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Series 7 > Unit 16 > Flashcards

Unit 16 Flashcards

1
Q

1) The simultaneous purchase & sale of the same or related securities to take advantage of market inefficiency

2) The difference between the interest paid on tax exempt bonds & the interest earned by investing the proceeds in higher yielding taxable securities. Federal law restricts earnings in connection with tax exempt bonds

A

Arbitrage

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2
Q

During a market halt, investors can still…

A

Cancel existing open orders

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3
Q

A Level 1 or 2 Halt cannot occur more than…

A

One time per day

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4
Q

1) 20% decline in S&P500

2) At any time - trading will halt & not resume for rest of day

A

Level 3 Halt

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5
Q

1) 13% decline in S&P500

2) Before 3:25 pm - 15 minutes

3) At or after 3:25 pm - trading may continue unless Level 3 Halt

A

Level 2 Halt

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6
Q

1) 7% decline in S&P500

2) Before 3:25 pm - 15 minutes

3) At or after 3:25 pm - trading may continue unless Level 3 Halt

A

Level 1 Halt

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7
Q

1) Priority - first order in

2) Precedence- largest order

3) Parity - spin the parity wheel

A

Order the DMM awards a trade

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8
Q

A market in which buyers enter competitive bids & sellers enter competitive asks simultaneously

Ex: NYSE

A

Auction Market

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9
Q

A different way to calculate margin requirements for an account based on the net risk of an entire portfolio of securities rather than a standardized percentage applied to each individual position

A

Customer portfolio margining (CPM)

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10
Q

If a customer in a margin account buys stock & simultaneously buys an option, the customer must deposit…

A

50% if the purchase price of the stock & 100% of the premium

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11
Q

When buying options, customers must deposit…

A

100% if the premium

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12
Q

Basic equation for the calculation of combined equity

A

LMV + CR - DR - SMV = EQ

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13
Q

A customer account that has long & short margin positions in different securities.

A

Combined account

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14
Q

For stock trading at or above $5 per share, the minimum maintenance requirement is…

A

The greater of $5 per share or 30% of the SMV. It will only be 30% when the SMV exceeds $16.67.

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15
Q

For stock trading under $5 per share, a customer must maintain…

A

100% if SMV or &2.50 per share, whichever is greater

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16
Q

The amount of money remaining in a customers account after all commitments have been paid in full.

A

Credit balance (CR)

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17
Q

What is the minimum deposit amount in a short account?

A

$2,000

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18
Q

The minimum maintenance requirement in a short account is…

A

30%

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19
Q

Formula for amount of equity in a short account.

A

CR - SMV = EQ

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20
Q

The amount of money in the customer’s account; equal to the sales proceeds plus the margin deposit requirement.

A

Credit register (CR)

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21
Q

The current market value of the stock position the investor sells short.

A

Short Market Value (SMV)

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22
Q

One for which another customer in writing agrees to the use of money or securities in her account to carry the guaranteed accounts.

A

Cross guarantee

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23
Q

The equity in the account above the 25% minimum requirements

A

Maintenance margin excess

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24
Q

A trader in securities or commodities who opens all positions after the opening of the market & offsets or closes out all positions before the close of the market on the same day.

Buying power is 4x the maintenance margin excess.

A

Day Trader

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25
Q

Someone who executes four or more day trades in a 5 business day period.

Minimum equity requirement = $25,000

Minimum maintenance margin requirement = 25%

A

Pattern Day Trader

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26
Q

How do each of the following effect SMA?

1) Rise in market value
2) Sale of securities
3) Deposit of cash
4) Deposit of marginable securities
5) Dividends or interest
6) Purchase of securities
7) Withdrawal of cash
8) Fall in long account MV
9) Interest charges to account
10) Stock dividend or split

A

1) Increases
2) Increases
3) Increases
4) Increases
5) Increases
6) Decreases
7) Decreases
8) No effect
9) No effect
10) No effect

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27
Q

SMA cannot be used to meet a…

A

A maintenance margin call

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28
Q

The buying power of SMA is…

A

2:1

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29
Q

Utilizing the SMA increases the…

A

Debt balance

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30
Q

Customers wishing to remove cash dividends from a margin account must do so in how many days?

A

39 days

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31
Q

The amount of SMA in the account is equal to the…

A

The greater of the EE or the amount already in SMA.

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32
Q

A notation on a customers general or margin account indicating that funds are credited to the account on a memo basis. The account is used much like a line of credit.

A

Special memorandum account (SMA)

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33
Q

The value of securities in a margin account that is in excess of the federal requirement.

A

Excess Equity (EE)

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34
Q

Market value at maintenance formula

A

DR / 0.75

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35
Q

A demand that a margin customer deposit money or securities when the customers equity falls below the margin maintenance requirement set by the BD or FINRA.

A

Margin maintenance call

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36
Q

The power of Regulation T that applies to the withdrawal of securities from a restricted account. The customer must deposit an amount equal to the unpaid portion of the securities being withdrawn in order to reduce the debit balance. The requirement is the reciprocal of the initial margin requirement.

A

Retention requirements

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37
Q

A margin account in which the equity is less than the regulation T initial requirement.

A

Restricted account

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38
Q

In a long margin account what is the minimum maintenance requirement?

A

25% if LMV

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39
Q

The minimum equity that must be held in a margin account, determined by the BD & FINRA. The amount of equity required varies with the type of security bought in margin & the BD’s house requirement is usually higher than that set by FINRA.

A

Margin Maintenance Requirement

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40
Q

Equation to determine amount of equity.

A

LMV - DR = EQ

41
Q

Customers net worth in the margin account; it represents the portion of the securities the customer fully owns.

A

Equity (EQ)

42
Q

The amount of money borrowed by the customer.

A

Debit register (DR)

43
Q

Current market value of the stock position the investor purchased.

A

Long market value (LMV)

44
Q

1) < $2,000
2) Between $2,000 - $4,000
3) > $4,000

A

1) 100% of purchase price
2) $2,000
3) 50%

45
Q

What are the minimum deposits for Regulation T & FINRA?

A

Regulation T = 50% of the market value of purchase

FINRA = initial deposit cannot be less than $2,000, unless paid in full

46
Q

Securities exempt from Regulation T include…

A

1) US Treasury bills, notes & bonds
2) Government agency issues
3) Municipal securities

47
Q

Buying & selling securities prior to the payment due date without making payment. This is a violation of Regulation T.

A

Freeriding

48
Q

If no extension is received by morning of 3rd business day after settlement, how long is the account frozen for?

A

90 days

49
Q

A BD may disregard any sum due from a customer not exceeding?

A

$1,000

50
Q

A registered trader that is obligated to maintain a fair & orderly market for specific securities & orderly market for specific securities assigned to the firm. Formerly known as specialists, they provide NBBO quotes, facilitate liquidity, open & close securities & furnish trading feedback to brokers.

A

Designated Market Maker (DMM)

51
Q

What cannot be purchased on margin but can be used as collateral?

A

1) Mutual funds
2) New issues

52
Q

What cannot be purchased on margin & cannot be used as collateral?

A

1) Put & call options
2) Rights
3) Won nasdaq OTC issues not approved by FRB
4) Insurance contracts

53
Q

What may be purchased on margin & used as collateral?

A

1) Exchange listed stocks, bonds
2) Nasdaq stocks
3) Non Nasdaq OTC issues approved by FRB
4) Warrants

54
Q

A security that is eligible for purchase on margin. A form is permitted to lend money to help customers purchase securities, using them as collateral for margin purchases.

A

Marginable securities

55
Q

The federal reserve board regulation that governs customer cash accounts & the amount of credit that firm & dealers may extend to customers for the purchase of securities. Currently sets the loan value of marginable security at 50% & the payment deadline at 2 days after settlement.

A

Regulation T

56
Q

An optional contract between a firm & a margin customer that permits the firm to lend margin securities to other brokers.

A

Loan Consent Form

57
Q

BDs are limited to pledging how much of a customer’s debt balance as collateral?

A

140%

58
Q

Registered in the name of the firm.

BD is known as the nominal or names owner. Customer is beneficial owner

A

Street name

59
Q

Gives permission to the BD to pledge customer margin securities as collateral.

A

Hypothecation agreement

60
Q

A component of a customers margin account agreement, outlining the conditions of the credit arrangement between the brokerage firm and customer

A

Credit agreement

61
Q

Using borrowed capital to increase investment return

A

Leverage

62
Q

Stock is borrowed and then sold short, enabling the customer to profit if it’s value declines

A

Short margin account

63
Q

Customers purchase securities and pay interest on the money borrowed until the loan is repaid

A

Long margin account

64
Q

To adjust the value of the securities in an account to the current market value of those securities. It is used to calculate the market value and equity in a margin account.

Done every business day on basis of the closing price of the stock

A

Mark to market

65
Q

Securities can be borrowed from

A
  1. The member firm executing the short sale
  2. Margin customers
  3. Other member firms
  4. Institutional investors
66
Q

Mandates a locate requirement

Firm must locate the security for borrowing to ensure that delivery will be made on the settlement date

A

Regulation SHO

67
Q

The sale of a security that the seller does not own, or any sale consummated by the delivery of a security borrowed by or for the account of the seller

Buy low, sell high principal but in reverse where the sale is made before purchase

Can occur any time during trading day

Short sell profits = stock decreases in value

A

Short sale

68
Q

A relatively wide spread indicates

A

A thin trading market for the security

69
Q

Firm quotes are only good for

A

Round lots only

70
Q

When are markups and markdowns charges?

A

When a market maker is acting as principal

71
Q

What factors influence a spreads size?

A
  1. Issues size
  2. Issuers financial condition
  3. Amount of market activity
  4. Market conditions
72
Q

The difference between a securities bid and offer price

A

Spread

73
Q

A quotation for a security that does not represent an actual offer to buy or sell but is given for informational purposes only

Must be clearly labeled as such

Common with municipal bonds

A

Nominal quote

74
Q

A qualified quotation whereby a broker dealer estimates the price on a trade that will require special handling owing to its size or to market conditions

A

Work out quote

75
Q

Allows the dealer to back away if market conditions change

A

Qualified quote

76
Q

A securities quotation subject to some condition requiring confirmation by the dealer

Opposite of a firm quote

A

Subject quote

77
Q

The failure of an over the counter market maker to honor a firm bid and ask price; this violates Conduct Rules

A

Backing away

78
Q

The sure price at which a trading unit of a security may be bought or sold. All quotes are these unless otherwise indicated

A

Firm quote

79
Q

An order to execute either of two transactions. If one order is executed, all other linked orders are canceled

A

Alternative orders (OCO)

80
Q

An order that instructs the firm to execute the entire order. Firm does not have to execute immediately

A

All or None (AON) orders

81
Q

An order that instructs the floor broker to execute immediately, in full or in part. Any portion of the order that remains unexecuted is canceled

A

Immediate or cancel (IOC) order

82
Q

An order that instructs the broker to fill the entire order immediately. If the entire order cannot be executed immediately, it is canceled

A

Fill or kill (FOK) orders

83
Q

Indicates that the customer agrees not to hold the floor broker or broker dealer to a particular time or price of execution

May not be placed with the NYSE DMM

A

Not held (NH) orders

84
Q

Executed at or as near as possible to the closing price in the OTC market

A

Market on close orders

85
Q

Entered as a stop order and changed to a limit order if the stock hits or goes through the stop price

A

Stop limit order

86
Q

An order that specifies it is to be executed at the opening of the market of trading in that security or else be canceled. The order will be executed at the opening price

Partial executions are allowed

A

At the opening order

87
Q

An order that is left on the specialists books until it is either executed or canceled

A

Good til canceled order (GTC)

88
Q

An order that is valid only until the close of trading on the day it is entered. If it is not executed by the close of trading, it is canceled

A

Day order

89
Q

Which orders are reduced for cash dividends?

A

Only orders placed below the market price

(BLISS)

90
Q

Not reduced by an ordinary cash dividend

Customer does not care if there is an execution due solely to the ex date reduction

A

Do not reduce (DNR)

91
Q

A stop order that once triggered becomes a limit order instead of a market order

A

Stop limit order

92
Q

Protects a profit or limits a loss in a long stock position and is entered at a price below CMV

A

Sell stop order

93
Q

Protects a profit or limits a loss in a short stock position

Entered at a price above CMV and is triggered when the market price touches or goes through the stop price

Also used by technical traders who track support and resistance levels

A

Buy stop order

94
Q

The stop order becomes a market order and is completed at the next price

A

Execution

95
Q

Transaction at or through the stop price that activates the trade

A

Trigger

96
Q

Becomes a market order if the stock reaches or goes through the stop price

Executed by DMM

No guarantee the executed price will be the stop price

Buy stop = increase in current market

Sell stop = decrease in current market

Designed to protect a profit or prevent a loss if the stock begins to move in the wrong direction

A

Stop order

97
Q

Buy limit = places below CMV
Sell Limit = places above CMV

Used when investors believe stock is overpriced

Limits the amount paid or received for securities

Executed at specified price or better

A

Limit order

98
Q

Executed immediately at the market price

Sent immediately to the reading floor for execution without restrictions or limits

Executed at current market price and has priority over all types of orders

Guarantees execution

To buy=executed at lowest offering price

To sell= executed at highest bid price

A

Market order

Series 7 (12 decks)

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