SIE 8 Securities Exchange Act of 1934 and the Secondary Markets

dark pools

- ECNs where participants can buy/sell large blocks of securities anonymously - designed to help institutional traders operate in a less transparent setting than exchanges (lit markets) - allows institutions to trade w/ less disruption of the secondary markets - helps institutional money managers to make it more difficult to determine their strategies

Broker Dealers (BDs)

- FINRA member firms - perform securities transactions for their own accounts or for their customers - primary source of revenue ism rom transaction fees (e.g., commissions and loads)

trustee

- a fiduciary that oversees a trust - might be living (pension)

Carrying/Clearing Firm

- carries customer accounts; accepts funds and securities from customers - typically rank among the larger BDs - have the capacity to do trade executions, clear & settle transactions, take custody of customer funds/securities, and handle all back-office tasks (e.g., sending trade confirms and statements) - may not commingle firm and client assets

clearing agency

- intermediary between the buy and sell sides in a securities transaction - receives and delivers payments and securities on behalf of both parties - Any organization that fills this function, including a securities depository but not including a Federal Reserve Bank, is considered this

fully disclosed firm (introducing BD)

- introduces its customers to a clearing firm - may take orders from customer and pass them on to a fully disclosed firm for execution - does have the ability to execute trades for its customers BUT the settlement falls to the carrying firm

Fourth Market (ECNs)

- market for institutional investors - large blocks of stock (listed and unlisted) trade in transactions b/w BDs - transactions take place through electronic communications networks

floor traders

- members that buy and sell on the floor for their firm's accounts (not outside customers) - help maintain liquidity on the exchange

retail investors

- normal people investing their own money for their own objectives - generally not professional investors - most of the rules on disclosure, communications, and recommendations are designed to help these investors

two dollar broker

- place trades for the floor brokers - receive a fee for performing the service

ask

- price a BUYER would PAY to buy security - ____ > bid

bid

- price a SELLER would RECEIVE for their security - ___ < ask

custodian

- refers to a _______ on a minor's account under the Uniform Transfer to Minors Act (UTMA) / Uniform Gift to Minors Act (UGMA) - may also refer to firm that holds assets in a qualified retirement account (i.e., IRA)

floor broker

- represents their firms and the firm's clients on the floor - handles customers placing trades that will execute on an exchange

registrars

- separate firm than the issuer or transfer agent - licensed by the states and provide audit and oversight for the transfer agent

designated market maker (DMM)

- specialist - exchange member that acts as the dealer on the floor for a specific security - maintains an inventory of the security; guarantees liquidity - responsible for maintaining a "fair and orderly" market in the assigned security

Third Market (Nasdaq Intermarket)

- trading market in which exchange-listed securities are traded in the OTC market (electronic) - BDs registered as market makers in listed securities can do transactions in this market - all securities in the NYSE and most listed on regional exchanges are eligible for this type of trading as long as the trades are reported to the Consolidated Tape within 10 seconds of execution

day trader

- type of retail investor who trades rapidly in and out of positions - typically close day "flat" (w/ no open positions)

Electronic Communications Networks (ECNs)

- websites that allow investors to trade directly with one another - open 24 hours/day - act solely as agents - fourth market

3 types of BD firms:

1. carrying / clearing firms 2. fully disclosed (introducing) firms 3. prime brokers

members of exchanges

1. designated market makers 2. floor broker 3. two-dollar broker 4. floor traders

4 types fo market centers (for secondary markets in the US)

1. exchanges 2. over the counter (OTC) 3. third market (Nasdaq Intermarket) 4. Fourth Market / Electronic Communications Networks (ECNs)

those who engage in secondary markets

1. investors 2. facilitators - NO issuers (only in primary markets)

exchange market criteria

1. physical location: listed markets (NYSE) have central marketplaces and trading floor facilities 2. pricing system: listed markets operate as double-auction markets - floor participants compete among themselves to execute trades at prices most favorable to the public

A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a A) clearing agency. B) broker-dealer. C) depository. D) transfer agent.

A) clearing agency. - clearing agency: business that functions to receive and deliver payments & securities for both parties of a transaction

Both the individual and institutional investor are able to easily buy and sell securities to meet their objectives through A) secondary markets. B) outdoor malls. C) primary markets. D) biennial markets.

A) secondary markets. - this is the purpose of secondary markets - increase liquidity

Great Plains Securities, an OTC market maker, holds inventory and provides liquidity for Modulux Homes, an NYSE listed company. This is an example of A) the third market. B) the force market. C) the primary market. D) the fourth market.

A) the third market. (Nasdaq Intermarket) - when an exchange-listed security trades in the OTC, it is being traded in the 3rd market - 4th market: ECNs for institutional investors - primary markets: raise capital

An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities, as well as other back-office functions, while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders. This account would be known as a A) prime account. B) self-clearing account. C) clearing account. D) fully-disclosed account.

A) prime account. - prime broker-dealer: provides custody of securities and other back-office functions; allows customer to maintain relationships with other BDs who will provide execution services - prime account: maintained w/ prime broker rather then any executing brokers

Which of the following is not part of the secondary markets? A) Third market B) The exchanges C) Mutual fund market D) Over-the-counter market

C) Mutual fund market - mutual funds, as open-end investment companies, do not trade in secondary markets - secondary markets include: exchange markets, OTC market, 3rd (Nasdaq market), and 4th Market (ECNs)

A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as A) an investment adviser. B) an investment banker. C) a market maker. D) an underwriter.

C) a market maker. - when a BD buys and sells securities for its own account as the major portion of its business model, it is functioning as a market maker (making markets in those securities) - Investment banking and underwriting primarily involve assisting issuers w/ bringing new securities issues to public investors - investment advisers sell advice; they do not trade

Which of these broker-dealers would most likely have correspondent firms? A) An introducing broker-dealer B) A market maker C) A fully disclosed broker-dealer D) A self-clearing firm

D) A self-clearing firm - a self-clearing (carrying) firm: holds funds & securities of fully-disclosed or introducing firm's customers and performs related functions (i.e., sending confirmations and statements for them) - correspondents: firms whom the carrying firm performs services for

A central, physical, marketplace where securities are traded through a designated market maker is A) the pit. B) the OTC. C) the third market. D) an exchange.

D) an exchange.

Secondary markets exist to do all of these except A) support the existence of primary markets. B) allow investors to easily liquidate securities. C) allow individual investors easy access to investment vehicles. D) decrease liquidity in the national markets.

D) decrease liquidity in the national markets. - secondary markets provide liquidity - supports primary market

Electronic market centers designed primarily for institutional investors describes A) the third market. B) the exchanges. C) the OTC market. D) the fourth market.

D) the fourth market. - fourth market: operates through Electronic Communication Networks (ECNs) - reduces transparency of large institutional investors - allows them to trade more efficiently

prime account

a customer contracts with one BD (the prime broker), to provide a list of custody and support services (such as clearing and settlement of transactions) while contracting with numerous other firms (execution brokers) to handle trades placed

Which of the following statements is true regarding Third Market? a. it is composed of listed securities traded OTC b. it is composed of only unlisted securities c. the services of a brokerage firm are not used d. it refers to the block trading of unlisted securities

a. it is composed of listed securities traded OTC - composed of OTC market makers (dealers) - provide liquidity for exchange-listed stocks - can also include non-listed stocks

OTC (Over the counter) market

an electronic marketplace for stocks and bonds 1. location: no rental market place; trading over the phone, computer, and in trading rooms country-wide 2. pricing system: inter dealer networks; registered market makers compete among themselves to post the best bid and ask prices

listed security

any security listed for trading on an exchange

investment advisor

anyone who: 1. gives investment advice 2. as a regular part of their business 3. for compensation - must be registered as an IA under the IA Act of 1940

a large-volume transaction for an institutional investor has occurred on an alternative trading system or network. entered anonymously, the general public will see no information regarding the volume, price, or who the institutional investor was. this transaction scenario is generally referred to a s having occurred: a. on a US exchange b. in a dark pool c. in the OTC market d. in the third market

b. in a dark pool - dark pools are designed to help institutional traders operate in less transparent setting than exchanges (lit markets) - less disruption from secondary markets

when a BD maintains inventory in a particular stock and trades that stock in the OTC market, it is acting as a(n): a. agent b. market maker c. broker d. underwriter

b. market maker - market maker: dealer in OTC market; maintains inventory in stock; provides liquidity for customers to buy and sell

SEC regulates the trading of all of the following EXCEPT: a. NYSE b. Chicago Board of Options exchange c. London Stock Exchange D. US OTC market

c. London Stock Exchange - the SEC is a US gov't regulator of securities

to fill a customer buy order OTC, your broker requests a quote from a market maker. that dealer responds, "15 bid, ask 15 1/4." if the trade order is entered, the market maker must: a. sell the shares for $15 b. buy the shares for $15 c. sell the shares for $15.25 d. buy the shares for $15.25

c. sell the shares for $15.25 - the order is to BUY, so market maker is selling - customer sells at bid price

exchange (auction) market

composed of the NYSe and other exchanges on which listed securities are traded

all are true for designated market maker EXCEPT: a. is a member of an exchange b. is charged with maintaining a fair and orderly market c. maintains an inventory of the assigned stock d. guarantees the customer will get a profitable trade

d. guarantees the customer will get a profitable trade - nobody can guarantee a profit in securities trading - DMM: exchange member that maintains an inventory in a stock, provides liquidity, responsible for maintaining fair and orderly market in assigned securities

spread

difference between bid and ask price

transfer agents

for a corporation is responsible for: 1. ensuring its securities are issued in the correct owner's name 2. cancelling old and issuing new certificates 3. maintaining records of ownership 4. handling problems relating to lost, stolen, or destroyed certificates

facilitators

help customers in performing transactions in secondary markets - do not actually trade

market centers

the locations (physical & electronic) where buyers and sellers gather and place trade

secondary market

the market in which previously issued securities are traded among investors - investor sells securities in this market and keeps the money for its own use

institutional investor

large investor (mutual fund, pension fund, bank, insurance company, some other financial service org.) w/ investment decisions made by a professional (i.e., investment advisor) who is paid by the institution to manage their portfolio

last

last price that took place

guardians and executors

normally court-appointed custodians over a minor, incapacitated adult, or an estate

depository

provides custody services for securities - except those that are subject to transfer or ownership restrictions (restricted securities)

market makers

securities dealers who "make markets" by offering to buy or sell certain securities at stated prices - firms that publish quotes to buy and sell securities