
D) Follow-on offering

Answer 5

Correct answer:
A) Share repurchase program

Answer Explanation
A company that believes its stock is undervalued may decide to buy their own shares in the open market.

Textbook Reference
Please see textbook section 9.3.1

Question 6

The fraud provisions of the Securities Exchange Act of 1934 apply to which of the following?
A) Manipulation of the price of a municipal security
B) Participation in an all-or-none offering and reporting the offering as firm to the client
C) Short sale of municipal security serial bonds
D) All of the above cases and for all types of securities

Answer 6

correct Answer:
D) All of the above cases and for all types of securities

Answer Explanation
The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934.

Textbook Reference
See textbook section 9.1

Question 7

Partial executions are possible with
A) stop orders and orders marked “GTC”.
B) stop orders but not limit orders.
C) both limit and stop orders.
D) limit orders but not stop orders.

Answer 7

Correct Answer:
D) limit orders but not stop orders

Answer Explanation
Limit orders may receive partial execution, owing to the fact that a trader may only be able to fill a portion of an order at a particular price. Stop orders become market orders once they are triggered and therefore must be executed in their entirety.

Textbook Reference
Please see textbook section 9.4.4

Question 8

Gavin enters a market order to buy 200 shares of Microsoft stock. If he enters the order when the price is $55, what price is he guaranteed to get?
A) It isn’t known
B) $55
C) The price quoted by his broker
D) Not less than $52.50

Answer 8

Correct Answer:
A) It isn’t known

Answer Explanation
The drawback to market orders is that the execution price isn’t known. It will be the best price available when the order reaches the market. It can be less than the price a broker quotes.

Textbook Reference
Please see textbook section 9.4.2

Question 9

Securities that are included in the Pink OTC Markets are
A) quoted by market makers
B) registered with the SEC
C) not required to report last sale and trading volume information
D) typically traded actively

Answer 9

correct Answer:
A) quoted by market makers

Answer Explanation
A market maker determines whether to quote a Pink Sheets security, and initiates quotations by submitting Form 211 to FINRA. It is possible for a market maker to quote securities in the Pink Sheet Quote system without the knowledge or permission of the issuer of the securities. Pink Sheet Securities are not always registered with the SEC, and are often thinly traded. All OTC equity securities are required to report last sale and trading volume information.

Textbook Reference
Please see textbook section 9.3.4.2

Question 10

In which of the following scenarios is the 5% Policy applicable?
A) Mary buys a Regulation A offering and receives an offering circular
B) Peter purchases a closed-end investment company from his RR in the secondary market
C) Fred subscribes to mutual fund shares and makes payment consistent with the instructions in the prospectus
D) Betty receives an allocation of shares of an IPO and makes payment to her RR

Answer 10

Correct Answer:
B) Peter purchases a closed-end investment company from his RR in the secondary market.

Answer Explanation
The FINRA 5% Policy applies to secondary market trades in both listed and unlisted securities.

Textbook Reference
Please see textbook section 9.2.1.4

Question 11

Henry places a GTC limit order to buy 200 shares of AT&T at $30.50 or better. If AT&T declares a quarterly dividend of 45 cents per share, what will his limit price be on the ex-dividend date?
A) $30.05
B) $30.50
C) Orders are cancelled when a dividend for more than $0.25 is declared.
D) $30.95

Answer 11

Correct answer:
A) $30.05

Answer Explanation
Buy limit orders are reduced by the amount of dividends on the ex-dividend date.

Textbook Reference
Please see textbook section 9.4.3

Question 12

An order that remains on the limit order book until executed or cancelled is known as a(n)
A) Good-Til-Cancelled (GTC) order
B) Immediate or cancel order
C) Marketable limit order
D) Opening cross order

Answer 12

Correct Answer:
a) Good-Til-Cancelled (GTC) order

Answer Explanation
A Good-til-Cancelled order is an order to buy or sell a stock that remains on the limit order book until the order is executed or cancelled

Textbook Reference
Please see textbook section 9.4.3

Question 13

A securities trader would be permitted to indirectly manipulate stock prices
A) As long as no retail investors are harmed.
B) If properly supervised by a principal.
C) If there are information barriers in place at the trader’s firm
D) Under no circumstances.

Answer 13

Correct Answer:
D) Under no circumstances

Answer Explanation
It is always against the law to directly or indirectly manipulate the prices of securities.

Textbook Reference
Please see textbook section 9.5.10

Question 14

An insurance company sells municipal bonds through a bank and pays commission on the transaction. This is a

I. Primary market transaction
II. Secondary market transaction
III. Principal transaction
IV. Agency Transaction
A) II and III
B) I and III
C) II and IV
D) I and IV

Answer 14

Correct Answer:
C) II and iv

Answer Explanation
This is a secondary market transaction. Since a commission is charged, the trade was completed on an agency basis.

Textbook Reference
Please see textbook section 9.2.1.2

Question 15

A trade instruction given by an investor who wants execution at a late-afternoon price is a:
A) Exit order
B) Stop order
C) Market-at-close order
D) Not held order

Answer 15

Correct Answer:
C) Market-at-close order

Answer Explanation
A market-at-close order is a market order that is held and executed near the end of trading hours as close to the closing price as possible. Not held and stop orders may be executed anytime during trading hours.

Textbook Reference
Please see textbook section 9.4.3

Question 16

A municipal bond is sold on Monday at 4pm. It must be reported to the Real-Time Transaction Reporting System (RTRS) by
A) 5:00 p.m. that day.
B) 4:15 p.m. that day.
C) 4:05 p.m. that day.
D) 7:30 a.m. the next morning.

Answer 16

Correct Answer:
b) 4:15pm that day

Answer Explanation
Trades must be reported to the RTRS within 15 minutes of execution.

Textbook Reference
Please see textbook section 9.5.3

Question 17

When a broker dealer acts on an agency basis to help a customer complete trades, the firm normally is compensated through
A) Transaction surcharges
B) Asset-based fees
C) Commissions
D) Mark-ups

Answer 17

Correct Answer:
C) Commissions

Answer Explanation
Acting as an agent, broker dealers normally charge commissions. Acting as principals, they mark up securities sold from their own inventory, or purchased and then sold.

Textbook Reference
Please see textbook section 9.2.1.2

Question 18

According to MSRB rules, when determining a fair and reasonable price when acting as principal the most important factor is
A) The price that the dealer paid to purchase the security for its inventory
B) Ensuring that the yield to the customer is comparable to the yield on similar securities
C) Ensuring that the transaction enables the dealer to make a profit
D) Maintaining a mark up or mark down that is less than 5%

Answer 18

Correct Answer:
B) Ensuring that the yield to the customer is comparable to the yield on similar securities

Answer Explanation
MSRB rules state that the most important factor when determining whether the price to a client is fair and reasonable when acting as principal is that the yield should be comparable to the yield on similar securities. Similar securities are those that are comparable in terms of coupon rate, quality, maturity, and block size when available in the market.

Textbook Reference
Please see textbook section 9.2.1.4

Question 19

A failing company becomes delisted by Nasdaq and goes to the OTCBB. What must it do, at minimum, to remain eligible for quotes on the OTCBB?
A) Maintain sufficient trading volume
B) Have at least three market makers
C) Amend its by-laws
D) File timely periodic reports with the SEC

Answer 19

Correct Answer:
D) File timely periodic reports with the SEC

Answer Explanation
The SEC believes that the investing public needs adequate disclosure about companies that trade in public markets, such as the OTCBB. Timely periodic filings (10K, 10Q, etc.) are one way that issuers can meet this requirement.

Textbook Reference
Please see textbook section 9.3.4.1

Question 20

What term describes the information a reasonable investor would consider important in deciding whether to buy, sell or hold a security?
A) Actionable
B) Time-sensitive
C) Relevant
D) Material

Answer 20

Correct Answer:
D) material

Answer Explanation
Any information that can affect the price of a security potentially can be material.

Textbook Reference
Please see textbook section 9.1

Question 21

In connection with the solicitation of securities, the anti-fraud rule of U.S. securities law makes it unlawful to omit a material fact necessary to make the statements made
A) understandable
B) confusing
C) not misleading
D) deceptive

Answer 21

Correct answer:
C) not misleading

Answer Explanation
It can be securities fraud to omit a material fact that is necessary to make the statements made not misleading in light of the circumstances under which they were made.

Textbook Reference
Please see textbook section 9.1

Question 22

Which of the following best characterizes an ECN?
A) Typically charges higher than usual brokerage fees owing to its advanced technology.
B) Accepts orders from its subscribers only, typically broker-dealers or institutional clients.
C) Accepts orders from the general public.
D) Available for trade executions during regular market hours only.

Answer 22

Correct Answer:
B) Accepts orders from its subscribers only, typically broker-dealers or institutional clients.

Answer Explanation
Electronic communications networks (ECNs) will only accept orders from its subscribers, and attempt to match buy and sell orders internally. Fees are typically lower than traditional brokerage commissions.

Textbook Reference
Please see textbook section 9.3.5.2

Question 23

The anti-fraud provisions of the Securities Exchange Act of 1934 apply to

I. Representatives who sell government securities
II. Firms that sell municipal securities
III. Exempt transactions
A) I and II only
B) I, II and III
C) II and III only
D) I only

Answer 23

Correct Answer:
B) I, II and III

Answer Explanation
The Securities Exchange Act of 1934 forbids fraud in securities transactions, and applies to both securities that are subject to the registration requirements of the Securities Act of 1933 and to those that are exempt, such as government and municipal securities. The anti-fraud provisions also apply to firms that sell municipal securities or engage in other exempt transactions.

Textbook Reference
Please see textbook section 9.1

Question 24

How many market makers, at minimum, are required for a security to be quoted on the OTCBB?
A) Two
B) Four
C) One
D) Three

Answer 24

Correct Answer:
C) One
Answer Explanation
Just one market maker is needed for a security to be on the OTCBB.

Textbook Reference
Please see textbook section 9.3.4.1

Question 25

What was the world’s first electronic stock exchange?
A) Euronext
B) NYSE Arca
C) NASDAQ
D) Instinet

Answer 25

correct answer;
C) naSDAQ

Answer Explanation
NASDAQ was the world’s first electronic stock exchange. With 3,500 listed companies, it is still the second largest stock market in the U.S., behind only the New York Stock Exchange. The controlling entity is NASDAX OMX.

Textbook Reference
Please see textbook section 9.3.3

Question 26

In which types of orders are specified prices reduced by the amount of dividends paid on the ex-dividend date, unless a do-not-reduce (DNR) instruction is used?
A) Limit orders to buy and sell
B) Limit orders to buy and stop orders to sell
C) Limit orders and stop-limit orders to buy
D) Limit orders to sell and stop orders to buy

Answer 26

Correct Answer:
B) Limit orders to buy and stop orders to sell

Answer Explanation
The DNR instruction may only be used with limit orders to buy and stop orders to sell. In both cases, the specified price (limit or stop) will not be reduced on the ex-dividend date, as they otherwise would be.

Textbook Reference
Please see textbook section 9.4.5

Question 27

FINRA prohibits members from accepting payments from which entities for publishing quotes or market making?
A) Promoters only
B) Issuers, their affiliates and promoters
C) Affiliates of the issuer only
D) The issuer only

Answer 27

Correct Answer:
B) Issuers, the affiliates and promoters

Answer Explanation
FINRA’s general rule prohibits any member from accepting any payment or other consideration, directly or indirectly from an issuer, any affiliate, or a promoter for publishing a quote or acting as market maker.

Textbook Reference
Please see textbook section 9.5.6

Question 28

All of the following statements are true regarding securities that are quoted on the Pink Sheets EXCEPT
A) The issuer is not subject to initial Pink Sheet listing requirements
B) The issuing companies are not required to file annual and quarterly reports with the SEC or other insurance or financial regulator
C) Most of these securities trade relatively infrequently and have a high bid/ask spread
D) The minimum price of stock included in the Pink Sheets is $1.00 per share

Answer 28

Correct Answer:
D) The minimum price of stock included in the Pink Sheets is $1.00 per share

Answer Explanation
Companies that trade on the Pink Sheets are not subject to initial listing requirements, and do not have to file financial reports with the SEC or other regulators. There is no minimum share price for Pink Sheet stocks. Pink Sheet stocks often trade infrequently and therefore have higher spreads between the bid and ask price.

Textbook Reference
Please see textbook section 9.3.4.2

Question 29

In an agency transaction for a penny stock, the amount of compensation disclosed is the
A) difference between price charged and prevailing market price
B) difference between price charged and the average of two or more market maker’s prices
C) commission received
D) rebate paid by the issuer

Answer 29

Correct Answer:
c) Commission received

Answer Explanation
In an agency transaction, the commission paid by the customer to the broker-dealer must be disclosed. In a principal transaction, it is the difference between the price charged to the customer and the prevailing market price charged by a market maker who works in an active and competitive market

Textbook Reference
Please see textbook section 9.2.1.2

Question 30

It is permissible for traders to circulate rumors from the trading desk
A) If they all agree not to share the rumor with other traders.
B) Under no circumstances.
C) If all customers are notified that the information may not be accurate.
D) If they receive permission from an appropriate supervisor.

Answer 30

Correct Answer:
B) Under no circumstances

Answer Explanation
Market participants may never circulate rumors that originated from the trading desk, as doing so will have harmful effects in the marketplace. Rumors that have already circulated in public media may be disclosed to clients along with their unsubstantiated nature.

Textbook Reference
Please see textbook section 9.5.10

Question 31

A fair and reasonable commission charged in an agency transaction
A) Cannot be based on the dealer’s judgment of the value of the securities
B) Must be no higher than other agency transactions executed by the firm regardless of additional efforts to complete the trade
C) Could never be higher than 5%
D) Could be a larger percentage for a small transaction than for a large transaction

Answer 31

Correct Answer:
D) COuld be a large percentage for a small transaction than for a large transaction

Answer Explanation
It is reasonable for a firm to charge a higher commission percentage for a transaction that involves extra expense or effort to complete. It is also reasonable for firms to charge a higher percentage of commission to complete transactions in thinly traded securities or for small orders. Firms must base commissions on their judgment of a security’s value based on current market conditions and other factors.

Textbook Reference
Please see textbook section 9.2.1.4

Question 32

The role of the specialist (Designated Market Maker) is most closely associated with which of the following markets?
A) FOREX
B) Nasdaq
C) OTCBB
D) NYSE

Answer 32

Correct Answer:
D) NYSE

Answer Explanation
The NYSE relies on specialists (also referred to as designated market makers) to match buyers and sellers. Market makers facilitate trades on the Nasdaq and OTCBB.

Textbook Reference
Please see textbook section 9.3.2.1

Question 33

According to industry rules, member firms must charge customers fair commissions or fair prices after taking into account all of the following circumstances EXCEPT:
A) Market conditions at the time of the transaction
B) How much the customer can afford to pay
C) The firm’s transaction expenses
D) The value of services the firm renders during the transaction

Answer 33

Correct Answer:
B) How much the customer can afford to pay

Answer Explanation
Fair commissions and prices are based on a variety of circumstances, but do not include what the customer can afford to pay. Fair commissions and prices should be consistent for similar transactions and services.

Textbook Reference
Please see textbook section 9.2.1.4

Question 34

In the world of securities trading, intimidation would least likely include
A) negotiation
B) retaliation
C) harassment
D) coercion

Answer 34

Correct Answer:
A) Negotiation

Answer Explanation
Intimidation would least likely include negotiation. The other practices all have negative consequences for the party they are directed to.

Textbook Reference
Please see textbook section 9.5.5

Question 35

Harrison owns 1,000 shares of Target stock, which he purchased at $30 per share. It currently is selling for $34 and he would like to protect his profits with a sell stop order. This order will be entered
A) Right below $34
B) At $30 or above
C) At $30 or below
D) Right above $34

Answer 35

Correct Answer:
A) Right below $34

Answer Explanation
Buy stop orders generally are placed above the current market price. Sell stop orders are placed below the current market price. In this case, he is protecting part of his profits if the price declines below $34 per share.

Textbook Reference
Please see textbook section 9.4.4

Question 36

A pink sheet security is one that
A) is represented by a minimum of three market makers
B) is quoted because its issuer has paid a fee for inclusion
C) might also be a penny stock
D) cannot be bought on margin.

Answer 36

Correct Answer:
C) Might also be a penny stock

Answer Explanation
Pink sheet securities are referred to as penny stocks if they trade for $5 per share or less. To become a pink sheets company, only one market maker is needed to quote the stock. Issuers do not pay a fee for listing, but market makers pay a monthly fee to quote the stock. Certain OTC equities are marginable, per guidance of the Fed.

Textbook Reference
Please see textbook section 9.3.4.2

Question 37

A registered representative is given a sneak-peak at a research report her firm will soon be publishing, containing non-public information. She is permitted to trade on this information
A) 10 days after the research report is released to the public.
B) at no time.
C) only after the research report is released to the public.
D) immediately, provided it does not contain highly sensitive information.

Answer 37

Correct Answer:
C) Only after the report is released to the public

Answer Explanation
It is a violation for a broker-dealer or registered representative to trade based on nonpublic information contained in a research report prior to the time the report is released to the public.

Textbook Reference
Please see textbook section 9.5.9

Question 38

After a company has met the listing standards of the NYSE and has started trading
A) it may choose to delist at any time by notifying NYSE Regulation
B) it must continue to meet standards for maintaining its listing, which are typically less stringent than the original standards
C) it must send a quarterly shareholders’ report
D) it will be suspended from trading if the stock falls below a price of $5 per share

Answer 38

Correct Answer:
B) It must continue to meet standards for maintaining its listing
Answer Explanation
Companies that trade on the NYSE must meet standards for continued listing. These standards are somewhat less strict than those required for initial listing. A company cannot delist its stock without notification to the NYSE and approval from the SEC. The NYSE, however, can delist a company’s stock if it determines it has not met listing standards, or if its continued listing is not in the best interest of shareholders. A company’s share price cannot fall below $1 to maintain NYSE listing. NYSE listed companies must provide annual reports to shareholders. See

Textbook Reference
Please see textbook section 9.3.1

Question 39

On secondary fixed-income markets, how are most dealers compensated for their market-making activities?
A) Markups or markdowns
B) Commission
C) Rebates
D) Asset-based fees

Answer 39

Correct answer:
A) Markups or markdowns

Answer Explanation
The dominant model for secondary market fixed-income trading is bi-lateral principal trades. Fixed-income market-makers and dealers are compensated mainly through markups or markdowns.

Textbook Reference
Please see textbook section 9.2.1.1

Question 40

Quotations which appear on the OTC Bulletin Board or Pink Sheets
A) must be two-sided.
B) are not required to be two-sided.
C) are always non-binding quotes which dealers are not required to honor.
D) may be one-sided, with specific consent from FINRA.

Answer 40

Correct Answer:
B) are not required to be two-sided

Answer Explanation
Quotations appearing on these systems may be one-sided, meaning a bid or offer is posted but not both. Quotations published in other outlets, such as the NYSE or NASDAQ, must be two-sided.

Textbook Reference
Please see textbook section 9.3.4.2

Question 41

Hal has an unfilled GTC limit order with his broker to buy 500 shares of McDonald’s at $120, with no further instruction. If the company declares a dividend of 60 cents per share, what will his order be after the ex-dividend date?
A) Buy 500 at $120.60
B) Buy 500 at $120
C) Buy 500 at $119.40
D) Buy 500 at $120 ex-dividend

Answer 41

Correct Answer:
C) Buy 500 at $119.40

Answer Explanation
In unfilled GTC buy limit orders, the limit price is automatically reduced by the amount of the dividend on the ex-dividend date, unless the investor uses a do not reduce (DNR) instruction.

Textbook Reference
Please see textbook section 9.4.5

Question 42

When a broker-dealer maintains a firm market in a stock, that broker-dealer is committed to
A) working out the amount of the markup or commission on each OTC transaction
B) buying or selling the normal trading unit of that stock at the quoted price
C) maintaining a continuous subject market
D) buying back any security it sells

Answer 42

Correct Answer:
B) Buying or selling the normal trading unit of that stocka t the quoted price

Answer Explanation
When a broker-dealer maintains a firm market in a stock it is committed to trading the stock at the quoted price, and for up to the quoted number of round lots. Any amount greater than that must be negotiated with the broker-dealer. Quotes in the NASDAQ are firm quotes, whereas quotes on the pink sheets are workable indications, and are not binding.

Textbook Reference
Please see textbook section 9.2.1

Question 43

Unless eligible for an exception, municipal trades must be reported to the Real-time Transaction Reporting System (RTRS) within
A) 15 minutes of execution.
B) 10 minutes of execution.
C) 30 minutes of execution.
D) 24 hours of execution.

Answer 43

Correct answer:
A) 15 minutes of execution

Answer Explanation
Trades must be reported to the RTRS within 15 minutes of execution.

Textbook Reference
Please see textbook section 9.5.3

Question 44

What standard must members meet in reviewing their procedures for meeting the best execution obligation?
A) Thorough and consistent
B) Regular and rigorous
C) Prudent man
D) As defined in FINRA’s Green Book

Answer 44

correct answer:
B) Regular and rigorous

Answer Explanation
Members are required to regularly and rigorously review their procedures for meeting the best execution duty. If a firm chooses not to conduct an order-by-order review, regular means at least quarterly.

Textbook Reference
Please see textbook section 9.5.1

Question 45

To protect an existing short position, an investor would place a
A) Sell-stop order
B) Market order
C) Buy-stop order
D) Buy limit order

Answer 45

Correct ANswer:
C) Buy-stop order

Answer Explanation
A buy-stop order would be used to protect a short stock position. A sell-stop order would be used to protect a long stock position.

Textbook Reference
Please see textbook section 9.4.4

Question 46

Which of the following impose listing standards on issues of securities before they can begin trading?

I. OTCBB
II. NYSE
III. Pink Sheets
IV. Nasdaq
A) II and IV
B) II and III
C) I and IV
D) I and III

Answer 46

Correct Answer:
A) II and IV

Answer Explanation
Both the New York Stock Exchange and the Nasdaq Stock Market have initial and ongoing listing requirements. Neither the Pink Sheets nor the OTC Bulletin Board have listing standards, although the SEC requires companies to be current in their filings before their stock can be quoted on the OTCBB.

Textbook Reference
Please see textbook section 9.3.1

Question 47

Which of the following statements pertaining to orders is correct?
A) Buy-limit orders are placed above the current market.
B) Sell-limit orders are placed below the current market.
C) Market orders will be executed as soon as possible upon receipt.
D) Limit orders guarantee an execution will occur, but at no particular price point.

Answer 47

correct answer:
C) Market orders will execute ASAP

Answer Explanation
A market order will be filled upon receipt, as the customer is willing to accept an execution at the current market.

Textbook Reference
Please see textbook section 9.4.2

Question 48

Which of the following best describes Pink OTC Markets?
A) A non-exchange equity quotation facility
B) A Third Market Quotation System
C) An Alternative Display Facility
D) An Electronic Communication Network

Answer 48

Correct Answer:
A) A non-exchange equity quotation facility

Answer Explanation
Pink OTC Markets, is a non-exchange, non-Nasdaq, equity quotation facility. The third market is for exchange listed securities only.

Textbook Reference
Please see textbook section 9.3.4.1

Question 49

An investor sees an endorsement on social media from a former patient in a medical facility claiming that a particular drug that was prescribed to them was responsible for the elimination of debilitating symptoms caused by an underlying medical condition. The individual recommends that everyone reading this post purchase shares of the company behind this life altering drug. This is example of a
A) testimonial from a satisfied customer.
B) likely pump and dump scheme and a form of market manipulation and is illegal.
C) legitimate plug for a stock as long as evidence of the drug company’s results for the prior fiscal year are properly documented in the medical literature.
D) recommendation that must be filed with and approved by FINRA.

Answer 49

Correct Answer:
B) likely pump and dump scheme

Answer Explanation
This is an example of a pump and dump scheme, where those parties who have an interest in a security will use tactics of any means to attempt to influence the price of a security in order to earn profits for themselves. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Textbook Reference
Please see textbook section 9.5.10

Question 50

The entry of an order by a trader with no intention to actually purchase or sell the security is an example of
A) backing away.
B) spoofing.
C) frontrunning.
D) blind pool.

Answer 50

Correct Answer:
B) spoofing

Answer Explanation
Spoofing occurs when a trader places an order to manipulate prices higher or lower, hoping to entice other parties to also place orders on the same side of the market. The trader’s intent is to be able to trade against the other orders that have been entered, and thereby benefit at other’s expense. This is a form of market manipulation. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Textbook Reference
Please see textbook section 9.5.10

Question 51

A customer has instructed his broker that he wishes to write 20 ABC 65 calls to add income and protect his portfolio. The order is to be entered immediately and he will take as many contracts as are available. This order is a
A) Market order
B) Stop loss all or none order
C) Sell limit order
D) Buy limit order

Answer 51

Correct Answer:
a) Market Order

Answer Explanation
Market orders instruct the broker to buy or sell the options at the current market price. In this example the customer is selling, and will be writing the 20 calls at the ask price. The advantage of using market orders is that orders are filled quickly (often instantly). Because the order is not designated as an all-or-none order the order may be filled with less than 20 contracts.

Textbook Reference
Please see textbook section 9.4.2

Question 52

FINRA prohibits member firms from adding an extra broker or dealer as a principal to a trade, in a way that has no benefit for the customer. This practice is called
A) Double dealing
B) Interloping
C) Circumvention
D) Interpositioning

Answer 52

D) Interpositioning

Answer Explanation
Interpositioning can be used to increase trading volume or order flow. It also can be used to circumvent the best execution responsibility.

Textbook Reference
Please see textbook section 9.5.1.1

Question 53

An order is placed to buy 100 shares at $61.55. The company then declares a cash dividend of 30 cents per share. What will the order price be adjusted to, before the open on the ex-dividend date?
A) 61.55
B) 61.25
C) 61.85
D) It can’t be determined from the information given

Answer 53

Correct Answer:
B) 61.25

Answer Explanation
The limit price will be reduced by the amount of the dividend, to compensate for the fact that a buyer on ex-dividend date (or after) will not receive the dividend.

Textbook Reference
Please see textbook section 9.4.5

Question 54

Issuers who list their securities on the OTCBB must
A) File current financial reports with the SEC
B) Provide the OTCBB risk disclosure document to each client prior to their first OTCBB trade.
C) Provide the OTCBB risk disclosure document to each client within 15 days of their first OTCBB trade.
D) Disclose on each trade confirmation that OTCBB-listed securities do not file current financial reports.

Answer 54

Correct Answer:
A) File current financial reports with the SEC

Answer Explanation
The OTCBB is an interdealer quote system that displays information for OTC securities not traded on an exchange. Trades are not done on the OTCBB platform and trades in OTCBB-listed securities are not exempt transactions. There is no OTCBB risk disclosure document.

Textbook Reference
Please see textbook section 9.3.4.1

Question 55

What are market makers not allowed to do, based on nonpublic advance knowledge of the contents or knowledge of research reports?
A) Offer quotes
B) Accept customer orders
C) Buy or sell for their own account
D) Communicate with the media about the stock

Answer 55

Correct Answer:
C) Buy or sell for their own account

Answer Explanation
The rule against trading ahead of research reports prevents altering inventory - i.e., changing it up or down. The firm may still enter quotes on an agency basis as this will not change the firm’s inventory.

Textbook Reference
Please see textbook section 9.5.9

Question 56

All of the following types of securities may be quoted on the OTC Bulletin Board except
A) Direct Participation Programs
B) ADRs
C) Corporate bonds
D) Domestic stocks

Answer 56

Correct Answer:
C) Corporate Bonds

Answer Explanation
The OTCBB is used for quoting domestic equities, ADRs and Direct Participation Programs that are not listed on stock exchanges and do not qualify for transaction reports on the Consolidated Tape. It does not report bonds.

Textbook Reference
Please see textbook section 9.3.4.1

Question 57

A trade that is made between investors on an exchange is a(n)
A) Primary transaction
B) Auction transaction
C) Over-the-counter transaction
D) Secondary transaction

Answer 57

Correct Answer:
D) Secondary transaction

Answer Explanation
A secondary market transaction occurs when securities are bought and sold between investors. A secondary market transaction can take place over-the-counter or on an exchange.

Textbook Reference
Please see textbook section 9.3

Question 58

Calvin entered a GTC limit order to buy 100 shares of Home Depot at $130, with no further instruction. When he checked back with his broker a few days later, he learned that the limit price on his order had changed to $129.30. What happened?
A) Home Depot stock split two for one
B) He lost priority
C) He failed to specify a stop price
D) Home Depot declared a 70 cent per share dividend

Answer 58

Correct Answer:
D) Home Depot declared a 70 cent per share dividend

Answer Explanation
In an unfilled GTC buy limit order, if a dividend is declared in a stock, the limit price is automatically reduced by the amount of the dividend on the ex-dividend date, unless the investor uses a do not reduce (DNR) instruction. Since the limit price was reduced by 70 cents, Home Depot must have declared a dividend of 70 cents.

Textbook Reference
Please see textbook section 9.4.5

Question 59

The fraud provisions of the act of 1934 apply to which of the following?
A) Participation in an all-or-none offering and reporting the offering as firm to the client
B) Short sale of municipal security serial bonds
C) All of the above cases and for all types of securities
D) Manipulation of the price of a municipal security

Answer 59

Correct Answer:
C) All of the above cases and for all types of securities

Answer Explanation
The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934.

Textbook Reference
Please see textbook section 9.1

Question 60

All of the following statements are true regarding securities that trade on the OTCBB EXCEPT
A) A market maker must apply to quote a security on the OTCBB
B) Most companies that start trading on OTCBB begin to trade on Nasdaq or the NYSE within several years
C) The issuing companies must file current annual and quarterly reports with the SEC or other insurance or financial regulator
D) Most OTCBB securities trade relatively infrequently and have a high bid/ask spread

Answer 60

Correct Answer:
B)

Answer Explanation
Companies that trade on the OTCBB are usually smaller companies with stocks that trade with little liquidity. As a result, there is no presumption or expectation that an OTCBB stock will be successful in making the jump from this market to an exchange because they may be unable to meet exchange listing requirements. As a quotation facility, market makers apply to quote a stock rather than the issuer applying directly.

Textbook Reference
Please see textbook section 9.3.4.1

Question 61

The filing of current quarterly and annual financial reports is a requirement for inclusion in all of the following EXCEPT
A) Nasdaq
B) OTCBB
C) Pink OTC Markets
D) NYSE

Answer 61

Correct Answer:
C) Pink OTC Markets

Answer Explanation
Companies that are quoted in the Pink OTC Markets are not required to file financial reports with the SEC or other regulators. Current financial reports must be filed for inclusion in the OTCBB, and listing on Nasdaq or the NYSE.

Textbook Reference
Please see textbook section 9.3.4.2

Question 62

Direct trades between institutional investors via electronic trading systems are said to occur in the:
A) Third market
B) Primary market
C) Fourth market
D) Secondary market

Answer 62

Correct Answer:
C) Fourth Market

Answer Explanation
In the fourth market institutional investors subscribe to electronic trading systems. OTC trading of exchange-listed securities is the third market. The secondary market includes all trading of outstanding securities between investors. In the primary market, issuers sell their new securities to investors.

Textbook Reference
Please see textbook section 9.3.5.2

Question 63

A stock price is reduced by the amount of a dividend on the
A) Evening of the record date
B) Evening of the ex-dividend date
C) Morning of the record date
D) Morning of the ex-dividend date

Answer 63

Correct Answer:
D) Morning of the ex-dividend date

Answer Explanation
The stock price is reduced on the morning of the ex-dividend date.

Textbook Reference
Please see textbook section 9.4.5

Question 64

To meet FINRA’s standard for best execution, a member must buy or sell so that the price to the customer is
A) within 2% of the last sale price.
B) not harmful, given the circumstances of the trade.
C) competitive with other similar quotes.
D) as favorable as possible under prevailing market conditions.

Answer 64

Correct Answer:
D) as favorable as possible under prevailing market conditions

Answer Explanation
Performing reasonable due diligence to assure best execution means determining the best market for each customer order, making every effort to execute a market order fully and promptly, and buying or selling so that the price is as favorable as possible under prevailing market conditions.

Textbook Reference
Please see textbook section 9.5.1

Question 65

When a broker-dealer holds customer orders for execution and takes advantage of price knowledge pertaining to those orders, which of the following types of trades would suggest a prohibited activity?
A) Proprietary order for the firm’s own account
B) Buy order for an institutional client
C) Sell order for a retail client
D) Riskless principal trade

Answer 65

A) Proprietary order for firm’s own account

Answer Explanation
A “front-running” violation can occur when a firm holds pending customer orders for execution, taking advantage of price knowledge pertaining to those orders and then executing proprietary orders for its own account in the same securities, ahead of the customer’s order.

Textbook Reference
Please see textbook section 9.5.7