Trading Market Questions Flashcards
he individuals who make a secondary market in corporate bonds include all of the following EXCEPT:
A market makers
B dealers
C traders
D registered representatives
The best answer is D.
The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (also known as dealers) and traders. Both market makers (dealers) and traders deal with the public through registered representatives (retail brokers).
A market maker that compensates a retail member firm for sending its customer orders to that market maker is:
I paying for order flow
II interpositioning
III engaging in a prohibited practice under SEC rules
IV permitted to do so, subject to best execution requirements
A I and III
B I and IV
C II and III
D II and IV
The best answer is B.
If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called “payment for order flow.” The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price.
The SEC regulation that requires market centers to accept automated executions that do not discriminate against any class of users of their systems is:
A Regulation NMS
B Regulation ATS
C Regulation SHO
D Regulation M
The best answer is A.
Rule 610 of Regulation NMS requires all market centers to electronically link and provide automated execution within 1 second for orders that are executable. It also mandates that market centers cannot discriminate against customers who access their quotes.
The “Trade-Through” rule of Regulation NMS applies to all of the following EXCEPT:
A NYSE issues
B NYSE American (AMEX) issues
C NASDAQ issues
D OTCBB issues
The best answer is D.
Rule 611 of Regulation NMS (National Market System) prohibits an exchange from “trading through” the better priced quote of another market (including Third Market Makers and ECNs). Thus, all exchanges must be linked so that the trade execution will always occur at the NBBO (National Best Bid and Offer prices). If another market is posting a better priced quote, the exchange that receives the order must fill the order at the better price, or must route the order to that market for a fill.
Regulation NMS applies to NYSE, NYSE American (AMEX), and NASDAQ listed issues. These are all markets that can electronically update and access quotes for trade execution within 1 second of order receipt. The rule does not apply to OTCBB or Pink Sheet issues, where the markets are much less liquid and trades are still done manually.
Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose which of the following information?
I Fill rates
II Speed of executions
III Rates of price improvement
IV Trading Volumes
A I and II only
B III and IV only
C I, II, III
D I, II, III, IV
The best answer is C.
SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on:
Effective spreads (narrow spreads are better!);
How market orders of various sizes were executed relative to the public quote (executions at, or very close to the public quote are better!);
Speed of execution (fast execution is better!);
Fill rates (a larger percentage of orders being filled is better!); and
Price improvement or disimprovement (getting a better price than expected is better!).
Trading volumes are not included in the monthly report on execution quality required under Rule 605 because trading volumes are reported every day by the exchanges.
Under SEC Rule 606 of Regulation NMS, broker-dealers are required to compile statistical information on the routing of customer non-directed orders to market venues, and make this information available to customers:
A monthly
B quarterly
C semi-annually
D annually
The best answer is B.
SEC Rule 606 of Regulation NMS requires broker-dealers to compile and report statistical information on their order routing procedures for all customer trades every quarter. Do not confuse this with another part of the rule that requires that broker-dealers give to their customers an annual notice that the customer can, on request, get detailed information on the routing of that customer’s orders over the prior 6 months.
An NMS stock is quoted at $30.50 Bid; $35.75 Ask. Which quotes can be accepted by an SRO for this stock?
I $30.55 Bid II $30.555 Bid III $30.65 Ask IV $30.655 Ask A I and III B I and IV C II and III D II and IV
The best answer is A.
Rule 612 of Regulation NMS does not allow sub-penny quotes or orders to be entered for NMS stocks.
An institutional customer places a marketable order to buy 10,000 shares of ABCD stock, a NASDAQ listed company. The customer directs that the trade be routed to an ECN for execution and not be sent to the NASDAQ. Which statement is TRUE about this?
A The customer’s instructions are to be followed and the order must be sent to the designated ECN
B The order must be sent to the NASDAQ for execution
C The order must be sent to the market with the largest display size
D The order cannot be accepted from the customer
Explanation
The best answer is A. If the customer directs that the trade be sent to a different trading venue, follow the customer’s instructions. When the ECN gets the order, it must either fill the order at the best price available in all markets; or it must re-route the order to the better-priced market (the “trade-through” rule); so the customer will get the best price, no matter where the order is actually sent!
A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $44 and $49 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed?
A Sell (Short) ABC @ $43 Stop GTC B Sell (Short) ABC @ $44 Stop GTC C Sell (Short) ABC @ $49 GTC D Sell (Short) ABC @ $50 Stop GTC
The best answer is A.
If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $44. If the stock moves through this price, it is expected that it will move sharply downward. To sell below the current market, a sell stop order must be used. Therefore, the order to sell (short) ABC @ 43 Stop GTC is appropriate. This would be a short sale (the sale of borrowed shares), so that these shares could be purchased at a lower price after the market drops and used to cover the short position at a profit. A sell limit order cannot be used, since these are orders to sell higher than the current market.
All of the following are requirements for a company to move its listing from another market to the NYSE EXCEPT:
A 2,200 shareholders
B Minimum of 1,100,000 shares outstanding
C $100,000,000 aggregate market value of outstanding shares
D Minimum debt to equity ratio of 50%
The best answer is D.
The NYSE does not set a maximum debt to equity ratio for a company that wishes to move its listing. It does require that the company have 2,200 or more shareholders; an average monthly trading volume of 100,000 shares for the past 6 months; $100,000,000 aggregate market value of outstanding shares; and at least 1,100,000 shares outstanding. Also, there must be a national interest in trading the stock and the company must agree to distribute proxies to be listed.
Which of the following individuals trades on the New York Stock Exchange Floor? I Specialist (DMM) II Floor Broker III Two Dollar Broker IV Competitive Trader A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D.
The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. The name comes from the fact that they used to charge $2 per trade. A Competitive Trader is a person that trades for his own account (this really doesn’t happen any more, but it is tested).
Under NYSE rules, every “responsible broker or dealer” who communicates bids and offers on the exchange floor (also known as “addressing the crowd”) must comply with all of the following rules EXCEPT:
A any bid or offer for less than the normal trading unit has no standing in the trading crowd
B the highest bid and the lowest offer have precedence in all cases
C bids and offers must be publicly announced
D bids and offers are set by floor officials during unusual situations
The best answer is D.
Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ’s “inside market” - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.
Regarding Specialists (DMMs) and Floor Brokers on the NYSE floor, which of the following statements are TRUE?
I Specialists trade for their own account
II Specialists do not trade for their own account
III Floor Brokers trade for their own account
IV Floor Brokers do not trade for their own account
A I and III
B I and IV
C II and III
D II and IV
The best answer is B.
Specialists (now called DMMs - Designated Market Makers) on the NYSE floor buy and sell designated securities into their inventory and from their inventory. Floor brokers handle public orders on the NYSE floor acting as agent only - they do not trade for their own account.
Which statements are TRUE regarding the NYSE Specialist (DMM)?
I The Specialist/DMM is under the obligation to act as the intermediary if there are 2 other floor brokers that are willing to trade with each other
II The Specialist/DMM is under the obligation to act as the intermediary if there are no other floor brokers that are willing to trade that security
III The Specialist/DMM is under the obligation to disintermediate himself if there are 2 other floor brokers that are willing to trade with each other
IV The Specialist/DMM is under the obligation to disintermediate himself if there are no other floor brokers that are willing to trade that security
A I and III B
I and IV C II and III
D II and IV
The best answer is C.
The Specialist (now renamed the DMM or Designated Market Maker) has both a “positive” obligation and a “negative” obligation. The Specialist/DMM must not interposition himself between 2 willing traders - this is the Specialist/DMM’s negative obligation. Thus, the Specialist/DMM cannot act as the “intermediary” in a transaction when there are 2 other willing traders - so the Specialist/DMM must “disintermediate” himself.
On the other hand, the Specialist/DMM’s positive obligation is to be the buyer or seller of last resort if there are no other willing traders - so the Specialist/DMM must “intermediate” himself under his positive obligation and take the other side of the trade if there is no one else willing to do so.
Orders on the Specialist/DMM’s book are filled on a:
A Last In, First Out basis
B First In, First Out basis
C First In, Last Out basis
D Random Selection basis
The best answer is B.
Orders on the book are handled on a FIFO basis - first in-first out. If an order is canceled and resubmitted as a different order (i.e., change the order from “Buy 100 shares at $50” to “Buy 200 shares at $50”), the new order goes to “last place” on the book.
An order is placed on the NYSE to buy 100 ABC shares at $50 Day. If the order is not executed on that day, who cancels the order?
A the customer
B the Specialist (DMM)
C the registered representative
D ABC corporation
The best answer is B.
It is the responsibility of the Specialist (now renamed the DMM - Designated Market Maker) to cancel any “Day” orders at the end of the day that have not been filled.
A Specialist (DMM) on the NYSE quotes ABC stock at:
$40.00 - $40.02
250 x 150
A customer places an order to sell 25,000 shares of ABC stock at the market. Which statement is TRUE?
A The Specialist/DMM is not required to fill the order
B The Specialist/DMM will put the order on his book
C The Specialist/DMM will fill the order in full for 25,000 shares
D The Specialist/DMM will fill the order for 15,000 shares and place the remaining unfilled portion of the order for 10,000 shares on his book
he best answer is C.
The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $40.00 Bid with a size of 250 (good for 250 x 100 = 25,000 shares); and $40.02 Ask with a size of 150 (good for 150 x 100 = 15,000 shares). This customer is placing an order to sell 25,000 shares at the market. Since the Specialist/DMM is willing to Buy 25,000 shares at the current Bid of $40.00, the order will be filled in full at the current Bid.
A floor broker goes to the trading post to buy 10,000 shares of ABC at the market-not held. The Specialist (DMM) says to the trader “One hundred shares are stopped at 19.” This means that:
A the trader is stopped from trading with anyone else
B trading has been stopped in the issue
C the Specialist/DMM has guaranteed that the price will not change for a short period
D the Specialist/DMM will not trade with anyone else at the $19 price
The best answer is C.
When a Specialist (now renamed the DMM - Designated Market Maker) “stops stock,” he gives a guaranteed price for a short time period to a floor broker. The floor broker is free to try and get a better price, but if he fails, he can return to the Specialist/DMM for the stock at that price. This can only be done for public orders.
All of the following statements are true about computerized trading of securities on exchanges EXCEPT:
A trades can be effected more efficiently and at lower cost
B trades bypass the floor broker
C orders are prioritized with member firm orders having priority over public orders
D orders can be accepted up to certain size limits
The best answer is C
. Electronic trading systems, such as the NYSE Super Display Book system, are faster, cheaper, and more efficient than manual trading by floor brokers. These systems have size limitations, and cannot handle orders that require human judgment such as a “Not Held” order. It is these systems that allow the NYSE to trade, on average, 1 billion shares a day. FINRA and NYSE rules require that public customer orders get priority over member firm orders. Thus, the statement that member firm orders are given priority over public orders is false.
hich of the following orders are accepted on the NYSE automated trading system? I Day orders II Market orders III Limit orders IV Large Block orders A I only B II and III only C I, II, III D I, II, III, IV
The best answer is C. The Super Display Book system cannot handle any size order. There are maximum order sizes (e.g., 3,000,000 shares for limit orders). The system accepts market and limit orders. It only accepts Day orders - any longer term order can only be accepted by that member firm into its internal system and routed to the NYSE as a new Day order each day.
Which statements are TRUE regarding trading halts?
I If it is a regulatory halt, only that exchange stops trading the stock
II If it is a regulatory halt, all markets must stop trading the stock
III If it is a non-regulatory halt, only that exchange stops trading the stock
IV If it is a non-regulatory halt, all markets must stop trading the stock
A I and III
B I and IV
C II and III
D II and IV
The best answer is C.
A “regulatory halt” is one imposed by either a regulator (the SEC stops trading in a stock) or one that occurs because the “circuit breaker” (7% drop in the S&P 500 Index) was tripped. If there is a regulatory halt, all trading in that stock must stop in the U.S. in all markets; and if the circuit breaker is tripped, all stock markets in the U.S. must stop all trading.
So what is a non-regulatory halt? An example is, back in the “good old days,” when the NYSE would routinely delay the opening of trading in a stock if there was a large opening order imbalance (many more opening sell orders than buy orders). During the halt, the Specialist would attempt to round up matching buy orders, so that there could be an orderly opening. The NYSE learned that this was not such a great idea, because institutions that could not trade the stock on the NYSE simply went to regional exchanges, Third Market Makers and ECNs to do their trades instead. So each time the NYSE did this, they lost market share! Needless to say, they don’t do this anymore - except in test questions of course!
Over-the-counter traders perform which of the following functions? I Giving quotes to customers II Taking positions in securities III Performing clerical duties IV Establishing spreads A I and II B III and IV C I, II, IV D I, II, III, IV
The best answer is D.
OTC traders position trade (that is, trade for the firm’s inventory account), establish spreads (the difference between the bid and ask quote that is the profit for the dealer), and give quotes to customers. Clerical duties are handled by clerks.
A nominal quotation given by an over-the-counter dealer represents a(n):
A firm bid or offer
B likely bid or offer
C approximate market value, with no bid or offer
D bid or offer limited to round lots of 100 shares
The best answer is C.
A nominal quote is really no quote - it is simply an approximate price. The dealer is not obligated to trade at this quote and must identify it as a nominal quot
Which statements are TRUE about firm quotes?
I A firm quote represents an actual price at which the dealer is willing to buy or sell
II A firm quote represents an approximation of market value, at which the dealer is not obligated to buy or sell
III Firm quotes must be identified as such when given
IV No identification of a firm quote is required when given
A I and III
B I and IV
C II and III
D II and IV
The best answer is B.
In the OTC market, it is assumed that quotes, when given are “firm” - that is the dealer is willing to trade the stated amount at the price given. There is no identification given for a firm quote. A nominal quote given by a dealer is simply an approximation of the current market value of the security, with no obligation of the dealer to trade at that quote. These are atypical, and FINRA requires that nominal quotes be identified as such when given.
Which statement is TRUE about agency transactions?
A In an agency transaction, a commission is charged
B In an agency transaction, a mark-up or mark-down is charged
C In an agency transaction, both a commission and a mark-up or mark-down are charged
D In an agency transaction, neither a commission, nor a mark-up nor mark-down are charged
The best answer is A.
In an agency transaction, a commission is charged. In a principal transaction, a mark-up or mark-down is charged. It is prohibited to charge both a commission; and a mark-up or mark-down; in the same transaction.
If a firm effects trades solely on an principal basis, the firm: I carries inventory II does not carry inventory III is a market maker IV is not a market maker A I and III B I and IV C II and III D II and IV
The best answer is A. If a firm effects trades solely on an principal basis, it carries inventory and is a market maker in the security.
When a firm “position trades,” it:
I trades on an agency basis for customers
II trades on a dealer basis for its own account
III takes inventory positions, both long and short
IV interpositions itself between a customer and another dealer
A I and II only
B
II and III only C IV only
D II, III, IV
Explanation
The best answer is B. Position trading is trading for a firm’s own account. The firm can take both long and short positions as it speculates in the market. Interpositioning is a prohibited practice under FINRA rules. If a customer wishes to buy or sell, a firm is obligated to go directly to the market maker. It cannot interposition another firm (another middleman) between the customer and the best available market.
An OTC equity trader has received a large influx of sell orders for ABC stock and, to fill them, has taken an extremely large long position in the firm’s inventory account. The dealer would most likely:
A decrease the ask price in the OTCBB
B decrease the bid price in the OTCBB
C decrease the mark-down to customers that sell
D place an “OW” in the OTCBB
The best answer is B.
The dealer’s Bid price is too high - that is why the sellers are pouring in! The dealer will lower the Bid price - this will discourage sellers.
If the dealer were to decrease the Ask price, this would encourage sellers to the dealer - and this dealer does not need to buy any more of the stock, he already has an overly large long position.
Decreasing the mark-down charged to customers would encourage more sellers at the Bid, which the dealer does not want, because the dealer does not want to buy any more stock.
Placing an “OW” in the OTCBB is an “Offers Wanted.” This indicates that the dealer wants to buy more of the stock from any willing sellers, which is not the case - the dealer wants to sell the stock, not buy it! Rather, the dealer would want to place a “BW” - Bids Wanted - in the OTCBB, telling potential buyers that he or she is interested in selling.
Which of the following describes an “agency cross” transaction?
A A customer directs the broker to sell one stock and use the proceeds to buy another
B A dealer receives a buy order from a customer and the dealer purchases stock into inventory and resells it to a customer
C A market order to buy and a market order to sell come in at the same time from two different customers for the same stock and amount and are matched
D A stock is bought and an equivalent security is simultaneously sold short
The best answer is C. Crossing is when a market order to sell and a market order to buy come in at the same time on the same stock and for the same amount from two different customers. Under FINRA rules, the firm can “cross” the order at the current market price, charging a fair and reasonable commission on each trade. Choice A describes a “proceeds transaction;” Choice B describes a “riskless principal transaction;” and Choice D describes an “arbitrage” transaction.
