Trading Market Basics
The "after hours" trading market for exchange listed and NASDAQ securities: I is a more liquid market than the regular hours trading session II is a less liquid market than the regular hours trading session III typically has wider dealer bid-ask spreads than regular trading sessions IV typically has narrower dealer bid-ask spreads than regular trading sessions A. I and III B. I and IV C. II and III D. II and IV
C. The "after hours" trading sessions have much lower investor participation, so trading volumes are very small. Because of the lack of order flow, the market is less liquid; and as a result, dealers who make the market demand wider bid-ask spreads.
Initial Public Offerings (IPOs) are sold for the first time in the: A. primary market B. first market C. third market D. fourth market
A. Initial Public Offerings (IPOs) are sold for the first time in the primary market. The First Market is trading of exchange listed securities on that exchange floor. The Third Market is trading of exchange listed securities in the over-the-counter market. The Fourth Market is trading of securities directly between institutions via ECNs - Electronic Communications Networks - such as Instinet.
A dual listed stock is one which trades in two different: A. countries B. U.S. markets C. cities D. states
B. A dual listed stock is one which trades in more than one marketplace - for example, a young West Coast company might have listed on the Pacific exchange when it was still small; and then listed on the NYSE when the company became large enough. Finally, note that most companies are only listed on 1 major market because each exchange charges listing fees, and corporations see no reason to pay multiple listing fees.
In an inefficient market: I dealer spreads are wide II dealer spreads are narrow III trading volume is high IV trading volume is low A. I and III B. I and IV C. II and III D. II and IV
B. An inefficient market is the opposite of an efficient one. An "inefficient" market is where there is a low trading volume - meaning there is high liquidity risk. With such light trading volume, dealer spreads will widen.
Which statements are TRUE? I Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on CQS II Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on the UQDF III Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on CQS IV Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on the UQDF A. I and III B. I and IV C. II and III D. II and IV
B. CQS (Consolidated Quotations Service) aggregates and displays quotes for all market makers in exchange listed issues - both NYSE and NYSE American (AMEX) listed. These market makers are exchange Specialists/DMMs and Third Market Makers (OTC firms that make markets in exchange listed issues). The UQDF (UTP Quote Data Feed) aggregates and displays quotes for all market makers in NASDAQ issues. UTP stands for "Unlisted Trading Privileges." Not only do NASDAQ Market makers quote and trade NASDAQ stocks, but exchange Specialists (DMMs) are now permitted to compete and trade NASDAQ stocks under a "UTP" plan.
Which statements are TRUE about ECNs? I ECNs only trade listed stocks II ECNs trade listed and OTC stocks III ECN trades are not reported to the tape IV ECN trades occur away from exchange trading floors A. I and III B. I and IV C. II and III D. II and IV
B. ECNs (Electronic Communications Networks) only trade listed stocks (NYSE, NYSE American (AMEX) and NASDAQ). They do this as an institutional matching service, getting a small fee for each match. These trades occur OTC in the "Fourth Market." ECNs do not trade OTC issues (OTCBB and Pink Sheets), because the market is illiquid. ECN trades are reported to the appropriate Network A, B, or C Tape by a system called TRACS.
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
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.
Which of the following first markets does NOT trade futures contracts? A. NYMEX B. NYSE C. CBOT D. CME
B. The NYSE trades stocks - it does not trade futures contracts. The NYMEX (New York Mercantile Exchange), CBOT (Chicago Board of Trade) and the CME (Chicago Mercantile Exchange) are all futures markets that do not trade securities.
The Second Market is a(n): A. auction market B. negotiated market C. unregulated market D. primary market
B. The Second Market is trading of unlisted securities "over-the-counter." This is a negotiated market. For example, a stock quoted in the OTCBB is actually traded by picking up the phone, calling the market maker posting the quote, and negotiating a price.
The Second Market is trading of: A. listed securities on an exchange B. unlisted securities "over-the-counter" C. listed securities "over-the-counter" D. securities directly between institutions
B. The Second Market is trading of unlisted securities in the over-the-counter market. For equities, the Second Market is the OTCBB (Over-The-Counter Bulletin Board) and the Pink OTC Markets. Choice A describes the First Market; Choice C describes the Third Market; and Choice D describes the Fourth Market.
The Secondary Market is divided into how many submarkets? A. 2 B. 3 C. 4 D. 5
C. The Secondary Market is divided into 4 subcategories: the First Market; the Second Market; Third Market; and the Fourth Market. The First Market is trading of exchange listed securities on that stock exchange. The Second Market is trading of securities that are not exchange listed on the over the counter market. The Third Market is trading of exchange listed securities over the counter. The Fourth Market is trading of securities directly between institutions in the over the counter market via ECNs (Electronic Communications networks) such as Instinet.
The Third Market trades: A. listed securities on an exchange B. unlisted securities on an exchange C. listed securities over-the-counter D. securities of companies based in Third World countries
C. The Third Market is OTC trading of exchange listed securities. Trading of listed securities on an exchange is the First Market. There is no formal name for trading of unlisted securities on an exchange floor, such as trading of OTCBB issues by exchange Specialists (DMMs) under a UTP (Unlisted Trading Privilege) plan - mainly because the exchanges don't bother to trade these issues (yet).
The Third Market is trading of: A. listed securities on an exchange B. OTCBB securities "over-the-counter" C. listed securities "over-the-counter" D. securities directly between institutions
C. The Third Market is over-the-counter trading of exchange listed securities - this market is competition for the NYSE and other exchanges. Choice A describes the First Market; Choice B describes the Second Market; and Choice D describes the Fourth Market, which is direct trading of securities between institutions, via ECNs (Electronic Communications Networks) such as Instinet.
The individuals who make a secondary market in corporate bonds include which of the following? I Market Makers II Underwriters III Traders IV Dealers A. I and II B. II and IV C. I, III, IV D. I, II, III, IV
C. 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. Underwriters take new issues public in the primary market (new issues), not the secondary (trading) market. Once these issues are placed by the underwriter, they begin to trade in the secondary market.
Retail member firms that route orders to market makers in return for compensation earn: A. mark-ups B. mark-downs C. commissions D. payments for order flow
D. 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 trading of listed securities over-the-counter occurs in the: A. Primary Market B. First Market C. Second Market D. Third Market
D. The "Third Market" is over-the-counter trading of exchange listed securities. Third Market Makers are OTC firms such as Jefferies and Co. and Weeden and Co. that stay open 24 hours a day and capture much of their trading volume in NYSE-listed issues when the NYSE is closed.
A trade takes place directly between a bank and an insurance company without the use of a broker. This trade took place in the: A. First Market B. Second Market C. Third Market D. Fourth Market
D. The Fourth Market is direct trading of securities between institutions on ECNs (Electronic Communications Networks) such as Instinet or Archipelago. The systems bypass brokerage firms, and therefore brokerage commissions. Instead, the ECN charges a small matching fee.
Listed stock
a company whose stock meets the listing requirements of one of the exchanges and therefore trades on the "floor" of the exchange. Note that in the NASDAQ Stock Market there is no physical trading "floor" - just a computer trading network, however the term "listed" applies to companies listed on NASDAQ as well.
Payment for order flow
a payment to retail member firms made by a market maker for routing their orders to that specific market maker. This practice is permitted, as long as the market maker's execution price is the "best available" at that time.
Auction market
a phrase used to describe how "open outcry" trading is performed on a stock exchange. In reality the exchange is a "double" auction market in which buyers call out successively higher bids and sellers call out successively lower offers until a trade is arranged at a price satisfactory to both parties.
Inefficient market
a securities market that is characterized by low trading volumes and high transaction costs for effecting trades. This is the typical market for very thinly traded securities like direct participation programs and certain municipal bond issues
Negotiated market
a securities market where traders "negotiate" a price - this is the trading method for the OTC market
OTC
common abbreviation of the over-the-counter market.
NASDAQ
the all electronic stock exchange, recognized as such by the SEC in 2006. NASDAQ operates the NASDAQ System, which is an automated order book and trade execution system for NASDAQ Global Market issues and NASDAQ Capital Market issues.
Mark-up
the amount or percentage that is added to the inside ask price when a customer buys an OTC security from a FINRA member firm acting as a principal or market maker in the transaction. Except for NASDAQ stocks, the mark-up on an OTC principal transaction is not usually disclosed to the customer on a confirmation; rather it is included in a net price to the customer.
Mark-down
the amount or percentage that is subtracted from the bid price when a customer sells an OTC stock to a market maker in a principal transaction. There is no requirement to disclose the mark-down amount in principal transactions in non-NASDAQ securities. Under the FINRA 5% Policy, mark-downs (and mark-ups) must be fair and reasonable.
Mutual fund
the commonly used name for an open-end management company that establishes a diversified portfolio of investments that is actively managed, and then continually issues new shares and redeems old shares representing ownership in the portfolio
Commission
the fee charged by a broker for executing an agency trade for a customer. The commission amount on an agency trade must be disclosed on the customer's confirmation
Primary market
the market in which the issuer first offers and sell its securities to the public, with proceeds from the sale going to the issuing corporation.
First market
the trading market (secondary market) is subcategorized into the First, Second, Third, and Fourth markets. The First market is trading of exchange listed securities on the exchange. It is called the "first market" because trading on an exchange was the very first securities market in the United States; for example the NYSE started trading in 1794.
Third market
the trading market (secondary market) is subcategorized into the First, Second, Third, and Fourth markets. This is the order of the development of these markets in the United States. Over-the-counter firms that trade exchange listed securities do so in the Third market. Thus, so-called Third market makers compete with the exchange Specialists/DMMs.
Second market
the trading market (secondary market) is subcategorized into the First, Second, Third, and Fourth markets. This is the order of the development of these markets in the United States. The Second Market is the OTC (over-the-counter) market, where securities that are not listed on an exchange trade. Securities traded OTC include government and agency bonds; municipal bonds; most corporate bonds; and non-NASDAQ equity securities included in the OTCBB or Pink OTC Markets. The Second Market should not be confused with the secondary market - which encompasses the entire trading market for issued securities.
After hours market
trading of exchange listed and NASDAQ securities that takes place when these markets are closed (i.e., - after 4:00PM ET). Part of the over-the-counter market, these trades are executed by Third Market makers and ECNs
Stocks that are listed on the New York Stock Exchange can also be typically listed and traded on all of the following exchanges EXCEPT: A. American Stock Exchange B. Chicago (Midwest) Stock Exchange C. Boston Exchange D. Pacific Exchange
A. Stocks that are listed on the NYSE are typically NOT listed on the AMEX (now renamed the NYSE American) or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. A dual listed stock is one which trades in more than one marketplace, and the typical example is a company that listed on a regional exchange when it was small, and then grew large enough to list on a national exchange. For example, a young New England company might have listed on the Boston exchange when it was still small; and then listed on the NYSE when it became large enough; and it kept its Boston exchange listing to maintain its New England "ties."
A securities firm does a trade for a customer and charges a commission. In what capacity did the firm act? A. Agent B. Dealer C. Principal D. Market Maker
A. A FINRA member firm can do securities transactions in one of two ways. It can act as a broker, routing the order to the best market, charging a commission for this service. This is called an agency trade, and the firm is acting as a middleman in the transaction. The other way to do the trade is to act as a dealer. Here, the firm maintains an inventory of the security, and acts as a principal, buying the security into inventory from the customer; or selling to the customer out of inventory. When acting as a principal, the firm earns a mark-up when selling to the customer out of inventory; or a mark-down when buying into inventory. Also note that the firm can only act in one capacity in a given transaction - either as a broker or as a dealer. Thus, it could not charge both a commission and a mark-up in the same transaction.
All of the following securities are traded in the secondary market EXCEPT: A. Mutual funds B. NYSE listed stocks C. NASDAQ listed stocks D. OTC stocks
A. Open end funds (mutual funds) are redeemable with the sponsor - they do not trade. All stocks are traded in the secondary market, with much higher trading volumes for NYSE and NASDAQ listed issues; and much lower trading volumes for OTC issues quoted in the OTCBB or Pink Sheets
An order for a New York Stock Exchange listed issue is routed by the member firm to an Electronic Communications Network (ECN) rather than to the exchange floor. This practice is permitted: A. if the price offered by the ECN is better B. only if the customer consents C. only if an attempt to fill the order on the NYSE fails D. only if the NYSE is closed
A. SEC rules require that execution must occur at the "best market." If a stock is traded in multiple markets, then the order must be routed by the member firm to the market that is posting the best quote.
A securities dealer is quoting ABCD stock at 10.00 - 11.00 (15 x 20). This means that the dealer is willing to: A. buy 1,500 shares at $10 and sell 2,000 shares at $11 B. sell 1,500 shares at $10 and buy 2,000 shares at $11 C. buy 1,000 shares at $15 and sell 1,100 shares at $20 D. sell 1,000 shares at $15 and buy 1,100 shares at $20
A. Securities dealers quote stocks with a bid and ask. The bid is the price at which the dealer is willing to buy from the customer (therefore, the customer is selling to the dealer at the bid). The ask is the price at which the dealer is willing to sell to the customer (therefore, the customer is buying from the dealer at the ask). Within the brackets is the "size" of the quote - how many shares the quote is good for. This dealer is willing to buy 1,500 shares at $10 and is willing to sell 2,000 shares at $11. The "size" is 15 x 20 - this translates into 1,500 shares bid at $10 and 2,000 shares offered at $11 by the dealer.
The First Market is trading of: A. listed securities on an exchange B. OTCBB securities "over-the-counter" C. listed securities "over-the-counter" D. securities directly between institutions
A. The First Market is trading of listed stocks on an organized stock exchange - like the NYSE, AMEX (now renamed the "NYSE American"), or NASDAQ. Exchanges have listing standards for the companies that trade there and accessible order books, where orders can be posted and traded against. Any companies that do not meet exchange listing standards are quoted in either the OTCBB (Over The Counter Bulletin Board) or the Pink OTC Markets. These constitute the Second Market. Both the OTCBB and Pink OTC Markets are classified by the SEC as "quotations vendors" - they are not exchanges. To trade an OTCBB or Pink OTC Markets stock, the trade must be negotiated, usually over the phone. Choice C describes the Third Market and Choice D describes the Fourth Market.
Trades of NYSE-listed securities that take place in all markets are consolidated and reported through the: A. Network A Tape B. Network B Tape C. Network C Tape D. Network D Tape
A. The Network A Tape reports trades of NYSE-listed issues, regardless of the market venue where the trade took place. The Network B Tape reports trades of NYSE American (AMEX) and regional exchange-listed issues, regardless of the market venue where the trade took place. Reports of trades of NASDAQ issues are made through the Network C Tape, regardless of the market venue where the trade took place. There is no Network D Tape.
The Second Market is the: A. trading of OTCBB stocks B. issuance of listed stocks C. trading of listed stocks on the floor of an exchange D. issuance of listed and unlisted stocks
A. The Second Market is over-the-counter trading of securities that are not listed on a stock exchange. For equities, the Second Market is the OTCBB (Over-The-Counter Bulletin Board) and the Pink OTC Markets. The First Market is trading of listed stocks on an exchange. Choices B and D are definitions of the primary (new issue) market - not the secondary (trading) markets.
The First Market is a(n): A. auction market B. negotiated market C. unregulated market D. primary market
A. The first market is trading of listed stocks on the floor of an exchange. Exchanges started as pure "auction" markets, where an open outcry auction determined the price of a stock. With the advent of computerized trading, the NYSE is now a "hybrid" market that offers both a computerized matching market and an auction market that is done both electronically and manually. NASDAQ, as the first "virtual" exchange, does not use the auction model. It simply uses computerized matching. The over-the-counter market (e.g., OTCBB and Pink Sheets), by comparison, is a negotiated market.
The trading of securities on regional stock exchanges is most similar to trading, as it takes place, on the: A. NYSE B. CBOE C. NASDAQ D. MSRB
A. The regional stock exchanges use a Specialist (Designated Market Maker) system for trading similar to the NYSE. NASDAQ uses a system of competing market makers, instead of a single Specialist/DMM in each security. The CBOE uses a system similar to that of the Chicago Board of Trade, where the Specialist market maker function is handled by a Market Maker; while the Specialist book function is handled by an Order Book Official (OBO). The MSRB does not trade municipal securities. Trading of municipal securities is conducted over-the-counter and is supervised by FINRA (FINRA audits broker-dealers for compliance with MSRB rules). Note: The regional exchanges as independent entities are a dying breed. At the end of 2007, NASDAQ purchased the PHLX and the Boston stock exchanges. The NYSE has purchased the Pacific and American stock exchanges and has renamed the Pacific as the "ARCA" exchange and the American as the "NYSE American." These must still be known for the exam, since these are being run as separate subsidiaries of the major markets.