Trading Markets
An order for a New York Stock Exchange listed issue is routed by the member firm to a Third Market Maker rather than to the exchange floor. This practice is:
permitted if the price offered by the Third Market Maker is better
In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is:
When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $30 + $2 commission = $32 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.
When would the price of a stock fall without any change in the underlying demand for that stock?
The "ex date" for a cash dividend is the first day that the purchaser of the stock in a regular way trade will no longer be entitled to that dividend.
A broker-dealer holds a limit order to buy 100 shares of ABC stock at $20.00 for a customer. Which of the following trades is an example of trading ahead of a customer?
The purchase of 100 shares of ABC for the firm's trading account at $19.50 prior to executing the customer's order
The trading of listed securities over-the-counter occurs in the:
Third Market
A sell order for a customer is considered to be "long" if the customer is long:
a convertible bond that has been converted into the stock being sold for delivery on settlement
The calculation of accrued interest on a Treasury Bond is based on:
actual day month/actual day year accrual with settlement on T+1
Accrued interest on U.S. Government bonds is computed:
actual/actual up to, but not including, settlement date
Buy limit orders:
are used to buy securities at prices that are lower than the current market price
A customer places an order to buy 1,000 shares of ABC stock at the market in his cash account. The order is executed and, when reporting the trade back to the customer, the registered representative notices that the trade was executed in the customer's margin account. Which statement is TRUE? The registered representative can move the trade to the customer's cash account:
as long as a cancel/rebill record is created that documents the reasons for the account designation change and the manager approves in writing
A customer places an order to sell 100 ABC at 25 Stop Limit, when ABC stock is trading at $29. The company is restructuring and has announced a special dividend of $1.60 to be paid to shareholders of record. On the ex date, the order will:
be reduced to $23.40
Sell limit orders:
guarantee a specific execution price or better & at or above the limit price when the market is rising
A broker-dealer receives fully paid stock certificates from a customer that are to be deposited to the customer's margin account. Upon inspection, the cashier of the firm finds that some of the certificates are mutilated and the identification numbers cannot be discerned. The proper procedure is to:
hold the mutilated certificates and request a validation letter from the issuer or transfer agent before crediting the account
The Fourth Market is direct trading of securities between:
institutions-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.
Under MSRB rules, yield to worst means that:
municipal discount bonds quoted on a yield basis must be priced to maturity & municipal premium bonds quoted on a yield basis must be priced to the near-term in whole call date
The ex date for stock splits and stock dividends is set at:
1 business day after the payable date
Accrued interest on municipal bonds is computed:
30/360
An 8% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the:
5 year call at 102 1/2
A customer places an order to sell bonds. The order reads "Sell 5M ABC 9s M '45 @ 90 GTC." At which of the following prices may the order be executed?
90 or higher
If a customer has a gain on a short stock position that he or she wishes to protect, which statement is TRUE?
A buy stop order will be entered
In a falling market, which orders will be executed?
Open Buy Limits and Open Sell Stops
For tax purposes, cash dividend payments by issuers to securities holders are taxable as of which date?
Payable date
A corporation announces a 1:5 reverse stock split. A customer has a 1,000 share position, currently valued at $50 per share. On the payable date, the customer will now have:
A company will perform a reverse stock split to raise its share price in the market. In a 1:5 reverse stock split, every 5 shares held now becomes 1 new share. This customer has 1,000 shares / 5 = 200 new shares. Each new share will be valued at $50 x 5 = $250. Notice that the aggregate value of the customer's holding does not change. Before the reverse split, it was 1,000 shares x $50 = $50,000; and after the reverse split, it is 200 shares at $250 = $50,000.
If a customer has a gain on a long stock position that he or she wishes to protect, which statement is TRUE?
A sell stop order will be entered below the current market price
A member firm receives a large block order to buy 100,000 shares of XYZ stock, which is not actively traded. Which customer(s) of the firm can buy XYZ stock prior to the filling of the block trade?
B Other customers of the firm who place buy orders, if the firm has information barriers in place
The record date to receive a dividend is set on Tuesday, June 14th. If a stockholder wishes to receive the dividend, he or she must sell the stock in a regular way trade no earlier than:
If a person owns common stock and wishes to receive the dividend, that person cannot sell prior to the ex date. The ex date is 1 business day prior to record date - or Monday, June 13th. Thus, if the stock is sold on June 13th or later, the seller would receive the dividend.
A company whose stock price has declined greatly decides to reverse split its stock 1:20. Prior to the split, the stock traded at $.50 per share. As of the ex date, the price per share will be:
In a reverse split, the number of outstanding shares of the corporation is reduced. After the reverse split, each shareholder's proportionate ownership interest remains the same. The only difference is that the shareholder's ownership interest is represented by fewer shares. Thus, an individual who originally had 1,000 shares at $.50, would now have 50 shares (1/20th of 1,000) at $10 (20 x $.50).
When ABC stock is trading at $40.50, an equity trader places an order to buy 500,000 shares of the stock at 3:58 PM ET, filled at $40.60, and places another order to buy 400,000 shares at 3:59 PM filled at $40.90. Because of these actions, the stock closes at $41. The equity trader then uses those purchased shares to fill Market-On-Close orders to buy that the firm was holding for clients. This is an example of:
Marking the close is the manipulative practice of placing large orders to either buy or sell near to the close of trading, in order to influence that price either up or down, with the benefit accruing to the firm placing the manipulative orders. In this example, the firm was able to manipulate the price of the stock up near the close by placing the large buy orders, and then was able to profit by selling those shares at the "pumped up" price to existing customers that had previously placed "MOC" - Market On Close orders. An MOC order is one to be filled at the closing price or it is canceled.
An "efficient" market is characterized by:
Narrow Spreads and High Trading Volume-one where there is a high trading volume, so that liquidity risk is minimized. As trading volume increases, dealer spreads will narrow, since the dealer doesn't have to make as much on each trade to be profitable.
A securities firm buys stock from a customer and charges a mark-down. In what capacity did the firm act?
Principal-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.
A customer places an order to sell 100 shares of ABC stock that he cannot deliver by settlement date. The order ticket should be marked:
Sell - Short
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than:
Settlement date
ABC Corporation has declared a 3:1 stock split to shareholders of record on November 10th. The price of the stock will be reduced on ex date by:
Since the stockholder has 3 times the number of shares after the split, the market price will be reduced on ex date by a factor of 3. Assume the market price of the stock is $60 before the split. After the split the new market price is $60/3 = $20. The new price is $40 less than the original $60, which is a 67% reduction from the original price ($40 reduction/$60 original price = 67%).
A customer has asked his registered representative to sell 100 XYZ if the market falls to 50, but he does not want to sell for less than 45. This type of order is a:
The order is a stop limit order - the customer wishes to sell if the market falls to $50 per share (this is the stop price). If the market falls to $50 or lower, the order is elected and becomes a limit order to sell at $45, meaning that the customer wants at least $45 per share to sell.
Which statements is TRUE about an order to: Buy 100 ABC @ 50 Stop 53 Limit?
The order is elected at $50 or higher and executed at $53 or lower
The orders that are executed if the market drops are "OBLOSS" - Open Buy Limits and Open Sell Stops. The orders that are executed in a rising market are "OSLOBS" - Open Sell Limits and Open Buy Stops.
The orders that are executed if the market drops are "OBLOSS" - Open Buy Limits and Open Sell Stops. The orders that are executed in a rising market are "OSLOBS" - Open Sell Limits and Open Buy Stops.
An open order is on the member firm's internal order entry system to sell 800 XYZ at 50 Stop GTC. The company has declared a 25% stock dividend. On the morning of the ex date, the order on the book will be:
To adjust the order for the 25% stock dividend, the number of shares is multiplied by a factor of 1.25 (since there are 25% extra shares) while the order price is divided by a factor of 1.25. 800 shares x 1.25 = 1,000 shares on the adjusted order $50 price / 1.25 = $40 adjusted order price
When a corporation declares a reverse stock split, which statement is TRUE?
When a corporation declares a reverse stock split, the market price per share will be increased and the number of outstanding shares will be reduced. Institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.
If a municipal bond, callable at par, is quoted on a yield basis that is higher than the nominal yield, the price of the bond to a customer would be calculated based on:
Yield to Maturity. Regarding a bond purchased at a discount: the yield to call will be the highest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called, the yield actually improves on the bonds, since the customer earns the discount faster.
A customer places an order to "Buy 100 ABC @ 90 Stop." The customer wishes to buy the stock at:
the market price, if the market rises to $90 per share or higher
Customers who trade NYSE-listed securities during extended trading hours are subject to:
volatility-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, few dealers participate in the market. Thus, one may not be able to get an execution; and each trade that is executed can result in a much greater than normal market price movement.
