Unit 8: Practice Exam 3 (Trading Securities)

A customer enters a day order to sell 300 XYZ stock at 34.60. XYZ continues to trade in a 33 to 33.60 range. An hour before the close, he considers changing the order to a GTC order. You respond that he might consider allowing the order to remain on the books as a day order, and if it remains unexecuted at the close, to re-enter it the next day as a GTC order. You would have based this recommendation on concern for which of the following? A) An existing order has precedence over a new order when it comes to execution. B) Day orders are less risky than GTC orders. C) Additional cost to the firm of changing the order twice in a day. D) Weakening the customer's risk tolerance by encouraging him to change orders frequently.

Your answer, An existing order has precedence over a new order when it comes to execution., was correct!. Time priority (first come, first served) of an order is lost if there are any changes in the terms of an order.

If an open-end investment company 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) Third. D) Secondary.

Your answer, Fourth., was correct!. The fourth market is where direct trades between institutions, pension funds, broker/dealers, and other financial entities occur, utilizing electronic communications networks (ECNs). In theory, there are no brokers involved in these transactions. Reference: 8.2.1.4 in the License Exam Manual.

Which of the following orders may be left with a designated market maker on the New York Stock Exchange? A) Good-till-canceled. B) Not-held. C) Good-for-a-week. D) Good-for-a-month.

Your answer, Good-till-canceled., was correct!. The designated market maker on the NYSE will accept GTC (good-till-canceled orders) and hold them on the order display book until they are executed or are canceled. Reference: 8.4.2.5 in the License Exam Manual.

Which of the following would be the usual use of a stop order? To protect the profit on a long position To prevent loss on a short position To buy at a specific price only To guarantee execution at or near the close. A) I and III. B) II and III. C) II and IV. D) I and II.

Your answer, I and II., was correct!. A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price. Reference: 8.4.2.4 in the License Exam Manual.

The Nasdaq market includes securities in the: Global select market. Global market. Bulletin Board listings. Electronic OTC Pink listings. A) II and III. B) I and IV. C) I and II. D) III and IV

Your answer, I and II., was correct!. The Nasdaq Market includes securities in 3 market tiers; global select, global, and capital markets. *Bulletin Board securities (OTCBB) are issues that are not listed on Nasdaq or any U.S. exchange. OTC Pink issues are unlisted and, like Bulletin Board stocks, are referred to as non-Nasdaq.* Reference: 8.2.1.2 in the License Exam Manual.

An all-or-none order (AON): must be executed in its entirety. may be executed in part or in full. must be executed in one attempt. may be executed after several attempts. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, I and III., was incorrect. The correct answer was: I and IV. In an all-or-none order, the firm handling the order can make multiple attempts to fill the order in its entirety. Reference: 8.4.3.7 in the License Exam Manual.

Trade reports made to the Consolidated Tape: include commissions. do not include commissions. include markups. do not include markups. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, I and III., was incorrect. The correct answer was: II and IV. Trade reports never include commissions, markups, or markdowns. Reference: 8.7.0.2 in the License Exam Manual.

The 5% policy applies to: commissions charged when executing customer agency (broker) transactions. riskless and simultaneous transactions. markups on stock sold from inventory. markdowns on stocks bought for inventory. A) I and II. B) III and IV. C) I, II, III and IV. D) II and III.

Your answer, I, II, III and IV., was correct!. The 5% policy applies to both commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades. Reference: 8.10.2.1 in the License Exam Manual.

*Which of the following statements regarding quotes and information for stocks on the electronic "OTC Pink" are TRUE? * Quotes are firm. Quotes are not firm. Updates are made daily. Updates are made weekly. A) II and III B) I and IV C) II and IV D) I and III

Your answer, II and III, was incorrect. The correct answer was: II and IV *With updates made weekly, quotes found on the electronic OTC Pink are never firm.* Reference: 8.9.2.3 in the License Exam Manual.

Which of the following terms are associated with over-the-counter trading? Market maker. Specialist. Auction market. Negotiated market. A) II and IV. B) II and III. C) I and III. D) I and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and IV. The over-the-counter 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. Reference: 8.2.1.2 in the License Exam Manual.

A customer sells short 1,000 XYZ at 60. Three months later, XYZ is at 44. Which of the following strategies might the customer employ to protect his unrealized gain? Sell 1,000 XYZ 45 stop. Buy 1,000 XYZ 45 stop. Buy 10 XYZ Mar 45 calls. Buy 1,000 XYZ 45 stop limit. A) II and III. B) II and IV. C) I and IV. D) I and III.

Your answer, II and IV., was incorrect. The correct answer was: II and III. In this short position, the customer currently has an unrealized gain of 16. He stands to see his unrealized gain begin to erode if the stock price rises, so he could enter a buy stop order above 44 to allow him to buy and cover his position if a price rise occurs. Purchasing calls would also be effective, since the right to exercise would allow the investor to buy stock at 45 and protect a gain of 15 points less the premium paid. Reference: 8.4.2.4.1 in the License Exam Manual.

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 $.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A) It remains at 18. B) It is increased to 18.55. C) It is reduced to 17.45. D) It is canceled.

Your answer, It remains at 18., was incorrect. The correct answer was: It is reduced to 17.45. Unless the customer has given DNR, (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend. Reference: 8.4.2.6 in the License Exam Manual.

For a client to get immediate execution on an order, it should be placed as which of the following? A) Market. B) Stop. C) Good-till-canceled. D) All-or-none.

Your answer, Market., was correct!. A market order is executed immediately at the best available market price. Reference: 8.4.2.2 in the License Exam Manual

The KPL Corporation is considering having its stock listed on the New York Stock Exchange. Who will make the final decision as to whether it will be listed? A) The New York Stock Exchange. B) The Board of Directors of KPL. C) FINRA. D) The SEC.

Your answer, The SEC., was incorrect. The correct answer was: The New York Stock Exchange. The New York Stock Exchange 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. Reference: 8.2.1.1 in the License Exam Manua

*An investor places an order to sell short ABCD at the open. The opening bid of 15.25 is the same as the prior day's close. At what price may the investor sell short at the open?* A) The investor is prohibited from selling short at the open. B) 15.26. C) 15.25. D) 15.24.

Your answer, The investor is prohibited from selling short at the open., was incorrect. The correct answer was: 15.25. *Short sales can occur any time during the trading day, including the opening and the close. In this case, the sale would take place at the best bid, which is 15.25.* Reference: 8.4.4 in the License Exam Manual.

Your broker/dealer has just negotiated a trade with another broker/dealer in a Nasdaq-listed stock. The automated system that will facilitate the reporting of the post-execution data electronically, such as price and volume, to FINRA is known as A) Trade Reporting Facility (TRF) B) the Designated Market Maker (DMM) display book C) Consolidate Tape System (CTS) D) Super Display Book (SDBK)

Your answer, Trade Reporting Facility (TRF), was correct!. Broker/dealers acting in a dealer capacity (negotiating transactions with other broker dealers) in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor will have the post-execution data such as price and volume transmitted electronically to FINRA via the Trade Reporting Facility (TRF). Reference: 8.2.2.5 in the License Exam Manual.

Failure to honor a firm quote is called: A) backing away. B) trading ahead. C) interpositioning. D) front running.

Your answer, backing away., was correct!. Failure to honor a stated quote is a rules violation called backing away. Reference: 8.9.1.1.1 in the License Exam Manual

The opening quote for issues listed on the NYSE is set by the: A) floor brokers based on the level of opening orders. B) specialist (designated market maker). C) exchange. D) third-market makers

Your answer, floor brokers based on the level of opening orders., was incorrect. The correct answer was: specialist (designated market maker). *The specialist (designated market maker) is responsible for setting the opening quote for issues listed on the NYSE. The set quote is based on orders in hand.* Reference: 8.4.1 in the License Exam Manual.

*The 5% markup policy would apply to all of the following equity transactions EXCEPT:* A) proceeds transaction. B) agency trade done on an exchange. C) riskless principal transaction. D) primary market transaction.

Your answer, primary market transaction., was correct!. The 5% markup policy applies to secondary market transactions in nonexempt securities. Reference: 8.10.2.2 in the License Exam Manual.

A securities firm that holds stock rather than sells the stock is: A) pegging. B) taking a position. C) churning. D) commingling.

Your answer, taking a position., was correct!. 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. Reference: 8.2.3.4 in the License Exam Manual.

A New York Stock Exchange specialist (designated market maker) is employed by: A) the OCC. B) the NYSE. C) the SEC. D) a member of the exchange.

Your answer, the NYSE., was incorrect. The correct answer was: a member of the exchange. Designated market makers are employed by firms which must be exchange members. Reference: 8.4 in the License Exam Manual.

Each of the following statements regarding OTC markets is true EXCEPT: A) the OTC market is an auction market. B) the OTC market has no exchange trading floor. C) the bid is the highest price at which a dealer will buy. D) securities traded OTC include ADRs and municipal bonds.

Your answer, the OTC market is an auction market., was correct!. The OTC market is a negotiated market in which market makers may bargain during a trade. Stock exchanges like the NYSE are an auction market. Reference: 8.8.1.1 in the License Exam Manual.

A short sale of stock directed to an exchange must observe all of the following EXCEPT: A) the locate requirement for borrowed shares. B) the symbol "ss" on the consolidated tape. C) a minimum maintenance requirement of 30%. D) a margin requirement of 50%.

Your answer, the symbol "ss" on the consolidated tape., was correct!. *The symbol "ss" does not designate "short sale." It is used to identify stocks traded in 10-share units.*

A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on: A) the total of both sides. B) each side separately. C) the buy side only. D) the sell side only.

Your answer, the total of both sides., was correct!. The firm must consider the entire transaction (a proceeds transaction) when calculating the markup. Reference: 8.10.2.5 in the License Exam Manual.

All of the following statements regarding Nasdaq Level 3 are true EXCEPT that: A) the system shows the inside quote. B) actual interdealer quotes are displayed. C) quotes are entered by market makers. D) this level is used by registered representatives only.

Your answer, this level is used by registered representatives only., was correct!. Nasdaq Level 3 is the interactive level of the Nasdaq system through which market makers enter and update their quotes. The best quote available (the inside market) is also shown on the Level 3. Registered representatives use the Nasdaq Level 1, which displays the inside market quote only. Reference: 8.11.1 in the License Exam Manual.