chapter 8 - Trading Securities

Firms engaged in buying and selling securities for the public must register as .... Most firms act both ..... but not in the same transaction

Firms engaged in buying and selling securities for the public must register as broker-deal- ers. Most rms act both as brokers and dealers, but not in the same transaction

"SLD" means that this trade, which occurred sometime earlier, is being reported .....

"SLD" means that this trade, which occurred sometime earlier, is being reported on the Consolidated Tape System (CTS) out of sequence (late).

..... is trading volume that occurs or liquidity that is not openly available to the public. The bulk of this volume represents trades engaged in by .....

Dark pools, sometimes referred to as dark pools of liquidity or simply dark liquidity, is trading volume that occurs or liquidity that is not openly available to the public. The bulk of this volume represents trades engaged in by institutional traders and trading desks away from the exchange markets.

Orders based on time considerations include the following:

DayGood till canceled At the open and market on close Not held Fill or kill Immediate or cancel All or none Alternative, which provides two alternatives, such as sell a stock at a limit or sell it on stop

.... or principals, buy and sell securities for their own accounts, often called position trading. When selling from their inventories, ..... charge their clients markups rather than commissions. A markup is the difference between the ..... When a price to a client includes a dealer's markup, it is called a net price.

Dealers, or principals, buy and sell securities for their own accounts, often called position trading. When selling from their inventories, dealers charge their clients markups rather than commissions. A markup is the difference between the current interdealer offering price and the actual price charged to the client. When a price to a client includes a dealer's markup, it is called a net price.

Buy stop orders are entered above the current market, whereas sell stop orders are entered below the current market. -- 3

-A trade at the stop price triggers the order, which then becomes a market order. A stop order takes two trades to execute, which are: ■ trigger—the trigger transaction at or through the stop price activates the trade; and then ■ execution—the stop order becomes a market order and is executed at the next price, completing the trade.

A broker-dealer can fill a customer order in the following three ways.

-If the broker-dealer is a market maker in the security, it will (as principal) buy from or sell to the customer, charging a markup or markdown. -If the rm is not a market maker in the security, it can ll the order as agent, without tak- ing a position in the security, and charge a commission for its execution services. -An order can be lled as a riskless and simultaneous transaction.

Following is a list of important test points about OTC quotes.

-Markups and markdowns are charged when a market maker is acting as a princi- pal (dealing from inventory with nancial risk). -Firm quotes are good for a round lot only, unless otherwise stated. A quote of 11-11.50 3 × 5 is firm between dealers for 300 shares at the bid of 11 and 500 shares at the asked of 11.50. -Nominal quotes can be given for informational purposes, and can be printed only if clearly labeled as such. -A relatively wide spread indicates a thin trading market for the security.

Sell stop orders:--3

-protect against loss in a long stock position; ■ protect a gain from a long stock position; and ■ establish a short position when a breakout occurs below the line of support.

The 5% markup policy is peculiarly named for two reasons:

1. It applies to markups, markdowns, and commissions, meaning it is applicable to principal and agency transactions. 2. Five percent is not the limit. A transaction charge of more than 5% might be fine if it is reasonably based on the circumstances of the trade. Examples of subject transactions are REITS, closed-end company shares, ADRs, third market trades, listed and unlisted stocks, bonds, and government securities. New issues sold by prospectus and municipal securities are not subject to this policy.

Designated market makers are employed by .....

Designated market makers are employed by firms which must be exchange members.

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 market wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted

During shorter market-wide trading halts that will allow trading to resume on that same trading day, pending and new incoming orders should be forwarded to the appropriate market for execution upon the resumption of trading. If a halt closes the market for the remainder of the trading day, market-on-close (MOC) orders pending at the time trading is halted should be canceled. MOC orders received after trading is halted should be declined.

A broker:

A broker: acts as an agent, transacting orders on the client's behalf; ■ charges a commission; ■ is not a market maker; and ■ must disclose its role to the client and the amount of its commission.

A buy stop order is elected (triggered) when the underlying stock trades

A buy stop order is placed above the prevailing market price and is elected (triggered), becoming a market order to buy when the stock trades at or through (above) the stop price.

A dealer:

A dealer: ■ acts as a principal, dealing in securities for its own account and at its own risk; ■ charges a markup or markdown; ■ may make markets and take positions (long or short) in securities; and ■ must disclose its role to the client and the markup or markdown if a Nasdaq security

A broker-dealer may fill a customer's order to buy securities in any of the following ways. -- 3

A firm may act as the client's agent by finding a seller of the securities and arranging a trade. A firm may buy the securities from a market maker, mark up the price, and resell them to the client. If it has the securities in its own inventory, the firm may sell the shares to the client from that inventory.

Super Display Book (SDBK).

A large percentage of the orders the NYSE receives each day are processed through a com- puterized trading and execution system called

A market order is executed .... at the .....

A market order is executed immediately at the best available market price.

A member must contact a minimum of .... If..... quotations can be found, the requirement to contact dealers is waived.

A member must contact a minimum of 3 dealers (or all dealers making a market in the security if 3 or less) to determine the prevailing market. If 2 or more quotations can be found, the requirement to contact dealers is waived.

A .... is an order to buy or sell stock in which the firm receiving the order is not a market maker.

A riskless and simultaneous transaction is an order to buy or sell stock in which the firm receiving the order is not a market maker. The 5% policy applies to all types of nonexempt secondary market transactions, including riskless and simultaneous transactions.

A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is.... If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the .....

A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is rising. If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the limit price or higher.

A customer, concerned about a possible pull-back in XYZ stock, instructs his broker, to "Sell my XYZ stock if it falls to 40, but I don't want less than 39.75 for my shares." The broker should enter a:

A sell stop limit order would be appropriate (sell 100 XYZ 40 stop 39.75). Once the price of XYZ trades at or through (below) 40, the order is elected and becomes a limit order to sell at 39.75 or better (higher).

A third-market trade occurs when .....

A third-market trade occurs when exchange-listed securities are traded over the counter.

A customer places an order to sell short 100 DEF 52.50 STOP. After placing the order, DEF trades as follows: 53, 52.60, 52.20, 53 SLD, 52.10, 52.25. At which trade can the order be executed?

After the sell stop order is triggered (at 52.20), it becomes a market order to sell at the next price in the trade sequence. The trade at 53 is qualified by SLD, which indicates a delayed report of a previous trade and is not part of the tick sequence. Therefore, the order will be executed at 52.10.

..... are executive officers, directors, or holders of more than 5% of an NYSE member firm's voting stock. They are not allowed to trade on the .....

Allied members are executive officers, directors, or holders of more than 5% of an NYSE member firm's voting stock. They are not allowed to trade on the exchange floor.

Only NYSE members (individual seat owners) can trade on the oor. There are four types of traders.

Also called oor brokers, commission house brokers (CHBs) execute orders for clients and for their rms' accounts. When commission brokers are too busy to execute all of their rms' orders, they call on two-dollar brokers to execute orders for them. Two-dollar brokers charge commissions for their services. Registered traders are members of the Exchange who trade primarily for their own accounts. If they accept a public customer's order from a oor broker, they must give that order priority. They may not execute their own trades while holding an un lled public order. Specialists (DMMs) facilitate trading in speci c stocks, and their chief function is to maintain a fair and orderly market in those stocks. In ful lling this function, they act as both brokers and dealers; they act as dealers when they execute trades for their own accounts and as brokers when they execute orders other members leave with them. The specialist (DMM) acts as an auctioneer. In return for providing this service to the exchange, DMMs receive rebates on fees charged by the exchange whenever their quotes result in trades.

An exchange is not a .... but an ..... in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the .... prevail.

An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail.

As agents, ..... , they execute all orders other brokers leave with them. They accept certain kinds of orders from members, such as.....

As agents, or brokers' brokers, they execute all orders other brokers leave with them. They accept certain kinds of orders from members, such as limit and stop orders, and execute these as conditions permit.

As on exchanges, short sales in the OTC market can occur ......

As on exchanges, short sales in the OTC market can occur at any time in the trade sequence.

As principals, or dealers, they buy and sell in their own accounts to make markets in assigned stocks. They are expected to maintain ..... A specialist, however, may not ...... In other words, a specialist cannot......

As principals, or dealers, they buy and sell in their own accounts to make markets in assigned stocks. They are expected to maintain continuous, fair, and orderly markets—that is, markets with reasonable price variations. A specialist, however, may not buy stock for his own account at a price that would compete with the current market. In other words, a specialist cannot buy, as principal, at a price that would satisfy a customer order to buy.

.... are agents that arrange trades for clients and charge commissions. ..... do not effect trades as principal but arrange trades between buyers and sellers.

Brokers are agents that arrange trades for clients and charge commissions. Brokers do not effect trades as principal but arrange trades between buyers and sellers.

In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the .... and applying the total to the ....

In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.

one attempt to fill the order but a partial execution is binding on the customer.

In an immediate-or-cancel order, the firm handling the order has

Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date?

In this example, adjust only the share price: $50 ÷ (1 + .10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares).

The OTC market is an inter-dealer market in which ... trade. It is also known as the ... In the OTC market, securities dealers across the country are connected by .... Thousands of securities are traded OTC, including....

unlisted securities—that is, securities not listed on any exchange— second market. computer and telephone. stocks, bonds, and all municipal and U.S. government securities.

Which of the following statements regarding transactions in the different securities markets are TRUE? Transactions in listed securities occur mainly in the OTC market. Transactions in unlisted securities occur in the OTC market. Transactions in listed securities that occur in the OTC market are said to take place in the fourth market. Transactions in listed securities that occur directly between institutions without the use of broker/dealers as intermediaries are said to take place in the fourth market.

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

Each stock exchange requires companies to meet certain criteria before it will allow their stock to be listed for trading on the exchange.

Location. Listed markets, such as the NYSE and other exchanges, have central market- places and trading oor facilities. Pricing System. Listed markets operate as double-auction markets. Floor participants compete among themselves to execute trades at prices most favorable to the public.

OTC markets also have criteria that a company must meet to be traded on a particular OTC venue just as exchanges do. While historically these criteria were not as stringent as those imposed by the exchanges, over time the quality of issues-traded OTC closed the gap and today equal exchange-traded issues.

Location. No central marketplace facilitates OTC trading. Trading takes place over the phone, over computer networks, and in trading rooms across the country. Pricing System. The OTC market works through an interdealer network. Registered market makers compete among themselves to post the best bid and ask prices. The OTC market is a negotiated market.

Markups are always based on the inside offer which is the ..... Markdowns are based on the inside bid which is the .....

Markups are always based on the inside offer which is the lowest ask price in a particular security. Markdowns are based on the inside bid which is the highest bid price for a particular security.

Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the ... but are still accepted in both ...

NYSE equity market the bond market and Nasdaq.

Nasdaq Level 1 is available to registered representatives through a variety of public vendors. Level 1 displays .....

Nasdaq Level 1 is available to registered representatives through a variety of public vendors. Level 1 displays the inside market only, the highest bids and the lowest asks for securities included in the system, and other basic information such as last sale and volume. Normal market price fluctuations prevent a registered representative from guaranteeing a Level 1 price to a client.

Nasdaq Level 2 is available to approved subscribers only. Level 2 provides .... ■

Nasdaq Level 2 is available to approved subscribers only. Level 2 provides the current quote and quote size available from each market maker in a security in the system. To list a quote on Level 2, a market maker must guarantee that the quote is rm for at least 100 shares.

Nasdaq Level 3 provides subscribers with .....

Nasdaq Level 3 provides subscribers with all of the services of levels 1 and 2 and allows registered market makers to input and update their quotes on any securities in which they make a market.

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following? Plus tick. Zero-plus tick. Minus tick. Zero-minus tick.

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

Which of the following orders may be used to acquire a security at a specific price or better? A buy stop limit. A buy limit. A sell stop. A sell limit.

Only buy orders can acquire stock. Only buy limit orders can acquire stock at a specific price or better.

Partial execution is permissible on an .....

Partial execution is permissible on an IOC (immediate-or-cancel) order.

Market—executed immediately at the market price Limit—limits the amount paid or received for securities Stop—becomes a market order if the stock reaches or goes through the stop (trigger or election) price Stop limit—entered as a stop order and changed to a limit order if the stock hits or goes through the stop (trigger or election) price

Price-Restricted Orders: Typical orders include the following

Remember that all computations must be based on the ....

Remember that all computations must be based on the inside quote (the best available from all the market makers), not the firm's quote.

.A person is long a security if he: --4

■ has title to it; ■ has purchased the security or has entered into an unconditional contract to purchase the security but has not yet received it; ■ owns a security convertible into or exchangeable for the security and has tendered such security for conversion or exchange; or ■ has an option to purchase the security and has exercised that option

The specialist:

■ must maintain a fair and orderly market; ■ must stand ready to buy and sell for his own account, if necessary, to maintain a fair and orderly market; ■ is expected to transact business for his own account in such a way as to maintain price continuity and minimize temporary price disparities attributable to supply and demand differences; - must avoid transacting business for his own account at the opening or reopening of trading in a stock if this would upset the public balance of supply and demand; ■ must file the reports and keep the books and records the Exchange requires; and ■ may trade for his own account in between the current bid and ask quotes in his book.

.Buy stop orders: --3

■ protect against loss in a short stock position; ■ protect a gain from a short stock position; and ■ establish a long position when a breakout occurs above the line of resistance

This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date.

SEC regulation SHO mandates a locate requirement for short sales that is applicable to

The 1934 Act, known as the Exchange Act, established the... and gave it the authority to regulate, in part, .... to maintain a fair and orderly market for the investing public.

Securities and Exchange Commission (SEC) broker-dealers, the securities exchanges, and the over-the-counter (OTC) markets

Sell stop limits are placed ... and will be elected when the stock trades ... the ...

Sell stop limits are placed below the current market and will be elected when the stock trades at or through (lower than) the stop price.

The 5% policy applies to all ..... It does not apply to .... It does, however, apply to .....

The 5% policy applies to all exchange and OTC transactions in nonexempt securities. It does not apply to prospectus offerings (new issues and mutual funds). It does, however, apply to third-market trades.

...receives, validates, and sequences the last sale price and size of all equity transactions in listed securities from all...

The Consolidated Tape System (CTS) U.S. Stock Exchanges and the Financial Industry Regulatory Authority.

The Consolidated Tape System (CTS) receives and validates the ..... Options transactions are ......

The Consolidated Tape System (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.

The NYSE trades between .... ET each business day. Normal hours for retail OTC trading are ..... although many market makers remain open until .... in extended hours trading.

The NYSE trades between 9:30 am and 4:00 pm ET each business day. Normal hours for retail OTC trading are the same as those of the NYSE, although many market makers remain open until 6:30 pm in extended hours trading.

The Nasdaq stock market is an equity and equity equivalent market. Listed are .... Straight debt securities are.....

The Nasdaq stock market 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.

The New York Stock Exchange now allows floor traders to handle..... NYSE floor traders can now transmit orders to and access liquidity from other exchanges without leaving the NYSE trading floor.

The New York Stock Exchange now allows floor traders to handle non-NYSE- listed stocks. NYSE floor traders can now transmit orders to and access liquidity from other exchanges without leaving the NYSE trading floor.

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

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

An order ticket is marked as follows: Buy 20M GGZ 9% Debentures at 95 AON GTC. All of the following statements regarding this order are true EXCEPT: A) the trade will be filled in its entirety or not at all. B) if executed, the customer will pay $19,000 or less for the bonds. C) the order will expire at the end of the day. D) this is a buy limit order.

The customer has placed a limit order to buy 9% debentures issued by GGZ. The limit the customer is willing to pay is 95% of $20,000 worth of bonds, or $19,000 or lower. AON means all-or-none (either fill the order in its entirety or do not execute the order). GTC is a good-till-canceled order, not a day order.

The dealer's cost is ..... in determining the markup on a stock.

The dealer's cost is not a legitimate factor in determining the markup on a stock.

The exchange market is composed of the ..... This market is also known as an .... market. The term .... refers to any security listed for trading on an exchange.

The exchange market is composed of the NYSE and other exchanges on which listed securities are traded. This market is also known as an auction market. The term listed security refers to any security listed for trading on an exchange.

The fourth market is a market for ..... trade in transactions unassisted by broker-dealers. These transactions take place through ....... 24 hours a day and act solely as agents.

The fourth market is a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers. These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as agents.

The market in which securities are bought and sold is also known as the.... as opposed to the ... for new issues. All securities transactions take place in one of ... trading markets.

The market in which securities are bought and sold is also known as the secondary mar- ket, as opposed to the primary market for new issues. All securities transactions take place in one of four trading markets.

A quote on Nasdaq is as follows: Bid Ask 10 10.50, 1300 x 1500 The market maker is obligated to execute all of the following customer transactions in their entirety EXCEPT:

This market maker has quoted a size of market of 1,300 − 1,500, which means it stands ready to buy a maximum of 1,300 shares at $10 and sell a maximum of 1,500 shares at 10.50. A sale of 1,500 shares at 10 is outside the size of this quote.

Those orders on the book which are above the current market will be ..... Those open orders above the current market ...

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 buy stop limits) and sell limits.

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

Which of the following securities may be traded over the counter?

Backing away is a violation of trading rules.

a market maker that refuses to do business at the price(s) quoted is backing away from the quote.

Sell stops, placed below the current market, become market orders to sell when the stock trades .. Market sell orders can ... declines in the price of the stock.

at or through (below) the stop price. accelerate

Exchange securities are bought and sold in an... Exchange markets are also sometimes referred to as... markets because both....in an attempt to transact business at the best possible price.

auction market. double auction buyers and sellers call out their best bids and offers

Buy limits and sell stops are entered ... Sell limits and buy stops are entered ...

below the current market and would be executed if the market were falling. above the current market and would be executed if the market were rising.

To provide for the orderly transaction of business on the oor, the highest ... and lowest ...always receive first consideration.

bids offers

For Nasdaq stocks, market makers must maintain ... quotes.

firm 2-sided

The OPD symbol appears on the Consolidated Tape System (CTS) with first transactions of the day for securities that ...

had delayed openings.

Fill-or-kill (FOK) orders must be executed ... or they are canceled.

immediately in their entirety

The term "work out" means that the quote is approximate, or nominal. As with a subject quote, the OTC trader that supplied the quote will most likely negotiate with a number of ... to get the customer's securities ...

market makers sold or bought

The third market, , is a trading market in which .... are traded in the ....

or Nasdaq Intermarket exchange-listed securitiesexchange-listed securities OTC market.

You are likely to be asked which orders are reduced for cash dividends. Only those ... Remember that BLISS .... orders are placed below the market price and are reduced for cash dividend distributions. All orders are adjusted for stock dividends and stock splits, whether placed above or below the market.

placed below the market price are automatically reduced.(buy limits and sell stops)

Quotes are in terms of bid and ask. The ask price is the... . The bid price is the.... To make a profit, the ask is always... The difference between bid and ask is called the...

price at which dealers are willing to sell price at which dealers are willing to buy. higher than the bid. spread.

A stop order, also known as a stop loss order, is designed to protect a...

profit or prevent a loss if the stock begins to move in the wrong direction.

Only orders placed below the market price are ... on the order book. Buy limits and sell stops are entered...

reduced for cash dividends below the market price.

Time priority (first come, first served) of an order is lost if there are any changes in

the terms of an order.

As far as equities are concerned, the OTC market is divided into Nasdaq and non-Nasdaq. Nasdaq consists of ... Non-Nasdaq consists of...

three markets: Global Select Market, Global Market, and Capital Market. stock on the OTC Pink or on the OTC Bulletin Board.