Trading Securities

Front 1

Dark pools of liquidity:

1. enhance market transparency for public retail customers.

2. diminish market transparency for public retail customers.

3. accommodate small transactions for institutional traders.

4. accommodate large-volume transactions for institutional traders.

Back 1

Answer: 2 & 4

Dark pools, sometimes referred to as dark pools of liquidity, is trading volume that occurs or liquidity that is not openly available to the public. The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets and is not visible to the public. This diminishes market transparency for public retail customers.

Front 2

If an open-end investment co. bought preferred stock directly from a bank through an electronic communication network (ECN), this trade took place in which of the following markets?

A) Fourth
B) Primary
C) Secondary
D) Third

Back 2

Answer: A

The fourth market is where direct trades between institutions, pension funds, broker/dealers and other financial entities occur, utilizing ECNs. In theory, there are no brokers involved in these transactions.

Front 3

Which of the following securities may be traded OTC?

1. Listed registered

2. Unlisted nonexempt

3. Registered unlisted

4. Unregistered exempt

Back 3

Answer: B

Registered securities not listed on an exchange constitute the bulk of the volume trading in the OTC market. Muni bonds and government securities are exempt from SEC registration requirements, so the major market for these securities is the OTC market. The 3rd market is the OTC trading market for exchange-listed securities.

Front 4

After the market closed yesterday, ABC announced that it would file for bankruptcy. The NYSE decides not to open trading in ABC. In response to the NYSE's announcement, which of the following statements regarding the OTC market is TRUE?

A) It applies to the SEC for a decision within 30 minutes of the opening.
B) It may either halt or continue trading as it sees fit.
C) It continues to trade ABC with the NYSE specialist's (Designated Market Maker's) permission.
D) It halts all trading in ABC until NYSE reopens it.

Back 4

Answer: B

The OTC market is not bound by the actions of the NYSE or other exchanges, and third market trading may continue in the stock.

Front 5

Which of the following statements regarding transactions in the different markets are TRUE?

1. Transactions in listed securities occur mainly in the OTC market.

2. Transactions in unlisted securities occur in the OTC market.

3. Transactions in listed securities that occur in the OTC market are said to take place in the fourth market.

4. Transactions in listed securities that occur directly between institutions without the use of broker/dealers are said to take place in the fourth market.

Back 5

Answer: 2 & 4

Listed securities traded on exchanges constitute the exchange market. Unlisted securities traded OTC make up the OTC market. Listed securities traded OTC compose the third market. Securities traded directly between institutions constitute the fourth market.

Front 6

Each of the following trades occurs in the secondary market EXCEPT:

A) an agent buying unlisted securities for a client.
B) an insurance co. buying corporate bonds directly from another ins. co.
C) a corporate bond syndicate selling new issues to the public.
D) a specialist (designated market maker) on the NYSE buying stock as principal.

Back 6

Answer: C

New issues sell in the primary market. Sales between investors are always in the secondary market.

Front 7

If ALFA Securities, a broker/dealer, is a position-trading firm, which of the following statements is TRUE?

A) It is trading for its own account.
B) It is violating NYSE rules.
C) It is underwriting securities in the primary market.
D) It is acting as a broker for customers.

Back 7

Answer: A

Position trading is simply trading as principal, or dealer, for a firm's own account. The opposite role is that of a broker or agent, purchasing or selling securities in the secondary market for customers.

Front 8

If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in:

A) arbitrage
B) hedging
C) short selling
D) position trading

Back 8

Answer: D

The dealer is buying for its inventory (position trading).

Front 9

Which of the following statements regarding the third market is TRUE?

A) It is composed of listed securities trading OTC.
B) It is composed only of unlisted securities.
C) The services of a brokerage firm are not used.
D) It refers to the block trading of unlisted securities.

Back 9

Answer: A

The third market refers to the trading of listed securities in the OTC market.

Front 10

The KPL Corp. is considering having its stock listed on the NYSE. Who will make the final decision as to whether it will be listed?

A) The NYSE
B) The BoD of KPL
C) FINRA
D) The SEC

Back 10

Answer: A

The NYSE has certain requirements that a company must meet before its stock can be considered for listing. Since the Exchange sets the requirements, it must make the final decision.

Front 11

Which of the following terms are associated with OTC trading?

1. Market Maker

2. Specialist

3. Auction Market

4. Negotiated Market

Back 11

Answer: 1 & 4

The OTC market is a negotiated market. Within it, Market Makers are broker/dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

Front 12

A securities firm that holds stock rather than selling the stock is:

A) churning
B) pegging
C) taking a position
D) commingling

Back 12

Answer: C

A firm that acts as principal by holding stock is taking a long position. The firm purchases the stock, hoping to sell at a later date at a higher price.

Front 13

Which of the following market tiers are included in NASDAQ?

1. NASDAQ Regional exchange-listed securities

2. NASDAQ Global Market

3. NASDAQ MidCap Market

4. NASDAQ Capital Market

Back 13

Answer: 2 & 4

NASDAQ consists of 3 markets:

Global Select Market, Global Market & Capital Market

Front 14

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for:

A) brokers acting as agents in all order execution scenarios.
B) trades in NASDAQ-listed securities and Exchange-listed securities when they occur off the Exchange trading floor.
C) trades in NYSE-listed securities occurring on the NYSE.
D) brokers executing orders as agents in an auction market on any exchange trading floors.

Back 14

Answer: B

FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in NASDAQ-listed stocks or in Exchange-listed stocks when they occur off the Exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

Front 15

ABC Corp. trading at $80/sh has just bid $50/sh for XYZ Corp, currently trading at $40/sh in a hostile takeover attempt. The most common risk or takeover arbitrage strategy would be to:

A) buy shares of the aggressor co (ABC).
B) sell shares of the target co (XYZ).
C) there can never be an arbitrage opportunity in a hostile takeover scenario.
D) buy shares of the target co. (XYZ) and short shares of the aggressor (ABC).

Back 15

Answer: D

The most common form of risk or takeover arbitrage is to purchase the shares of the target co. and short the shares of the aggressor, believing that the potential acquisition will raise the target co.'s share price and decrease the share price of the aggressor.

Front 16

Priority and precedence rules of bids and offers manage trading activity on the:

A) third market
B) NYSE
C) OTC market
D) NYSE & the OTC

Back 16

Answer: B

The auction rules of priority, precedence and parity allow for the efficient execution of orders when several bids or offers are made at the same price at a given time on the NYSE floor.

Front 17

All of the following are minimum requirements for listing on the NYSE EXCEPT:

A) number of shareholders
B) market value of publicly held shares
C) earnings per share
D) number of publicly held shares

Back 17

Answer: C

While the numerical values are not tested, it is important to know there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.

Front 18

The market wide circuit breaker (MWCB) rule uses which of the following as the pricing reference point to measure a market decline?

A) S&P 100 index, recalculated monthly
B) The Wilshire index, recalculated daily
C) S&P 500 index, recalculated daily
D) DJIA, recalculated quarterly

Back 18

Answer: C

The MWCBs use the S&P 5OO, recalculated daily, as the pricing reference point to measure market declines for the purpose of triggering market circuit breakers to halt trading.

Front 19

On the basis of a major decline occurring within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the MWCB rules, market-on-close (MOC) orders pending at the time trading is halted:

A) must be canceled.
B) should be held for execution on the following trading day.
C) should be held for execution on the following trading day unless canceled by the customer.
D) are converted to market orders and executed at the opening on the following trading day.

Back 19

Answer: A

If trading resumes on the same trading day, pending and new customer orders should be forwarded to the appropriate market for execution upon resumtion of trading. If a halt closes the market for the remainder of the day, pending and new orders received during the halt should be treated as good-til-canceled and held for execution at reopening the following day. MOC orders received after trading is halted should be declined.

Front 20

On the trading floor, the highest bid and offer receive first consideration. When several bids at the same price occur, the trade will be awarded based on:

A) priority, precedence, then parity
B) priority then precedence
C) priority then parity
D) parity, precedence, then priority

Back 20

Answer: A

When there are several bids or offers at the same price, the order in which they are filled is based upon time entered and size of order. This is known as priority, precedence and parity on the NYSE.

Front 21

FINRA can initiate a trading halt for all of the following EXCEPT:

A) listed stocks trading OTC
B) listed stocks trading on an Exchange
C) Bulletin Board stocks
D) NASDAQ

Back 21

Answer: B

Only the Exchange or SEC can initiate a trading halt for a listed security trading on an Exchange floor.

Front 22

Traders can sell short:

1. when a stock ticks up.

2. when a stock ticks down.

3. unrestrictedly in both exchange and OTC markets.

Back 22

Answer: 1, 2 & 3

In both exchange and OTC markets, traders can sell short anytime in the trade sequence.

Front 23

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following?

1. Plus tick

2. Zero-plus tick

3. Minus tick

4. Zero-minus tick

Back 23

Answer: 1, 2, 3 & 4

On an exchange floor, a customer short sale can be executed at any time in the trade sequence.

Front 24

All of the following orders could be placed on the specialist's (designated market maker's) order display book EXCEPT:

A) limit orders
B) stop limit orders
C) stop orders
D) market orders

Back 24

Answer: D

Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop & limit orders.

Front 25

All of the following statements regarding the short sale of a listed security are true EXCEPT:

A) A short sale can be effected anytime during the trade sequence.
B) Short sales may take place at the opening.
C) Short sales may take place at the closing.
D) The buyer must be advised that he is purchasing borrowed shares.

Back 25

Answer: D

The buyer is never informed that shares being purchased represent borrowed shares.

Front 26

You receive a not-held order from a customer who wants you to buy 1,000 shares of ABC when the price is right. Under NYSE rules, this order is a:

A) day order
B) limit order
C) GTC order
D) FOK order

Back 26

Answer: A

Unless the customer instructs you otherwise, not-held orders must be executed on the day received.

Front 27

On the order book, all of the following orders are reduced on the ex-date for a cash dividend EXCEPT:

A) sell stop
B) sell stop limit
C) buy stop
D) buy limit

Back 27

Answer: C

Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.

Front 28

The opening quote for issues listed on the NYSE is set by the:

A) specialist (designated market maker)
B) exchange
C) floor brokers based on the level of opening orders
D) third market orders

Back 28

Answer: A

The specialist is responsible for setting the opening quote for issues listed on the NYSE. The set quote is based on orders in hand.

Front 29

Which of the following orders on the order book will NOT be filled if the stock rises?

A) Sell stop
B) Buy stop
C) Sell limit
D) Buy stop limit

Back 29

Answer: A

Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including stop limits) and sell limits.

Front 30

All open orders must be confirmed to the order book:

A) April 1 and October 1.
B) The last business days of April & October.
C) Once a year on the anniversary of the order.
D) Every 6 months after the order has been entered.

Back 30

Answer: B

All open orders must be confirmed the last business day of April and the last business day of October.

Front 31

A customer has placed an open order to buy 1,600 shares of GHI at $60. GHI declares a 25% STOCK (not cash) dividend. On the ex-date, this order is considered a buy limit order for:

A) 2,000 shares at $60
B) 2,000 shares at $48
C) 1,600 shares at $45
D) 1,600 shares at $50

Back 31

Answer: B

The order is adjusted on the ex-date. The number of shares increases by the % of the declared dividend and the specified price is reduced to compensate.

1,600 + 25% = 2,000

To get the adjusted price, divide the total value of the original market order (1,600 x $60 = $96,000) by the new number of shares ($96K/2K = $48). The order's total market value remains the same.

Front 32

A customer has his broker enter an order to buy GHI stock at the opening. Though transmitted promptly, the order does not reach GHI's trading post in time to be filled at the opening. How is the order handled?

A) As a market order
B) Executed in the day, at a price as close to the opening price as possible
C) Automatically becomes an at-the-open order in the following trading session
D) The order is canceled

Back 32

Answer: D

An at-the-open order is to be filled at the opening price or not at all.

Front 33

All of the following are reasons for entering a stop order EXCEPT to:

A) guarantee execution at a specified price
B) protect unrealized gains on a long position
C) limit losses in a long position
D) protect profits in a short position

Back 33

Answer: A

A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit.

Front 34

Last week, one of your customers placed a GTC order to sell 200 shares of ABC with an $18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order?

A) It is increased to $18.55
B) It is canceled
C) It is reduced to $17.45
D) It remains at $18

Back 34

Answer: C

Unless the customer has given a DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-date by the amount of the dividend.

Front 35

A customer sold 100 shares of ABC short when the stock was trading at 19. If ABC is now trading at 14 and he wants to protect his gain, which of the following orders should he place?

A) buy stop at $14.25
B) sell stop at $13.75
C) sell limit at $14
D) buy limit at $14

Back 35

Answer: A

A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading.

Front 36

ALFA Electronics has been trading around 70. A customer tells his RR that if 1000 shares of the stock can be purchased in one attempt, the customer will take it. If not, the customer is not interested. How should the RR enter this order?

A) 1000 ALFA AON @ 70
B) 1000 ALFA IOC @ 70
C) 1000 ALFA FOK @ 70
D) 1000 ALFA @ 70

Back 36

Answer: C

A fill-or-kill (FOK) order designates that the customer wants the order to be filled in its entirety in one attempt or be canceled. With an all-or-none order, the broker/dealer can make numerous attempts to fill the order in its entirety.

Front 37

Sell orders sent to an exchange:

A) must be marked long or short.
B) must be marked only if they are long.
C) must be marked only if they are short.
D) do not need to be marked, only executed in accordance with the appropriate rules.

Back 37

Answer: A

Every sell order must be marked as either long or short sale.

Front 38

Which of the following would accelerate a decline in a bear market?

A) Sell limit
B) Sell stop
C) Buy stop
D) Buy limit

Back 38

Answer: B

Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orderes can accelerate declines in the price of the stock.

Front 39

A customer enters an order to sell 100 TCB at $49 stop limit. Prior to the order, TCB was trading at $49.25. Subsequent trades are reported on the tape as follows:

TCB 48.75, 48.85, 49, 49.25

Which trade triggered the order?

A) 49

B) 49.25
C) 48.75
D) 48.85

Back 39

Answer: C

This is an order where the stop price & limit price are the same. A sell stop limit order is triggered by the first trade that is at or below the stop price. It is subsequently executed at a price at, or better than the limit price.

Front 40

Which of the following is applicable to the NASDAQ OMX PHLX?

1. Regional exchange operated by NASDAQ.

2. Offers trading in equity securities and options contracts.

3. Is a completely electronic exchange with no physical trading floor.

4. Regional exchange operated by FINRA for the execution of OTC stocks only.

Back 40

Answer: 1 & 2

The OMX PHLX is a regional exchange operated by NASDAQ where equity securities and options contracts are traded both electronically and on floor.

Front 41

A customer has entered an option order with your broker/dealer. At which of the following locations could such an order be executed?

1. NYSE/AMEX

2. CBOE

3. NASDAQ OMX PHLX

4. None of the choices listed

Back 41

Answer: 1, 2 & 3

Options orders can be executed on any of the choices.

Front 42

Super Display Book (SDBK) is the electronic order processing system used by which of the following markets for trading common stocks?

A) Philadelphia Stock Exchange
B) NYSE
C) OTC Market
D) Chicago Board Options Exchange

Back 42

Answer: B

The NYSE uses the SDBK system for processing orders.

Front 43

Transactions involving which of the following would NOT be reported to the Consolidated Tape System (CTS) by an exchange or FINRA?

A) Listed securities traded through an electronic communication network (ECN).
B) NYSE listed rights & warrants
C) Listed options.
D) NYSE listed securities traded on the Chicago and Philadelphia exchanges.

Back 43

Answer: C

The CTS receives and validates the last sale price and size of listed equity securities transactions on the NYSE and other regional exchanges and FINRA. Options transactions are not reported to the CTS.

Front 44

Trade reports made to the Consolidated Tape:

1. include commissions.

2. do not include commissions.

3. include markups.

4. do not include markups.

Back 44

Answer: 2 & 4

Trade reports never include commissions, markups or markdowns.

Front 45

The symbol OPD appearing on the CTS indicates:

A) short sale
B) a cross
C) an execution of a block trade
D) a delayed opening print

Back 45

Answer: D

The OPD symbol appears on the CTS with first transactions of the day for securities that had delayed openings.

Front 46

Stock prices in the OTC market are determined by:

A) Open outcry for the securities at a central marketplace.
B) Buyers & sellers bidding directly against each other in a double auction market.
C) Negotiation between the buyers & sellers.
D) The 5% markup policy.

Back 46

Answer: C

The OTC market is a negotiated market (not an auction market as is the case with an exchange) in which dealers negotiate stock trades with each other.

Front 47

Which of the following securities are eligible for inclusion on NASDAQ?

1. Listed common stock

2. Unlisted common stock

3. Listed convertible bonds

4. Unlisted convertible bonds

Back 47

Answer: 2 & 4

NASDAQ includes OTC securities only, which means that unlisted securities including stocks and convertible bonds are eligible.

Front 48

The NASDAQ permits listing for all of the following EXCEPT:

A) warrants
B) nonconvertible debt securities
C) common stock
D) convertible bonds

Back 48

Answer: B

NASDAQ is an equity and equity equivalent market. Listed are common stock, preferred stock, warrants, limited partnerships, ADRs and convertible bonds. Straight debt securities are not part of NASDAQ.

Front 49

A customer of your broker/dealer is questioning the timeliness in which one of her equity orders for a stock listed on NASDAQ was handled & executed. A source providing the most complete order entry and execution details for the customer's order could be found:

A) on FINRA's website
B) with the Order Audit Trail System (OATS)
C) at the broker/dealer's order entry desk
D) on the SEC's website

Back 49

Answer: B

For an equity stock listed on NASDAQ, the source that would provide the most complete information regarding the handling of the order and its execution, including a timeline of all relevant entry and execution events, would be the Order Audit Trail System (OATS).