Equity Trading Flashcards Preview

Series 62 > Equity Trading > Flashcards

Flashcards in Equity Trading Deck (48):

Non-exchange trade securities are known as...

OTC equities - they are not listed on a physical or electronic exchange


Five stages an order normally goes through...

1. Order entry
2. Execution
3. Clearing
4. Settlement
5. Custody and safekeeping


List five things on an order ticket other than date, security name and quantity...

1. Long or short
2. Type (market, limit etc)
3. Cash or margin account
4. Whether discretion exercised
5. Solicited or unsolicited


What's the spread in a quote?

Difference between bid (highest price a buyer will pay) and ask (lowest price a seller will accept)


What's a market order and when used?

No price specified in order, so executed at market price.
Used for liquid stocks where the trade won't impact the price.


What's a limit order?

Specific price.
May only be exercised at limit price or better.
Buy limit - placed below current market price
Sell limit - placed above current market price


What's the ranking of orders for execution?

1. Market orders
2. Limit orders ranked by price (buy limit orders: high to low / sell limit orders: low to high)
3. Limit orders at same price ranked by time of entry


What's the difference between a sell stop order and sell stop limit order?

Sell stop order activates at stop price and becomes a market order (no guarantee of execution price)
Sell stop-limit order activates at stop price and only executed at stop price or better.


When would a buy stop order be used?

To limit loss/protect profit on a short sale.
Once activated, price is not guaranteed, but execution is guaranteed.
Always placed above current market price (as short sellers want price to fall).


What happens to open orders in a reverse split?

All cancelled.
(On a forward split or stick dividend, they are adjusted)


What type of orders are adjusted for a cash dividend on the ex-dividend date?

Orders entered below the market - price reduced to reflect dividend for:
- Buy limit
- Sell stop
- Sell stop limit


Three types of orders entered above the market...

1. Buy Stop-Limit
2. Buy-stop
3. Sell limit


Three types of orders entered below the market...

- Buy limit
- Sell stop
- Sell stop-limit


What's the difference between Day Order, GTC, Open and At-the-Open orders?

Day Order - every order is day order unless specified, automatically cancelled if not executed by end of day
GTC or Open orders - remains on books until executed or cancelled
At-the-Open - buy or sell at opening price. If not executed then it is cancelled.


What must a BD do prior to a customer engaging in extended hours trading?

Give a risk disclosure document summarising risk from lower liquidity, higher volatility, unlinked markets, news announcements, price changing from close, wider spreads.


What defines a market maker in a particular stock?

Always stands ready to buy and sell shares in that stock


What price does a customer pay when buying/selling stock directly to a market maker?

Adjusted price on the spread: markup or markdown in the quoted price.


In context of determining BD role, what to ABC and PDM mean?

Agency Broker Commission

Principal Dealer Markup


What's a Designated Market Maker?

Also known as Specialist
- Must buy and sell for own account (acting as dealer) to make market fair and orderly
- Provides liquidity: buys when no buyers (and vice versa) to keep spread narrow
- Only member allowed to continuously buy and sell on principal basis


What does DMM's obligation of "No Competition with Public Orders" entail?

Only bid higher or offer lower than prevailing market price.
This way their trades narrow the spread.


Dealer to dealer settings are known as...

OTC markets
(Most debt securities including US Treasuries trade in these markets)


How does market making differ between NYSE and Nasdaq?

NYSE: one DMM per security
Nasdaq: competing market makers (required to trade a minimum number of shares dependent on security and the OTC requirement)


A quote of 16.20 - 16.40, 10x5 means...

Offer to buy 10 round lots of 100 shares at 16.20 and
Sell 5 round lots of 100 shares at 16.40


Nasdaq is registered with SEC as a securities exchange. What is requirement for initial listing?

- Fully registered securities
- Assets of a defined level
- Number of shareholders and outstanding shares
- Corporate governance standards
- At least three market makers


What are the Nasdaq system levels?

- Level I: inside market providing highest bid and lowest offed of at least two market makers
- Level II: bids / offers
from all market makers
- Level III: allows market maker to enter bids and offers


What must a market maker do if a customer order improves its quote?

Display in its quote within 30 seconds even if it does not improve the inside market - but only if it accepts the order.
If quote is 20.25 - 20.85, then a buy order at 20.30 will narrow the spread.


What are the Third and Fourth Markets?

Third: OTC trading of exchange-listed securities

Fourth: direct institution-to-institution trading without a BD


What's an ECN?

Market centre allowing quoting and trading of exchange-listed securities.
Must register with FINRA as BD and act only in agent capacity.


What's the CQS?

Consolidated Quotation System providing quotations for NYSE listed securities trading in marketplaces outside the primary location where listed.


When must transactions in equity securities be reported?

Within 30 seconds (to TRG, ORF, TRACS or exchange)
[corporate debt to TRACE within 15 mins]


What size must a transaction be if deemed a block-sized order?

At least 10,000 Shares or $200k in market value.

Market maker under no obligation to display in its quote when order is at the inside.


What's the Manning Rule?

Market maker must protect an accepted order – must fulfil the order immediately upon executing a trade for its own account that would fill the order.
Must do for client at least what it did for its own account.


What are restrictions on pricing increments for NMS stocks?

Stocks priced at $1 or more - increments of a penny

Stocks at less than $1 - increments of hundredth of a penny.


For an unexcused withdrawal, what's the lockout period?

Nasdaq or ADF market maker: 20 business days

CQS security: one business day

(Excused withdrawal: same business day)


What are the levels that trigger circuit breakers to halt trading?

Level 1: 7% between 9.30-15.25 / 15 minute halt
Level 2: 13% between 9.39-15.25 / 15 minute halt
Level 3: 20% decline any time / remainder of day
- All on S&P500


If a quote is 16 - 16.15, how many shares is a MM obligated to buy at 16?

100 - if no size is displayed a round lot is the minimum quantity (a quote without qualification)


What is stopping stock?

DMM guaranteeing a price to a floor broker, and allowing broker to seek a better deal. Can only do for a public order and not for its own account


What does OATS track?

Life of an order from entry to execution


What do FINRA best execution rules require?

Reasonable diligence to obtain the best price possible


If a market maker has a fail to deliver with its clearing firm and security cannot be borrowed... It's what type of withdrawal?

An excused withdrawal


Two exceptions to the Limit Order Display Rule?

1. Customer request (documentation of request highly recommended)
2. Block sized orders


What's the broadest index?

Wilshire 5000 index


What's interpositioning?

Putting a third party between customer and best market to customer's detriment


An order entered at a specific price is a...

Limit order.
May be partially completed unless marked AON (all or none).
May be held unless marked IOC (immediate or cancel)


Rule 611 of NMS prevents trade throughs of protected quotations on an inter market basis. What's a trade-through?

A market participant receiving an inferior price to best bid/offer on all market centres within NMS


What does the OTCBB require to display an inside market?

Two sided quotes from at least two market makers


What's NOT a factor in obtaining best execution?

Number of market makers


What's NOT a factor in obtaining best execution?

Number of market makers