Trading and Market-Making Activities

Question 1

A market maker, quoting $17.10 - $17.13, has 1,200 shares to buy at the bid ranked in time priority as follows: As principal, 500 shares; customer #1, 300 shares; customer #2, 400 shares. A market order to sell 1,000 shares is received. Under FINRA rules, how will the order be filled?

A. Customer #1, 300; Customer #2, 400; Market Maker, partial
B. Market Maker, 500; Customer #1, 300; Customer #2, partial
C. Market Maker, 500; Customer #1, partial; Customer #2, partial
D. Market maker, partial; Customer #1, partial; Customer #2, partial

Answer 1

A

An order for a public customer must have priority over an equivalent order for the account of a member firm or of an associated person.

Question 2

A market maker is holding a customer limit order to buy 500 WXYZ at 45.20 MAQ. As principal, the firm buys 300 shares at 45.15. Under Nasdaq rules, the market maker:

A. Is not obligated to fill the order, in whole or in part.
B. Is obligated to fill 300 shares of the order and cancel the remaining 200 shares.
C. Is obligated to fill 300 shares of the order and protect the remaining 200 shares.
D. Is obligated to fill the entire customer order.

Answer 2

A

MAQ stands for minimum acceptable quantity. In other words, the customer wants to buy 500 shares at a minimum. As the market maker bought only 300, it is not obligated to fill the order.

Question 3

Alice thinks the stock price of ABC Industries is about to drop rapidly, and she wants to profit from it. Her rep, Paulson, tells her the way to do this is to borrow ABC shares and then sell them short. But first, he says, the shares to be borrowed must be located. Who has the responsibility to locate them?
A. Alice
B. Paulson
C. Paulson’s broker-dealer
D. The broker-dealer of the customer from whom shares are borrowed

Answer 3

C

Question 4

Assume that the price of a stock has fallen by more than 10% from the previous day’s close. After this occurs, which of the following statements is true?
A. Positions in the stock marked “short” can’t be sold at all in that trading day.
B. Positions in the stock marked “short-exempt” can’t be sold at all on that trading day.
C. Positions in the stock marked “short” can’t be sold on a downtick.
D. Positions in the stock marked “short-exempt” can’t be sold on a downtick.

Answer 4

C

Question 5

What is the corresponding execution system for the ADF quotation system?

Answer 5

Private connectivity systems

Question 6

What is the corresponding execution system for the OTC Pink quotation system?

Answer 6

Voice

Question 7

What is the corresponding reporting system for Nasdaq Level 1, 2 and 3 quotation systems?

Answer 7

TRF

Question 8

What is the corresponding reporting system for the OTC quotation system?

Answer 8

ORF

Question 9

What is the corresponding reporting system for the ADF quotation system?

Answer 9

ADF

Question 10

A broker-dealer makes a market in ABC Pharmaceuticals stock. During regular market hours, it is bidding to buy 300 shares of the stock at a price of $31.24 per shares. What must it offer, at minimum (# of shares and share price) to sell ABC stock?
A. 100 shares, $31.25 per share
B. 300 shares, $31.23 per share
C. 100 shares, no minimum price
D. 300 shares, no minimum price

Answer 10

A

Market makers must have a two-sided quote for at least 100 shares of a stock during regular trading hours. They can offer to buy or sell more than 100 shares, but not less. The ask (sell) price must be higher than the bid price.

Question 11

T or F: The NBBO is also called the “inside market.”

Answer 11

T

Question 12

T or F: Market makers who are participating in the NBBO are not allowed to change their quotes.

Answer 12

F

Market makers can change their quotes at any time.

Question 13

T or F: A market order to buy will execute immediately against the bid side of the NBBO.

Answer 13

F

It executes against the ask side of the NBBO.

Question 14

T or F: A market order to sell will execute immediately against the bid side of the NBBO.

Answer 14

T

Question 15

Indicate whether the following order or quote is for a round lot, a mixed lot, or if it can’t be determined.

A dealer quote to buy stock.

Answer 15

Round lot

All dealer quotes are for round lots – multiples of 100 shares.

Question 16

Indicate whether the following order or quote is for a round lot, a mixed lot, or if it can’t be determined.

A customer order displayed by the system as 300 shares.

Answer 16

It can’t be determined

Any customer order of from 300 up to 399 shares is displayed by the system as 300 shares.

Question 17

Indicate whether the following order or quote is for a round lot, a mixed lot, or if it can’t be determined.

A customer order to buy 270 shares.

Answer 17

Mixed lot

270 shares cannot be divided by a multiple of 100 shares.

Question 18

Indicate whether the following order or quote is for a round lot, a mixed lot, or if it can’t be determined.

A customer order to sell 5,500 shares.

Answer 18

Round lot

5,500 shares can be divided into 55 round lots of 100 shares each.

Question 19

Indicate whether the following order or quote is for a round lot, a mixed lot, or if it can’t be determined.

A dealer quote to sell 300 shares.

Answer 19

Round lot

All dealer quotes are for round lots.

Question 20

A customer’s buy market order is filled at the market maker’s [?].

Answer 20

Ask/offer

Limit order improvements update the same side of the displayed quote. Market orders execute against the opposite side of the displayed quote.

Question 21

A sell limit improvement goes to update the [?] side of the NBBO.

Answer 21

Sell

Limit order improvements update the same side of the displayed quote. Market orders execute against the opposite side of the displayed quote.

Question 22

A customer’s sell market order is filled at the market maker’s [?] price.

Answer 22

Bid

Limit order improvements update the same side of the displayed quote. Market orders execute against the opposite side of the displayed quote.

Question 23

A buy limit improvement order goes to update the [?] side of the NBBO.

Answer 23

Buy

Limit order improvements update the same side of the displayed quote. Market orders execute against the opposite side of the displayed quote.

Question 24

A customer of ABC Securities, a broker-dealer, has a limit order to sell 3,500 shares of XYZ Industries stock at $18.49 per share. ABC makes a market in XYZ stock. IF ABC executes an order (as a dealer) to sell 600 shares of XYZ at $18.51 per share, what does the Manning Rule obligate the market maker to do?

1. How many shares must be executed on behalf of the customer? At least 600, or at least 3,500?
2. What price must the customer receive on the execution? $18.49, or $18.51?
3. During what time frame must the customer trade be executed? Within 60 seconds, or within 90 seconds?

Answer 24

A. at least 600
B. $18.51
C. within 60 seconds

Question 25

What is the purpose of the Manning Rule? A. Prohibit market maker trades at a price better than a customer limit order. B. Pass on price improvement to customer limit orders.

Answer 25

B

Question 26

For each situation below, indicate if the designated percentage or defined limit is 8%, 9.5%, 20%, 29.5% or 30%. 1. Tier 1 security is traded during the market open period (designated percentage). 2. Tier 2 security is traded during market hours (defined limit). 3. Tier 1 security is traded during market hours (designated percentage). 4. Tier 1 security is traded during market hours (defined limit). 5. Tier 3 security is traded in extended hours (designated percentage).

Answer 26

A. 20% B. 29.5% C. 8% D. 9.5% E. 30% ## Footnote Designated percentages are in whole percentages, while defined limits are fractional half percentages. For Tier 1 securities, designated percentages increase from 8% in regular market hours to 20% during the market open (9:30-9:45am) and market close (3.35-4:00pm).

Question 27

A promoter offers a market maker $8,000 to publish quotes on ABC Securities. In this case, does FINRA Rule 5250 prohibit the market maker from accepting payment and/or from publishing the quotes on ABC Securities? A. Payment may not be accepted and quotes may not be published. B. Payment may be accepted but quotes may not be published. C. Payment may not be accepted but quotes may be published. D. It depends on whether the promoter has a conflict of interest.

Answer 27

C ## Footnote If a promoter offers payment to a market maker to initiate quotations, the market maker must refuse payment but may publish quotes.

Question 28

T or F: MPIDs consist of codes that combine a minimum of four letters and numbers.

Answer 28

F ## Footnote 4 letters only, no numbers.

Question 29

T or F: Market makers may be assigned multiple MPIDs.

Answer 29

T

Question 30

T or F: Market makers must use each MPID for specific purposes identified.

Answer 30

T

Question 31

T or F: FINRA may cancel one or more MPIDs of a market maker for an infraction.

Answer 31

T

Question 32

T or F: Cancellation of a primary MPID does not affect the market maker's use of secondary MPIDs.

Answer 32

F ## Footnote If the primary MPID is cancelled, the market maker is prohibited from using any additional MPIDs for any purpose.

Question 33

For a market maker with 3 terminals, which one of the following is **not** a reason for the granting of an excused withdrawal from making two-sided quotes? A. Vacation B. Equipment failure C. Illness D. A religious holiday

Answer 33

C ## Footnote There are only 3 reasons for excused withdrawals. Illness is not a reason. The firm is expected to have enough back-up to work through an employee's illness.

Question 34

In a normal market hours situation, does the market maker's action lock the market, cross the market, or neither? The inside market is 18.69 - 18.77. A market maker enters a quote to sell at 18.71.

Answer 34

Neither ## Footnote The quote would produce a new inside market of 18.69 - 18.71, narrowing the spread.

Question 35

In a normal market hours situation, does the market maker's action lock the market, cross the market, or neither? The inside market is 47.92 - 48.12. A market maker updates a quote (previously 47.89 - 48.15) to buy at 48.12.

Answer 35

Locks the market ## Footnote The quote would produce an inside market of 48.12 - 48.12, so it is not displayed. Rather, the system executes the order at 48.12.

Question 36

In a normal market hours situation, does the market maker's action lock the market, cross the market, or neither? The inside market is 9.37 - 9.49. A market maker enters a quote to buy at 9.50.

Answer 36

Crosses the market ## Footnote The quote would produce an inside quote of 9.50 - 9.49 so it is not displayed. Rather, the system executes the order and the seller gets the price improvement.

Question 37

In a normal market hours situation, does the market maker's action lock the market, cross the market, or neither? The inside market is 27.00 - 27.11. A market maker updates a quote (previously 27.00 - 27.12) to 26.99 - 27.08.

Answer 37

Neither ## Footnote The inside quote changes to 27.00 - 27.08.

Question 38

Which system is being described below? Nasdaq's premier data feed

Answer 38

Nasdaq TotalView

Question 39

Which system is being described below? A service level that allows firms to see the entire depth of the market.

Answer 39

Nasdaq Level 3

Question 40

Which system is being described below? A professional-level service that provides current prices and last transaction data but not market participant depth.

Answer 40

Nasdaq Basic

Question 41

Which system is being described below? The service level required for all market makers.

Answer 41

Nasdaq Level 3

Question 42

Which system is being described below? The most appropriate service level for retail investors and financial professionals not directly executing trades.

Answer 42

Nasdaq Level 1

Question 43

The S&P 500 ends the trading day on Thursday at 4,000. However, just before the market's open on Friday, the Fed announces a surprise rate increase of 1.5% to combat inflation. The S&P 500 starts to fall rapidly. 1. At what index level would a Level 1 market-wide circuit breaker be triggered? How long would it last? 2. The S&P rallies for 30 minutes after the Level 1 circuit breaker ends. However, shortly after noon, it begins to plummet again. At what index level would a second circuit breaker be triggered, and what type would it be? How long would it last? 3. If the S&P then goes into total free fall after the second circuit breaker ends, what would happen next? At what time would trading end for the day? What is the worst-case last trading level for the S&P 500 on that trading day?

Answer 43

1. 7% decline. 15 minutes. 2. 13% decline, level 2. 15 minutes. 3. Level 3, trading halt for rest of day. When level 3 is triggered. 3,200 (the 20% decline). ## Footnote Level 1 and Level 2 circuit breakers are triggered by declines of 7% and 13%, respectively, and each lasts 15 minutes. The S&P 500's closing level on the previous trading day is always the reference value.

Question 44

Rank the OTC markets listed below based on their eligibility requirements. Give the highest rank (1) to the market with the most stringent requirements, on down to 4 for the least stringent requirements. * OTC Pink Open Market * OTC Markets Group * OTCQX * OTCQB

Answer 44

4, 3, 1, 2

Question 45

Under the Penny Stock Quote Rule, market makers and broker-dealers must certify that they have performed due diligence on the issuer's securities prior to publishing quotes in an OTC security. The certification process requires a review of the issuer's financial and disclosure documents and: A. Verification of the issuer's most recent financial statemenets. B. A random fact check of the issuer's background and financial data. C. An attestation from the issuer that the documents are complete. D. A belief that documents are accurate and dependable.

Answer 45

D

Question 46

Under Regulation NMS, which one of the following quotes for a stock is not allowed? A. Buy 200 shares at $1.111. B. Sell 200 shares at $19.47. C. Sell 200 shares at $0.4791. D. Buy 200 shares at $1,047.01.

Answer 46

A ## Footnote Equities priced at or above $1.00 must be quoted in minimum increments of $0.01. Equities priced below $1.00 are priced in increments of $0.0001. Remember, "for decimals, a dollar a share is the dividing line."

Question 47

Leanne enters a limit order to buy 500 shares of ABC Securities at $46.25 GTC. The order does not execute for a few days and then the stock soars in price, to $75 per share, while her order remains unfilled. If she takes no action and the share price remains elevated, what event would cause her limit order to be cancelled? A. Her broker-dealer can cancel the order at any time. B. The order is automatically cancelled after one year. C. The order is automatically cancelled due to a LULD trading halt. D. The order is automatically cancelled during a trading halt due to an extraordinary event.

Answer 47

B ## Footnote A GTC limit order remains in effect until it is executed or cancelled by the customer. It is not cancelled by trading halts. If it remains unfilled, it automatically expires after one year.

Question 48

At 2:12 pm, the stock of Great Wave, Inc., an NMS stock, moves higher in a short period of time. 1. What is the reference price, for purposes of determining whether the stock has entered a limit state? 2. What LULD price band will determine if the stock has entered a limit state? 3. What action triggers a volatility trading pause? 4. For how long does a volatility trading pause continue?

Answer 48

1. The 5-minute moving average price, recalculated every 30 seconds. 2. 5% higher or lower than the reference price. 3. Best bid or offer remains at LULD band for 15 seconds. 4. 5 minutes.

Question 49

When do market makers have an obligation to maintain bona fide two-sided quotes on stocks in which they make a market? A. Whenever the market is open for trading. B. Only during regular market hours. C. Only during the market maker's regular business hours. D. Only when there are no other market makers quoting the same security.

Answer 49

B

Question 50

What are the four general requirements of broker-dealers under Regulation SHO?

Answer 50

Marking Requirement, Short Sale Price Test Circuit Breaker,Locate Requirement, Close-Out Requirement

Question 51

A limit order which improves the market maker's bid or offer must be displayed within [?].

Answer 51

30 seconds

Question 52

A market maker must execute a customer's limit order at a price at or better than an execution received in a dealer's trade, within [?].

Answer 52

60 seconds

Question 53

A penny stock has a per share value of [?] and trades [?].

Answer 53

Less than $5 Over-the-counter

Question 54

What is the customer's role in executing the following type of order/trade? Approves, initiates or none. Solicited order

Answer 54

Approves

Question 55

What is the customer's role in executing the following type of order/trade? Approves, initiates or none. Discretionary order

Answer 55

None

Question 56

What is the customer's role in executing the following type of order/trade? Approves, initiates or none. Unsolicited order

Answer 56

Initiates

Question 57

Donna enters a limit order to buy 100 shares of an OTC stock and her broker-dealer fills the trade from its own inventory, on a principal basis. Which of the following items is not shown on her trade confirmation? A. That the firm acted in a principal capacity B. The commission she paid on the trade C. The markup she paid on the trade D. The trade price

Answer 57

B

Question 58

In which case does a broker-dealer's best execution responsibility not apply? A. Orders to buy or sell foreign stocks B. Orders to buy or sell odd lots C. Unsolicited orders with routing instructions D. Unsolicited orders to buy or sell thinly traded OTC stocks

Answer 58

C

Question 59

Caroline sells 500 shares of ABC Industries stock on Thursday, February 10. The company declares a quarterly cash dividend of 4 cents per share to owners of record on February 11. What is the dollar amount of the dividend she can expect to receive? A. Zero B. $10 C. $20 $22.50

Answer 59

A ## Footnote Her trade on February 10 settles on the record date of February 11, so the buyer (the holder of record on the record date) receives the dividend.

Question 60

If a firm fails to deliver a security by its [?], a failure occurs. The failing party is responsible for [?] the fail-to-deliver position by purchasing [?].

Answer 60

Regular settlement day Closing out The same or similar security

Question 61

The real-time quote information system for NYSE-listed and Nasdaq-listed stocks is [?].

Answer 61

Consolidated Quotation System (CQS)

Question 62

The pre-market operating session hours for the CQS are [?].

Answer 62

7:00 am - 9:30 am EST

Question 63

The post-market operating session hours for the CQS are [?].

Answer 63

4:00 pm - 8:00 pm EST

Question 64

Why is it important to determine which broker-dealer is the executing party in a trade? A. The executing party is responsible for reporting the trade. B. The executing party receives the markup. C. The executing party bears liability if the trade is cancelled or fails to deliver. D. The executing party clears the trade.

Answer 64

A

Question 65

Indicate which of the following trades are not required to be reported to the TRF (for purposes of publication and dissemination): A. A non-shelf follow-on offering B. A trade executed via a tender offer C. A block trade between institutions D. A shelf follow-on offering E. A trade to facilitate a gift, made at a pre-negotiated (non-market) price F. A private placement

Answer 65

A, B, E, F

Question 66

Which modifier is used in trade reporting for: Trade executes at 10:31 am. Report is within 10 seconds of execution.

Answer 66

None

Question 67

Which modifier is used in trade reporting for: Trade executes at 2:38 pm. Report is after 10 seconds of execution.

Answer 67

.Z

Question 68

Which modifier is used in trade reporting for: Trade executes at 7:48 pm. Report is after 10 seconds of execution.

Answer 68

.U

Question 69

Which modifier is used in trade reporting for: Trade executes at 2:12 am. Report is at 8:15:00 am.

Answer 69

.T

Question 70

How must trades made on an alternative trading system (ATS) be reported? A. In most cases, they are not reported. B. To the ORF, within 60 minutes of execution. C. To the ATS, within 30 seconds of execution. D. To either the ORF or TRF, within 10 seconds of execution.

Answer 70

D

Question 71

On what system are U.S. Treasury bond trades reported?

Answer 71

TRACE

Question 72

If a bond trade takes place at 10:04 am EST, when must it be reported?

Answer 72

By 10:19 am EST (within 15 minutes)

Question 73

If a bond trade takes place at 6:42 pm EST, when must it be reported?

Answer 73

By 8:15 am EST the next day

Question 74

If a trade takes place at 6:42 pm EST, what modifier must be used in trade reporting?

Answer 74

as/of

Question 75

T or F: All business clocks used for CAT reporting must be synchronized every business day.

Answer 75

T

Question 76

T or F: Business clock synchronization may occur at any time during normal business hours.

Answer 76

F ## Footnote It must occur prior to the opening of trading, every business day.

Question 77

T or F: Business-related clocks of a broker-dealer must be synchronized, even if they are not used for regulatory reporting.

Answer 77

F ## Footnote Only regulatory reporting clocks must be synchronized.

Question 78

T or F: Firms must log the times when business clock synchronization takes place.

Answer 78

T

Question 79

T or F: The business clock synchronization standard is within one second of the NIST clock.

Answer 79

F ## Footnote The standard is within 50 milliseconds of the NIST standard.

Question 80

Must non-FINRA members report audit trail information to the CAT?

Answer 80

No ## Footnote Answer was Yes, but I think that is wrong.

Question 81

Members reporting ATS daily trading volume may only publish those numbers to [?].

Answer 81

A trade reporting facility - TRF or ORF.