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Flashcards in Trading - Secondary Market 6% Deck (82)
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Difference between a bull and a bear

a bear sells first, buys second


What risk is involved with a long or short position?

Long has limited risk, can lose investment

Short has potential unlimited risk, as if the stock goes up, they will owe more than they did


Capacity of Broker/Dealer

Acts as either one or the other, never both.

as a broker when matching of a buyer and a seller
-said to be acting in an agent capacity
-firm charges a commission, think ABC (agent, broker, commission)
-involves no risk to the broker/dealer

as a dealer, it is using its own inventory, acting as a principal
-selling, charges a markup
-buying, charges a markdown
-involves risk, as no assurance to sell security quickly or at a profit

as a


Trade Ticket - information required

- name of security
- Quantity
- Whether the trade is solicited, unsolicited or discretionary
- Long or short (if the trade is a sell); and
- Time Stamps


Trade Ticket

Original Document that documents the buy or sell transaction, goes to the margin department, purchase and sales, and order or wire department


Ticket for a sell

Must be marked:
-long if closing a long position
-if b/d is not holding the securities in street name, RR must
receive affirmation from the customer that the customer can
deliver the securities by settlement date
-short if opening a short position
-if not in street name, rr must receive affirmation from the
customer concerning the source of borrowed securities


Street Name

a brokerage account, where the customer's securities and assets are held under the name of the brokerage firm, rather than the name of the individual who purchased the the security or asset. The individual is listed as the real and beneficial owner.


Regulation SHO

If the b/d misses 13 consecutive settlement dates on a threshold security, the b/d is required to perform a mandatory buy in.


Threshold security

a security with a large short position where the b/d might be at risk of covering the short


Trade Ticket - Time Stamps

Three time stamps are required on the trade ticket
1. when the order is received
2. when the ticket hits the trading desk
3. when it is executed

provides an audit trail of best execution and to confirm b/d did not trade ahead of customer's order


Trade Confirmations

Must be sent to customer no later than the completion of the trade


Trade Confirmation - Required information

1. B/D name and address
2. Whether the trade was a purchase or sale
3. Complete Security Description
4. Quantity
5. Trade Date and Settlement Date
6. Delivery and Payment Instructions
7. Capacity of the B/D (agent or principal)
8. Commission (if acted as agent); and
9. Markup or Markdown (if firm acted as a principal in a NASDAQ or
riskless principal trade)
when the firm is acting in an agency capacity, the contra broker must be disclosed on the trade confirmation, or stated that the name can be available upon request


The Trading Spread (or the inside market)

difference between the bid and offer(ask)

the market for a security is always the highest bid and lowest ask

a narrow spread indicates active trading in a security

a wider spread indicates sluggish or thin spread



price at which investors can sell shares and purchasing dealer can buy shares - always lower than the offer


Offer (or ask)

price at which investors can buy shares and the lowest price a dealer is willing to accept


Five Percent Policy

FINRA says markups/markdowns in the secondary market must be fair and reasonable, generally to to exceed 5%. It is a guideline, as fairness can vary depending on the type of transaction.


Five percent policy - applies to:

-nonexempt (corporate) securities traded in the OTC secondary market;
-pink sheets
-yellow sheets (lists corporate bonds)
-the Bulletin Board
-all nonexempt securities which trade OTC, including ADR's
-securities listed on the exchange such as NYSE.
-misc bond wire services
-proceeds trades
-agency cross trades
-riskless and simultaneous principal transactions
-other nonexempt stock and bond trades.
-third market - listed equities trading OTC
does not apply to exempt securities, nor to prospectus offerings


Securities Market

Primary Market = New Issue Market

Secondary Market = Trading of Outstanding (previously issued) Securities
- First Market
- Second Market
- Third Market
- Fourth Market


First Market

Trading of securities listed on the exchange


Second Market

Trading of unlisted Securities OTC


Third Market

Listed Securities Trading OTC


Fourth Market

Electronic Trading of large blocks between institutional investors (Instinet)


Exchanges vs OTC

Exchanges represent an auction market with competitive buyers and competitive sellers

OTC market is a negotiated market where one buyer negotiates with one buyer



a stock exchange is a physical location where "listed" securities trade.

NYSE, founded in 1792, most active of the world's stock exchanges, trading more than 1 billion shares average daily volume.

NYSE Euronext (NYSE/New York and Euronet/Paris: NYX), NYS/ARCA and NYSE/AMEX have all combined to create the NYSE


Requirements to be listed on the exchangea

-Min Shares outstanding = 1.1 million
-Min Market Value of shares = $140 million
-Aggregate pre tax earnings over the last 3 years of $10 million
-Not less the $500 million in global capitalization and $100 million in revenues during the most recent 12 months
-Min share price at listing $4
-Majority of board of Directors must be independent or outside directors


NYSE Member

An individual who has a seat on the exchange. Each firm that is an NYSE member firm must have an individual employee who owns a seat on the exchange.


NYSE Member Categories

1. Commission House Broker or Floor Broker
2. Two Dollar Broker
3. Registered Competitive Traders
4. Specialist


Commission House Broker or Floor Broker

executes orders for clients of the broker's firm. Members firms charge a commission to their clients


Two dollar broker

executes orders for floor brokers when they are too busy to execute all of their firm's orders. They charge each broker a commission


Registered Competitive Traders

orders for their own accounts. seldom work for clients, but if they have clients, they must give them priority