Homework 3

What are *trades* where participants can anonymously buy or sell large blocks of securities?

Block Trading

Taking advantage of the source of debt financing called broker's call loans is called:

Buying on Margin

Which of the following statements is NOT true about prospectus? The prospectus has been approved by the SEC Prospectus is a description of the firm and the security it is issuing. A Red Herring is the final prospectus approved by the SEC. Prospectus is a statement filed with the SEC in its final form.

A Red Herring is the final prospectus approved by the SEC.

What are *electronic trading networks* where participants can anonymously buy or sell large blocks of securities?

Dark Pools

True or false: An informal network of brokers and dealers who negotiate sales of securities is called an "over-the-counter (OTC) market.

True

True or false: The "ask price" is the minimum price that a seller of security is ready to accept. True false question.

True

True or false: The effective spread (measured in dollars per share) fell dramatically as the minimum tick size fell. (Value-weighted average of NYSE - listed shares)

True (good thing)

High-frequency traders' profits rely on the

Volume of each trade

What percentage of the U.S. market is believed to be initiated by computer algorithms?

about 50%

In a specialist market, the_____ outstanding bid price and the ______ outstanding ask price "win" the trade.

highest; lowest

Select the answer that best fits in the sentence below. Large transactions ____________ 10,000 shares of stock are bought or sold are called block stocks

in which at least

Fill in the blanks to complete the sentence. Nonpublic knowledge about a corporation possessed by corporate officers, major owners and other individuals with privileged access to information about the firm is called _______ information

insider

The sale of newly issued securities on the primary market is often managed by

investment bankers

A limit buy order _____.

involves the purchase of shares at or below a specified price

The ________ in a broker's call loan is the portion of the purchase price contributed by the investor.

margin

When you purchase of share of stock in the secondary markets this causes the total number of outstanding shares to

not change

During a public offering a preliminary registration statement that must be filed with SEC; this statement describes the issue and the prospects of the company. It is called the ________

prospectus

A _______ _______ _______ is the sale of additional shares in firms that already are publicly traded.

seasoned equity offering

When a private firm comes up with its initial public offering, it sells its ________ to the general public.

securities

A limit sell order

sells the stock when the price rises above a limit

The sale of shares now owned by the investor but borrowed through a broker and later purchased to replace the loan is called a

short sale

___________ is another name for an investment banker charged with the role of helping to manage public offering.

underwriter

ECNs allows participants to post market and limit orders over computer networks. ECN stands for

Electronic Communication Networks

What is a likely catalyst for the increased pressure for international alliances or mergers?

Electronic Trading

True or false: By law, at least 10% of all proceeds from stock transactions in the secondary market go to the issuing company.

False

Which of the following markets began as a dealers market but evolved to a trading system?

NASDAQ

True or false: Regulations prohibit insider trading. It is illegal for anyone to transact in securities to profit from inside information, that is, private information held by officers, directors, or major stockholders that has not yet been divulged to the public.

T

True or false: The "bid price" is the price that a dealer is willing to pay for the purchase of a security.

T

True or false: The Securities Exchange Act of 1934 was established to administer the provisions of the 1933 act. It also extended the disclosure principle of the 1933 act by requiring periodic disclosure of relevant financial information by firms with already-issued securities on secondary exchanges.

T

Which of the following statements is NOT true about the NASDAQ? NASDAQ was introduced in 1971 to link brokers and dealers in a computer network. Prior to the introduction of the NASDAQ, all of the over-the-counter quotations were recorded manually and published daily on so-called pink sheets. The NASDAQ requires direct negotiation for electronic execution of trades at quoted prices. The NASDAQ was originally organized to be more of a price quotation system, than a trading system.

The NASDAQ requires direct negotiation for electronic execution of trades at quoted prices.

During a transaction in the secondary market, what percent of the sale price goes to the managers of the firm to use to grow the business?

0%

_________ trading is the use of computer programs to make trading decisions.

Algorithmic

The marriage of electronic trading mechanisms with computer technology has had far-ranging impacts on trading strategies and tools. _________ trading delegates trading decisions to computer programs. _________ -frequency trading is a special class of trading in which computer programs initiate orders in tiny fractions of a second, far faster than any human could process the information driving the trade.

Algorithmic; High

Which of the following is NOT true about the responsibilities of an Underwriter? The underwriters may receive shares of common stock or other securities of the issuing firm as their compensation. An underwriter can only purchase securities from the issuing company for themselves. Underwriters are investment bankers that market stocks and bonds. The underwriters purchase the securities from the issuing company and then resell to the public.

An underwriter can only purchase securities from the issuing company for themselves.

What did the NYSE acquire in 2006 that contributed to the changing of the effective spread in the market?

Archipelago Exchange

In an ECN, orders that can be crossed (matched) will be automatically executed without the approval of a _________.

Broker

Define the type of market where various assets are purchased by market makers for their own accounts, and later sold for a profit from their inventory.

Dealer Markets

Which type of market is the least organized?

Direct Search Market

Which of the following is not true regarding the globalization of stock markets? Companies need the ability to go beyond national borders when they wish to raise capital. Due to increased global demand, there are more limits on the securities that can be traded around the world. Due to the impact of electronic trading, securities markets have come under increasing pressure to make international alliances or mergers. It has become very important for exchanges to provide the cheapest and most efficient mechanism by which trades can be executed and cleared.

Due to increased global demand, there are more limits on the securities that can be traded around the world.

True or false: A market specialist is a trader who makes a market in the shares of only one firm and who maintains a "fair and orderly market" by dealing personally in that market.

False **One or More Firms**

True or false: When private firms wish to raise funds, they sell shares directly to a large number of institutional or wealthy investors in a private placement.

False *a small number

Before 1971, all OTC quotations were recorded manually and published daily on

Pink Sheets

Where are newly issued securities sold?

Primary Market

A market _________ is a market for new issues of securities. A _________ market is a market for already existing securities.

Primary; Secondary

What is the SEC rule that allow companies to sell shares directly to a small number of investors, forgoing the extensive and costly registration statement required of a public company?

Rule 144A

Which of the following statements does NOT correctly describe the Securities Act of 1933? Requires registration of new securities and issuance of a prospectus that details the financial prospects of the firm. State laws to outlaw fraud in security sales did not exist before the Securities Act of 1933 Due to the nature of this act, it is often referred to as the "truth in securities" law. Requires full disclosure of relevant information relating to the issue of new securities.

State laws to outlaw fraud in security sales did not exist before the Securities Act of 1933

Which of the following statements is NOT true about a short sale? With a short sale, the order is reversed. First, you sell and then you buy the shares. You begin and end with no shares. The short-seller anticipates the stock price will go up, and the shares will be purchased later at a lower price than it initially sold for. Short-sellers must not only replace the shares but also pay the lender of the security any dividends paid during the short sale. A short sale allows investors to profit from a decline in a security's price.

The short-seller anticipates the stock price will go up, and the shares will be purchased later at a lower price than it initially sold for.