Which two of the following are securities that TRADE in the over-the-counter market? I Mutual Funds A. I and II The best answer is D. Mutual funds and variable annuities are redeemable securities - they are non-negotiable and cannot trade. Redeemable securities are issued by the sponsor and are redeemed with the sponsor at Net Asset Value. Government bonds are negotiable, and are the most actively traded security. Do not confuse government bonds with so-called "savings bonds" - Series EE and HH
issues. Savings bonds are non-negotiable. In regard to Direct Participation Programs, limited partnership interests are rarely traded because the market is very thin. However, they are negotiable. Certain limited partnerships (so-called "Master Limited Partnerships") are exchange listed and trade actively like any other listed security. Which two of the following are redeemable securities
that are NOT traded in the "over-the-counter" market? I Mutual Funds A. I and II The best answer is C. Mutual funds and variable annuities are redeemable securities - they are non-negotiable and cannot
trade. Redeemable securities are issued by the sponsor and are redeemed with the sponsor at Net Asset Value. Government bonds are negotiable, and are the most actively traded security. In regard to Direct Participation Programs, limited partnership interests are rarely traded because the market is very thin. However, they are negotiable. Certain limited partnerships (so-called "Master Limited Partnerships") are exchange listed or NASDAQ listed and trade actively like any other listed security.
Which of the following securities is LEAST likely to trade "over-the-counter"? A. U.S. Government Securities The best answer is D. Options are "listed" and trade on exchanges. There is
virtually no options trading "over-the-counter." U.S. Government bonds and municipal bonds are only traded "over-the-counter," they do not trade on exchanges. Common stock, preferred stock, and American Depositary Shares trade on exchanges and trade "over-the-counter" as well. Which of the following securities are generally traded "Over-the Counter"? I Treasury issues A. I only The best answer is C. All trades in Treasury issues and municipal bonds are effected "over-the-counter." The vast majority of corporate debt also trades "OTC," with the exception of a small amount of bond trading performed on the NYSE. All options
trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange). All of the following statements are true about the second market for equity securities EXCEPT: A. companies that are traded
must meet listing standards The best answer is A. The over-the-counter market is a negotiated market. A greater number of companies trade OTC (about 6,000 smaller companies)
than on any single exchange. For example, the NASDAQ Stock Market has about 3,000 issues; while the NYSE lists about 2,800 issues. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards. FINRA regulates the OTC market. Registered representatives: I can trade
securities on stock exchange floors A. I and III The best answer is D. Registered representatives cannot trade securities - they can enter orders on behalf of customers to be
executed by traders in the market. When comparing Specialists (DMMs) on the NYSE to market makers on NASDAQ, which statements are TRUE? I The Specialist/DMM is obligated to make a continuous competitive market in the stock A. I and III The best answer is B. Specialists (now renamed DMMs - Designated Market Makers) are obligated, under NYSE rules, to make a continuous competitive market in the assigned stock during the entire
trading session. NASDAQ Market Makers, on the other hand, once they have traded the amount that they show in the market at a competitive firm price, are not obligated to renew that quote at the current market. They can renew at a price that is "away" from the current market, thus assuring that they will not have to trade! (Of course, it is in their best interests to actively trade that stock and maintain competitive quotes - that is how NASDAQ market makers maintain a good reputation that
attracts future business.) Which of the following will result in a "locked-in" trade? A. A market order placed for a NASDAQ issue quoted in the NASDAQ System (Single Book) The best answer is A. A "locked-in" trade is one in which all of the terms and conditions of the trade are accepted by buyer and seller. Once the trade is executed, last-sale reporting to NASDAQ and reporting to the clearance corporation (NSCC) are done electronically. System trades of NASDAQ stocks are "locked-in" - the NASDAQ System is both an automated quotation and execution system.
Anyone who enters a quote or order into the System agrees to accept automated executions. Note that the previous name for the System was Single Book, and this may still show on the exam. The OTCBB and Pink Sheets are quotation mediums only. There is no automated trading; rather, trades are still negotiated "over-the-phone" or "on-line" and thus, are not locked-in. If a member firm
routes a customer market order for a NASDAQ Capital Market issue to NASDAQ's automated trading system, the order will be sent to: A. the NASDAQ System (Single Book) The best answer is A. The system for automated trading and order maintenance of NASDAQ issues (Global Market and Capital Market stocks) is the NASDAQ
Market Center Execution System, or simply the "System." The previous name was Single Book. Super Display Book is the NYSE's automated execution system. The Pink Sheets give a listing of the bid and ask prices of certain thinly traded OTC stocks that are not exchange listed. The OTCBB (OTC Bulletin Board) is an electronic system that disseminates real-time quotes for smaller OTC stocks.
Which of the following securities can be traded using the NASDAQ Market Center Execution System (Single Book)? A. NASDAQ Global Market issues The best answer is C. The system for automated trading and order maintenance of NASDAQ issues (Global Market and
Capital Market stocks) is the NASDAQ Market Center Execution System, or simply, the "System." The predecessor name was Single Book. OTCBB and Pink Sheet issues, which do not have listing standards, cannot be traded through the System. The "spread" on a NASDAQ stock is the difference between the prices of the: A. last reported trade and prior trade The best answer is B. When referring to the market for a stock, the "spread" is the difference between the prices of the best bid and best offer. The best bid price (price at which a dealer is willing to buy from a customer) is the highest bid. The best ask price (price at which a dealer is willing to
sell to a customer) is the lowest ask price. A narrow bid-ask spread indicates a competitive market. All of the following statements are true regarding quotes provided on NASDAQ Level II EXCEPT: A. bid and ask quotes are shown The best answer is C. NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot). Quotes for odd lots (less than 100 shares) can be entered into the system, but are not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or over. A mixed lot is an order that has both
a round lot and an odd lot component (such as an order for 143 shares - which is composed of a 100 share round lot and a 43 share odd lot). Just like odd lots, any portion of the order that is less than 100 shares is not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or more.Quotes for NYSE listed issues are not found on NASDAQ - rather they are found on CQS - the Consolidated Quotations Service. Quotes shown in the NASDAQ System (Single Book) are: I Firm A. I and III The best answer is B. The NASDAQ System only accepts Firm 2-Sided (Bid and Ask) quotes. Which statements are TRUE regarding the NASDAQ System (Single Book)? I The System handles trades up to a maximum size of 999,999 shares A. I and III The best answer is A. The automated system for trades of NASDAQ issues is the NASDAQ System (previously called Single Book). It accepts orders up to 999,999 shares. Orders can be split for entry into the system; and can be aggregated and executed as a single order (cheaper than multiple orders) within the system size limit. Both agency and principal transactions can be effected through the System. Which of the following orders can be placed in the NASDAQ System (Single Book)? I Market order A. I and III The best answer is A. Single Book is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders (a limit order at the current inside price) and limit orders that are away from the market. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the system does not accept stop orders - the same is true for the NYSE Super Display Book system. Member firms take stop orders into their internal systems and feed them to the appropriate exchange if they are triggered. A market maker enters a quote of $10.50 Bid; $10.75 Ask; with a size of "1 x 1" into the NASDAQ System. If a market order to buy is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to sell: A. 100 shares at $10.50 The best answer is B. A market order to buy will be matched, in sequence, against the "Ask" quotes in the system, from lowest to highest. Such a market order "sweeps" the book from low to high price, until it is filled. Because this dealer's Ask of $10.75 is only for 100 shares, this is the amount that the system will match. It will then move to the next Ask quotes from other dealers, in sequence, until the order is filled for 500 shares A market maker enters a quote of $10.50 Bid; $10.75 Ask; with a size of "1 x 1" into the NASDAQ System. If a market order to sell is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to buy: A. 100 shares at $10.50 The best answer is A. A market order to sell will be matched, in sequence, against the "Bid" quotes in the system, from highest to lowest. Such a market order "sweeps" the book from high to low price, until it is filled. Because this dealer's Bid of $10.50 is only for 100 shares, this is the amount that the system will match. It will then move to the next Bid quotes from other dealers, in sequence, until the order is filled for 500 shares A market maker enters a quote of $31.50 Bid; $32.00 Ask; with a size of "3 x 5" into the NASDAQ System. If a market order to sell is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to buy: A. 300 shares at $31.50 The best answer is A. A market order to sell will be matched, in sequence, against the "Bid" quotes in the system, from highest to lowest. Such a market order "sweeps" the book from high to low price, until it is filled. Because this dealer's Bid of $31.50 is only for 300 shares, this is the amount that the system will match. It will then move to the next Bid quotes from other dealers, in sequence, until the order is filled for 500 shares A market maker enters a quote of $20.50 Bid; $21.00 Ask; with a size of "5 x 5" into the NASDAQ System. If a market order to buy is entered into the system for 1,500 shares, and this dealer's quote is matched, the market maker will be obligated to sell: A. 500 shares at $20.50 The best answer is B. A market order to buy will be matched, in sequence, against the "Ask" quotes in the system, from lowest to highest. Such a market order "sweeps" the book from low to high price, until it is filled. Because this dealer's Ask of $21.00 is only for 500 shares, this is the amount that the system will match. It will then move to the next Ask quotes from other dealers, in sequence, until the order is filled for 1,500 shares Which statement is TRUE about the NASDAQ Regular Market trading session? A. The session starts earlier than the NYSE opening The best answer is C. NASDAQ's Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time - the same as NYSE hours. Which of the following are entered into OATS? I Orders to buy NASDAQ issues A. I and II only The best answer is D. OATS stands for "Order Audit Trail System." It electronically captures order information for equity securities (no more paper order tickets). OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues. The "idea" is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered. The system that compares trades of NASDAQ issues and reports the trades to the Network C Tape is called: A. ACES The best answer is C. The ACT system takes the details of completed trades and reports the trade to the Network C (NASDAQ) Tape; to the contra-party to the trade for comparison; and to the clearing corporation for settlement. ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance in SingleBook (not tested on Series 7). OATS is the Order Audit Trail System - which automates order entry. The ADF is the Alternate Display Facility. It is where ECNs display their quotes if they choose not to link to an exchange for quote display. Trades in NASDAQ stocks must be reported by the: A. initiating member within 10 seconds of execution The best answer is B. Trades of NASDAQ stocks must be reported by the executing member within 10 seconds of execution to the Network C tape. This is FINRA's reporting rule for trades of NASDAQ stocks and all OTC equity trades, including OTC trades of NYSE-listed issues (Third Market trades), OTCBB trades and trades of Pink Sheet issues. Note that the NYSE operates under the same rule. Which of the following trades are reported through ACT's Trade Reporting Facilities (TRFs)? I NASDAQ Market Center trade of a NASDAQ listed stock A. I and III The best answer is A. The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape, it is a big source of revenue for the exchange). The TRFs run by ACT include: NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape); A NASDAQ security is bid at $30.25 and offered at $30.75. An over-the-counter trader effects a trade at $30.75 and charges a commission of $.50 to the customer. The price that will show on the tape is: A. $30.25 The best answer is C. Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $30.75, and this is the price that will show on the tape. Trades of NASDAQ securities executed on an unlinked ECN are reported by: A. CAES The best answer is B. An unlinked ECN is one that is not linked into the NASDAQ System or another exchange, so its quotes are shown in a separate system - the ADF - Alternate Display Facility. Trades of NASDAQ securities executed by unlinked ECNs are reported through TRACS - the Trade Reporting and Comparison Service. Trades of NASDAQ securities executed by linked ECNs are reported through the TRF - the Trade Reporting Facility that is part of NASDAQ's ACT system. TRACE is the FINRA system for reporting of corporate bond trades. CAES (Computer Assisted Execution System) is an older system used for Third Market trades. Dark Pools are: I regulated as broker-dealers A. I and III The best answer is A. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such). Dark Pools: I display their quotes with size A. I and III The best answer is C. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. Dark Pools are: I sources of displayed liquidity A. I and III The best answer is C. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such). The OTCBB includes quotes for: I NASDAQ Global Market stocks A. I only The best answer is C. Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the "Over-The-Counter Bulletin Board" (run by FINRA) or can be found in the privately run "Pink Sheets" - now renamed the Pink OTC Markets. Bid and Ask quotes for non-NASDAQ "over-the-counter" stocks can be obtained from the: I Pink Sheets A. I and II only The best answer is B. The Pink Sheets give bid and ask quotes for over-the-counter stocks that are not included on NASDAQ. FINRA has the "Non-NASDAQ OTC Bulletin Board," which gives electronic quotes for stocks that do not meet NASDAQ listing standards. When NASDAQ became a "stock exchange" in late 2006, it did not want the OTCBB, which went to FINRA. The OTCBB originally had about 6,000 listings - but FINRA did nothing with it, while the Pink Sheets moved to the web and included a trade negotiation system in its software that the OTCBB does not have. Because of this, most of these quotes have moved to Pink OTC Markets, leaving the OTCBB with about 300 quoted issues. The Yellow Sheets, now out of business, used to provide quotes for corporate bonds traded OTC. The Consolidated Quotations Service (CQS) provides bid and ask quotes for Exchange listed stocks. The Pink Sheets: I give bid and ask quotes for OTC stocks A. I and III The best answer is B. The Pink Sheets give bid and ask quotes for over-the-counter stocks that do not meet exchange listing standards. They do not show trades as they occur. All trade reporting for OTC equity securities occurs through the ORF - the Over-The-Counter Reporting Facility. A dealer offering an OTC stock in the Pink Sheets publishes a quote for 1,000 shares "AON" This means that the dealer: A. is willing to sell part or all of the shares at the stated price The best answer is B. A quote that is published as "AON" means All or None. The dealer will sell all of the securities at that price, but will not accept a partial order at that price. Last sale information is available for: I Exchange listed securities A. I only The best answer is D. Real time transaction reporting occurs for all exchange trades and for OTC equity trades (OTCBB, and Pink Sheet) trades. Corporate and agency bond trades are reported via TRACE, while municipal bond trades are reported via RTRS. Over-the counter traders perform all of the following functions EXCEPT: A. establish spreads 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. Which statements are TRUE about nominal quotes? I A nominal quote represents an actual price at which the dealer is willing to buy or sell A. I and III The best answer is C. 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 of the following is a "firm" quote from a market maker? A. 12.50 The best answer is A. An OTC quote is considered to be "firm" for 100 shares unless it is otherwise qualified. If a dealer gives a quote of 12 - 12.50, he is willing to sell 100 shares at 12.50 or buy 100 shares at 12. A workout quote is an approximate price - the final price must be "worked out." A subject quote is subject to confirmation. A nominal quote is a "guess" at a likely price - it is really no quote. When a dealer says "The price is 42.25," the quote is considered a: A. nominal quote The best answer is C. When a dealer says "the price is," the quote is firm for a normal trading unit at the stated price. A nominal quote is a dealer's guess at the current price - he or she is not committed to trading at that quote. A "work-out" quote is sometimes given for very thinly traded issues, where there is no current trading in the issue, but the trader believes that the trade can be executed in a given price range. After giving the "work out" quote, the trader will search the market to "work out" the trade within the stated price range. A subject quote is subject to confirmation and can change - it is very close to a nominal quote. In an over-the-counter agency trade, the member firm executing the order: I is a broker A. I and III The best answer is B. In an over-the-counter agency transaction, the firm acts as a broker, matching a customer who wishes to buy with a seller (and vice-versa). For this service, the member firm earns a commission. In contrast, in an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell. All of the following terms are synonymous EXCEPT: A. principal The best answer is D. A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down. An agent is a broker who is middleman in a transaction, earning a commission. Which statements are TRUE about over-the-counter transactions? I In a principal transaction, the customer is charged a mark-up or mark-down A. I and II only The best answer is D. In a principal transaction, a firm trades into, or out of, its inventory account, charging the customer a mark-up or mark-down that is fair and reasonable. In an agency transaction, the firm trades with another market marker, charging the customer a fair and reasonable commission for finding the best market. Broker-dealers are permitted to execute the following over-the-counter transactions? I Agency trades where the customer is charged a
commission A. I and III The best answer is B. In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction. Furthermore, it is prohibited to charge both a commission; and a mark-up or mark-down; in any transaction. Which of the following describes a position trade? A. Buying a security into inventory directly from a customer with a mark-down The best answer is A. Position trading is trading for a firm's own account. This is either selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down. When the firm "position trades," the firm can take both long and short positions as it speculates in the market. Choice B describes a "riskless principal" transaction; Choice C describes an "arbitrage transaction;" and Choice D describes a "proceeds transaction." Which of the following describes position trading? A. Selling a security for a customer and using the proceeds to purchase a different security for that customer The best answer is B. Selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down; is position trading. The term position trading comes from the dealer taking "positions" for his inventory. Choice A describes a "proceeds transaction;" Choice C describes an "arbitrage transaction;" and Choice D describes a "riskless principal" transaction. Position trading by "over-the-counter" firms is: I buying securities into, or selling securities from, the firm's inventory account A. I and III The best answer is A. Position trading is the buying of securities into a dealer's inventory account; and the selling of securities out of the dealer's inventory account. The profit to the dealer is the spread between the bid and ask quote. This is the basic function of an over-the-counter market maker; and is, of course, permitted under FINRA rules. When a firm "position trades," it: I trades on an agency basis for customers A. I and II only 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 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. An OTC equity trader has received a large influx of buy orders for ABC stock and, to fill them, has taken a short position in the firm's inventory account. The dealer would most likely: A. increase the ask price
in the OTCBB The best answer is A. The dealer's Ask price is too low - that is why the buyers are pouring in! The dealer will raise the Ask price - this will discourage buyers. If the dealer were to decrease the Bid price, this would discourage sellers to the dealer - and this dealer needs to buy to cover the current short inventory position. Therefore, the dealer is likely to increase the bid price as well. Decreasing the mark-up charged to customers would encourage more buyers at the Ask, which the dealer does not want. Placing a "BW" in the OTCBB is a "Bids Wanted." This indicates that the dealer wants to sell more of the stock to any willing buyers, which is not the case - the dealer wants to buy the stock, not sell it! Rather, he or she would want to place an "OW" - Offers Wanted - in the OTCBB, telling potential sellers that the dealer is interested in buying. An agency cross transaction performed in the over-the-counter market occurs when a broker-dealer: A. buys stock on one exchange and sells it on another for an immediate profit The best answer is D. An agency cross transaction, as performed in the "over-the-counter" market occurs when, at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price. Under FINRA rules, such transactions must comply with the 5% Policy. In this transaction, the firm is acting as an agent (since it is not buying or selling the securities from its inventory) and may only charge a commission on each side of the trade. These commissions must be "fair and reasonable" under the 5% Policy. Remember, 5% commissions (in agency trades) or mark-ups (in principal trades) are only "guidelines" - not rules. Each commission or mark-up must be "fair and reasonable," taking into consideration all relevant factors surrounding that transaction. Which of the following describes a riskless principal or simultaneous transaction? A. Selling a
security and using the proceeds to purchase a different security The best answer is D. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. Choice A describes a "proceeds" transaction; Choice B describes a "principal" transaction; and Choice C describes an "arbitrage" transaction. In riskless principal transaction, the dealer: I buys a security into inventory in advance of filling a customer order to buy that security A. I and III The best answer is C. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer. In a riskless principal transaction, the dealer: I has risk A. I and III The best answer is C. In a riskless principal or simultaneous transaction, a dealer gets an order from a customer to buy a security, and then the dealer buys the stock into his inventory to sell to the customer. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer. Proceeds transactions are: I matching a buy order from one customer to a sell order for the same security from another customer A. I and III The best answer is C. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. Choice I describes an agency cross transaction. Both of these types of transactions are permitted under FINRA rules. Which of the following describes an arbitrage transaction? A.
Selling a security and using the proceeds to purchase a different security The best answer is C. If a security is bought on one market; and simultaneously sold on another market; this is known as an arbitrage transaction and is used to exploit price differences for the same security that may exist in those markets. Choice A describes a "proceeds transaction;" Choice B describes a "principal" transaction, or "position" trade; while Choice D describes a riskless principal transaction. All of the following can result in the establishment of a short position EXCEPT: A. Arbitrage transaction The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades of borrowed shares are short sales. Selling a long position is just selling a position that was originally purchased. The purchased shares are delivered to satisfy the sale - there is no borrowing of shares. Which of the following can result in the establishment of a short position? I Arbitrage transaction A. I only The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades (position trading is trading for the firm account, using the firm's "positions") of borrowed shares are short sales. A customer has previously entered an order to sell 100 shares of ABCD at $9.50. The quotations terminal shows the last trade of ABCD taking place at $9.50 yet the customer's order has not been executed. Which are valid reasons for this? I The trade at $9.50 was performed by another market maker A. I and II The best answer is A. The customer's limit order to sell at $9.50 might not be executed even though the last trade occurred at $9.50 because there were other limit orders ahead of his order or another market maker performed a trade at that price. Trading departments must stay open at all times during the hours that the market is open. Firms are prohibited from executing orders for their own account if they compete with an existing customer order. Before the firm can sell for itself at $9.50, it must first sell for the customer at $9.50. Once the customer orders are cleared, the firm can trade at that price. An index arbitrage trading desk places sequential buy orders at the market opening for securities included in the index to raise their price against the current index value. Which statement is TRUE? A. These transactions can only be effected on an upbid The best answer is C. Marking The Open is trading at the open, or falsely reporting trades at the open, just to affect the stock's opening price. FINRA has disciplined program traders for "marking the open" violations. These firms attempt to arbitrage the difference between an index option's value (which can be based on market open, depending on the index option) against the actual prices of the securities that are included in the index. The illegal practice was placing sequential orders at the open for the securities in the index to either move their price up (or down), so that the index arbitrage position would show a profit. Which statements are TRUE about reporting of trades in NASDAQ stocks?Which statements are TRUE about reporting of trades in NASDAQ stocks? The best answer is C. Trades of NASDAQ stocks must be reported by the executing member within 10 seconds of execution to the Network C tape.
Which statements are TRUE regarding NASDAQ system single book?Which statements are TRUE regarding the NASDAQ System (Single Book)? The best answer is A. The automated system for trades of NASDAQ issues is the NASDAQ System (previously called Single Book). It accepts orders up to 999,999 shares.
Which of the following is TRUE regarding NASDAQ Level 2?Which of the following statements are TRUE regarding quotes provided on NASDAQ Level II? The best answer is D. NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot).
What type of companies are in the NASDAQ?The NASDAQ trades shares in several different types of companies – including capital goods, consumer durables and nondurables, energy, finance, healthcare, public utilities, technology and transportation – but it is well-known for its high-tech stocks.
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Which of the following statements are true regarding market makers who trade on Nasdaq quizlet?
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