Series 6: Securities Markets and Analysis (Securities Markets)
The best bid and ask quote for a given security can be found on NASDAQ:
Level I NASDAQ Level I is now called the "NBBO" - National Best Bid and Offer. It is the best pricing in the market at that moment - the high bid and the low ask. NASDAQ Level II is incorporated into the NASDAQ "SingleBook" system which gives a single book of orders for all NASDAQ issues in one place. Every quote placed by a market maker with the quote size (how many shares the quote is good for) is shown on Level II. NASDAQ Level III is now obsolete with SingleBook, but used to be the level on which a market maker could change its own quote. There is no such thing as NASDAQ Level IV
All quotes from NASDAQ market makers with the quote size can be found on NASDAQ:
Level II NASDAQ Level II is incorporated into the NASDAQ "SingleBook" system which gives a single book of orders for all NASDAQ issues in one place. Every quote placed by a market maker with the quote size (how many shares the quote is good for) is shown on Level II. NASDAQ Level I is now called the "NBBO" - National Best Bid and Offer. It is the best pricing in the market at that moment - the high bid and the low ask. NASDAQ Level III is now obsolete with SingleBook, but used to be the level on which a market maker could change its own quote. There is no such thing as NASDAQ Level IV
All of the following are trades that take place in the Second Market EXCEPT trades of:
NYSE listed securities on the exchange floor. The Second Market is OTC (over-the-counter) trading of securities that are not listed on an exchange. For equities, the Second Market is the OTCBB (Over The Counter Bulletin Board) and the Pink Sheets. Also, virtually the entire debt market is "OTC" - including the Treasury market, municipal bond market, and the corporate bond market (only a tiny amount of corporate bonds are traded on exchanges). NYSE listed issues traded on the exchange floor represents the First Market.
When a corporation issues new shares of common stock, which statement is true?
Net worth increases Upon issuing new shares of common stock, the issuer receives the cash proceeds of the sale, increasing its cash. Because more shares are issued, stockholder's equity increases, increasing net worth. The company must now spread its earnings over both the old and the new shares (outstanding shares have increased). Thus, reported earnings per share will decrease.
Which of the following is NOT true about the ex-dividend date?
Purchases made on the ex-dividend date receive the dividend TRUE: The ex dividend date is one day before record date On the ex-dividend date, the exchange where the stock trades will reduce the opening price by the cash dividend amount On the ex-dividend date, OTC market makers will reduce both their bid and ask quotes by the cash dividend amount If a customer buys a stock prior to the ex-date, the customer "pays" for the dividend that he or she will receive. Because the price of the stock is reduced by the dividend amount as of the morning of the ex-date, any purchaser of the stock on that day or after will not receive the dividend, but does not pay for it since it has been deducted from the price. The "ex-date" is set at 1 business day prior to record date, because if the stock is purchased 2 or more business days prior to record, then the trade would settle on the record date or before and the purchaser would receive that dividend.
Who has the responsibility for maintaining a fair and orderly market at the NYSE?
Specialists (DMMs) Specialists are the designated market makers (DMMs) on the NYSE floor. They must make a fair and orderly market in each stock. To do so, they act as "auctioneers" managing the pricing of the stock as trades take place between floor brokers who assemble at the specialist's trading post during active trading periods; and in slow trading periods, they act as the buyer and seller of last resort. If there are no other buyers present in the market, the specialist must buy that stock for its own account; if there are no other sellers present in the market, the specialist must sell that stock out of its own account to anyone who wants to buy.
he YOYO Company indicates in its prospectus that the underwriter may enter the market during the offering period to purchase shares should the market price of its new issue fall below the offering price. The prospectus is describing:
Stabilization Stabilization is the only "legal" form of market manipulation. As of the effective date, when the syndicate starts selling the issue, the manager of the syndicate is permitted to buy back the issue in the aftermarket from any purchasers who wish to quickly sell the shares. The manager "buys back" the stock at the Public Offering Price, to stop any such sales from depressing the stock's price in the aftermarket. When the manager stops stabilizing, true market forces will determine what happens to the price of the stock - so at this point, the price may drop. Any purchaser of the new issue is put on notice that the manager may stabilize, because there is a legally required "Notice of Stabilization" on the inside front cover of the prospectus.
All of the following are considered to be a good delivery for a 400 share purchase of stock EXCEPT:
Ten 40 share certificates To be a good delivery dealer to dealer, stock certificates must be delivered in multiplies of 100 on one certificate or in certificates of less than 100, where the certificates can be added exactly to 100 share units. Choice C does not meet this requirement. Individual 40 share certificates cannot be added into 100 share units. 25 share certificates are good (Four 25 share certificates = 100), as are eight 50 share certificates or one 400 share certificate.
Which of the following reports trades of NYSE issues?
The Consolidated Network A Tape The Network A Tape reports trades of NYSE listed issues, wherever the trade occurred. The Network B Tape reports trades of AMEX listed issues, wherever the trade occurred. The Network C Tape reports trades of NASDAQ listed issues, wherever the trade occurred. There is no such thing as the Network D Tape.
Which of the following report trades of NASDAQ issues?
The Consolidated Network C Tape The Network A Tape reports trades of NYSE listed issues, wherever the trade occurred. The Network B Tape reports trades of AMEX listed issues, wherever the trade occurred. The Network C Tape reports trades of NASDAQ listed issues, wherever the trade occurred. There is no such thing as the Network D Tape.
A NASDAQ market maker quotes shares of a NASDAQ-listed closed-end fund at $27 - $28. A customer of a NASDAQ "order entry" firm directs it to purchase 500 shares of the fund for his account. On settlement date for the trade, which is 2 business days later, the fund is quoted at $30 - $31. Which statement is true?
The customer will pay $28 plus a commission Closed-end fund shares are listed and trade like any other stock. Do not confuse them with mutual fund shares, which do not trade! A customer buys the shares at the dealer's ask price of $28, plus the customer must pay a commission to the order entry firm for executing the trade. The customer sells the shares at the dealer's bid price of $27, less a commission paid to the order entry firm for executing the trade. The price of the security on trade date is the price of the trade. If the price moves after that date, it has no effect on the price the customer paid to buy or the price the customer will receive for selling.
A NASDAQ market maker quotes shares of a NASDAQ-listed closed-end fund at $27 - $28. A customer of a NASDAQ "order entry" firm directs it to sell 500 shares of the fund for his account. On settlement date for the trade, which is 2 business days later, the fund is quoted at $30 - $31. Which statement is true?
The customer will sell at $27 less a commission Closed-end fund shares are listed and trade like any other stock. Do not confuse them with mutual fund shares, which do not trade! A customer buys the shares at the dealer's ask price of $28, plus the customer must pay a commission to the order entry firm for executing the trade. The customer sells the shares at the dealer's bid price of $27, less a commission paid to the order entry firm for executing the trade. The price of the security on trade date is the price of the trade. If the price moves after that date, it has no effect on the price the customer paid to buy or the price the customer will receive for selling.
Which statement concerning dividend payments to shareholders is correct?
The ex-dividend date is determined based on the record date Shareowners recorded on the books of the company as of the record date receive dividends. To be an owner of record, the stock must be purchased and the trade settled by the close of business on the Record Date. The Ex-Dividend Date is the first date where a purchaser of the stock will not settle in time to be on record to receive the dividend. Since regular way settlement takes 2 business days, anyone who buys 2 business days or more in advance of record date will settle in time to receive the dividend. Anyone who buys 1 business day prior to Record Date will settle after Record and will not receive the dividend. Thus, the first day the stock will trade "without" the dividend is 1 business day prior to record. This is known as the "Ex Dividend-Date" - as in, the stock is trading "ex" - without the dividend. The Declaration Date is the date that the issuer makes the dividend announcement and sets the Record Date and the Payable Date. The Payable Date is the date on which the issuer actually mails out the dividend checks to the stockholders of record.
Which of the following statements concerning the prices at which specialists (DMMs) buy and sell securities is correct?
The spread is smaller for more frequently traded stocks Bid and Ask must always be viewed from the standpoint of the dealer, not the customer. The Ask price is the price at which the dealer will sell a security to a customer. The Bid price is the price at which the dealer will buy a security from a customer. The dealer's profit is the difference between the Bid and Ask, known as the spread. Dealers in actively traded issues will work for narrower spreads, since they profit from the volume. Dealers in thinly traded issues demand wider spreads.
Which of the following statements concerning broker-dealer firms is correct?
These firms can act as agents in some transactions and principals in others A broker-dealer must wear one hat at a time when executing a transaction for a customer. It can act either as a broker, finding the best market for the customer, and charging a commission for this service. Or, it can act as a dealer, buying the security into its inventory from the customer; or selling the security from its inventory to the customer. For this, the firm earns a mark-up or mark-down. FINRA prohibits a firm from acting as both broker and dealer in the same transaction. Therefore, a firm cannot charge both a commission and a mark-up (or mark-down) in a transaction.
A wealthy investor recently traded 750,000 shares of Kodak stock (an NYSE listed company) when the NYSE was closed. The trade was executed by an OTC market maker. This trade took place in the:
Third Market The trading (Secondary) market is subdivided into 4 markets: The First Market is trading of listed stocks on the floor of the exchange that lists that stock. The Second Market is OTC trading of securities that are not exchange listed. For equities, it consists of NASDAQ, the OTCBB and the Pink Sheets. The Third Market is OTC trading of exchange listed securities. So-called "Third Market Makers" are OTC market makers that compete with exchange specialists (DMMs - Designated Market Makers). They stay open 24 hours and do much of their trading when the exchange trading floor is closed. The Fourth Market is direct trading of securities from institution to institution via ECNs - Electronic Communications Networks such as Instinet and Archipelago. The Primary Market is the new issue market.
ZYX Corporation sets the record date for a cash dividend distribution for Wednesday, April 25th. The exchange will set the ex-dividend date as:
Tuesday, April 24th The exchange sets the ex-dividend date at one business day prior to the record date. This is the first day that anyone who purchases in a regular way trade will settle after the record date and therefore will not be entitled to receive the cash dividend. The record date is Wednesday, April 25th; therefore, the ex-date is 1 business day before, which is Tuesday April 24th.
On a ticker tape, a trade of LMN stock is reported as: ....10s 32.00....... How many shares traded?
1,000 The designation "s" stands for a round lot of 100 shares. Therefore, "10s" means that 10 round lots of 100 shares = 1,000 shares were traded of LMN stock at $32.00.
After a customer makes a stock purchase, what document must be sent to him or her?
A confirmation Customers get the details of a trade by a confirmation notice from the broker-dealer, who sends the confirmation no later than the one business day after the trade date. The order memorandum is the order ticket the representative places to execute the stock purchase. The comparison is a confirmation used in transactions between broker-dealers. A prospectus is a disclosure document that must be delivered when a new issue is purchased by a customer.
When a corporation considering the sale of a new issue of securities stipulates that it will issue no securities unless the entire issue sells, the arrangement is a(n):
all-or-none commitment Best efforts underwritings are agency relationships, where the underwriter uses its "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer. An all-or-none underwriting is a variation on a best efforts, used for start-up companies, where if the full amount of the offering was not sold, the company would likely fail. In a best efforts - all or none underwriting, either the entire issue is sold or the deal is canceled. A stand-by underwriting occurs when an issuer attempts to sell more shares directly to its existing shareholders via a rights offering. If all of the shareholders subscribe, then the issuer successfully marketed its shares without needing an underwriter. However, as a back-up, the issuer will have an underwriter stand-by on a firm commitment basis to pick up any unsubscribed shares in the rights offering. The underwriter will then resell these shares to the public. In a firm commitment underwriting, the underwriter agrees to buy the issue outright from the issuer; and will then resell it to the public at a higher price. The underwriter takes full financial liability for any shares that cannot be sold.
All of the following statements about investment banking firms are correct, EXCEPT they:
are paid commissions by the purchasers of public offerings When an issuer wishes to raise money, investment banking firms advise the issuer about the type of securities (bonds or stocks) that would be most easily sold in the current market at the best prices. For stock offerings, the intent is to sell the shares at the highest price; for bond offerings the intent is to sell the bonds at the lowest interest rate. The compensation to the investment banker is the "spread" which is included in the offering price of the securities. Buyers pay no commissions on new issues. If an issue is large, the investment banker will assemble both a syndicate and selling group to help market the issue. They share in the spread when they sell the issue to the public. All broker-dealers must be registered with FINRA and are subject to FINRA rules. Investment banking is one of the businesses in which broker-dealers engage.
Which of the following is NOT true regarding a signature guarantee required for good delivery?
A notarized signature and photo ID meet the signature guarantee requirement Good delivery rules require a guaranteed signature, which must be executed by a Medallion Signature Guarantee Program member. These include commercial banks and FINRA member firms. The guarantor assumes the risk for an invalid signature. A notary does not "guarantee" a signature because the notary does not assume risk of loss if the signature is invalid.
The ZYGGI Company wants to issue a new series of bonds. It would prefer to issue them at 5%. Who would analyze the market to determine if this rate will probably be attractive enough to sell the issue?
An investment banker Investment bankers analyze the marketplace and advise issuers about the size and pricing for proposed new issues. For bond issues, the pricing is the interest rate that will be set on the issue. If the banker determines that 5% is too low to make the issue attractive, it will advise the issuer that the interest rate must be higher to successfully market the issue.
"Offerings of this issue may only be made with the final prospectus." This means which of the following?
Each time a registered representative offers a newly-issued security to a potential client, the representative must provide a prospectus By law, every time a registered representative offers a newly-issued security to a potential buyer, the representative must provide a prospectus. The key is "each time the representative OFFERS a newly issued security," and not after the sale of such a security.
ARGO Inc. wishes to raise additional capital and has met with its underwriter, where they determined that ARGO should issue 1 million new shares of stock. Before filing the registration for the issue with the SEC, ARGO or the underwriter may:
discuss the probable selling price with the underwriter ARGO or the underwriter cannot promote the issue in any way prior to the filing of the registration statement with the SEC. Thus, it may not inform the shareholders about the new issue or advertise it. Only after the registration statement is filed can a "red herring" preliminary prospectus about the new issue be distributed to interested potential customers. Prior to filing the registration statement, ARGO may discuss probable selling prices and other details about the issue with the underwriter, this information cannot be disclosed to the company's current shareholders or the public.
All of the following are a good delivery for a 300 share stock trade EXCEPT:
Four certificates for 75 shares To be a good delivery, certificates must be in round multiples of 100 shares on one certificate or must be delivered in certificates that add up to 100 share units. Certificates of 75 shares each are not good because 75 + 75 = 150 - a round lot of 100 shares cannot be created from these units.
A bank that has a large position in ABCD stock wishes to dispose of it at the lowest cost. To do so, the bank would first attempt to get an execution in the:
Fourth Market Instinet and Archipelago are ECNs - Electronic Communications Networks - that allow institutions to trade directly with each other at extremely low cost (e.g., $1 per trade). A trade will only occur if there is a match between buyer and seller; otherwise no trade occurs. Many institutions will first attempt to get a fill in the Fourth Market. If there is no match, then they send the order to an exchange or to an OTC market maker.
A bank with a large block of stock to sell, sends the trade to Instinet to attempt to get a fill. This trade was sent by the bank to the:
Fourth Market Instinet and Archipelago are ECNs - Electronic Communications Networks - that allow institutions to trade directly with each other at extremely low cost (e.g., $1 per trade). A trade will only occur if there is a match between buyer and seller; otherwise no trade occurs. Many institutions will first attempt to get a fill in the Fourth Market. If there is no match, then they send the order to an exchange or to an OTC market maker.
Andrew buys IBM stock through his brokerage firm. The broker places the order on the NYSE, which lists IBM stock. Andrew's trade occurs: I in an auction market II in a negotiated market III on the floor of an exchange IV on the OTC market
I & III Exchange markets are "auction" markets in which specialists (who are the designated market makers (DMMs) in exchange listed issues) will act as the auctioneer when there is an active trading crowd at the specialist's trading post. The trading crowd consists of floor brokers who have customer orders to buy or sell. The specialist conducts the "auction" of the security to set the price based on the prices that floor brokers are bidding or asking for their customers in the market. The primary market is the new issue market. Exchange floors are part of the secondary market, which is trading of issued securities. Exchange floors are called the "First Market" because this was the first way that securities were traded in the U.S. (since the 1780s). In contrast, the second way that securities began trading was "over-the-phone" starting in the early 1900s with the telephone's invention. The OTC (over-the-counter) market is known as the "Second Market." There is no exchange floor - rather, trading is done over the phone and trades can be negotiated in this manner. Now, most OTC trades are done electronically.
When a corporation issues new shares of stock, which of the following changes occur on the corporation's balance sheet? I Cash increases II Cash decreases III Net Worth increases IV Net Worth decreases
I & III only When a corporation receives the payment for the sale of the new stock, the receipt of the funds increases cash, and the additional shares issued are recorded on the books of the company as an increase in stockholder's equity (which increases net worth).
Which of the following statements are correct? I Specialists (DMMs) buy at the bid price II Specialists (DMMs) sell at the ask price III Investors sell at the ask price IV Investors buy at the bid price
I and II only The Specialist is the "Designated Market Maker" in a listed stock on an exchange floor. The Specialist/DMM maintains a bid-ask quote in the stock. The Specialist will sell at the ask price to any customer that wishes to buy. The Specialist will buy at the bid price from any customer that wishes to sell.
Which statements are true? I The spread is the difference between a dealer's bid and ask quote II The spread is the difference between the security's opening and closing price III Active markets are characterized by narrow spreads IV Active markets are characterized by wide spreads
I and III The spread is the difference between a dealer's bid and ask quotes. Active markets are characterized by narrow spreads; inactive markets are characterized by wide spreads.
When an investment banker agrees to buy the portion of an add-on stock offering not subscribed to in a rights offering, this is a(n): I stand-by underwriting II all or none underwriting III firm commitment IV best efforts commitment
I and III A stand-by underwriting occurs when an issuer attempts to sell additional shares directly to its existing shareholders via a rights offering. If all of the shareholders subscribe, then the issuer successfully marketed its shares without needing an underwriter. However, as a back-up, the issuer will have an underwriter stand-by on a firm commitment basis to pick up any unsubscribed shares in the rights offering. The underwriter will then resell these shares to the public. Best efforts underwritings are agency relationships, where the underwriter uses its "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer. An all-or-none underwriting is a variation on a best efforts, used for start-up companies, where if the full amount of the offering was not sold, the company would likely fail. In a best efforts-all or none underwriting, either the entire issue is sold or the deal is canceled.
Which securities are only offered in the OTC market? I IPOs II Closed-End Funds III Mutual Funds IV Listed stocks
I and III All Initial Public Offerings are made OTC. Once a company has completed its IPO, its shares will start to trade. Most new issues, once the IPO is complete, start to trade on NASDAQ. However, if the company is very successful, it might get an immediate NYSE listing, if it so wishes (NYSE listing standards are much tougher than NASDAQ standards). All mutual fund shares are offered OTC with a prospectus. These shares do not trade. They can only be redeemed with the sponsor. In contrast, closed-end fund shares are listed and trade like any stock. They are listed both on exchanges and OTC. Listed stocks are traded on exchange floors - there are only a handful of so-called "dual listed" stocks that are listed both on an exchange like the NYSE and on NASDAQ.
If the 20-day cooling off period is completed without comment from the SEC, then: I registration is effective II registration is not effective III sale of the issue can commence IV sale of the issue cannot commence
I and III If the 20-day cooling off period is completed without comment from the SEC, then registration is effective and the issue can now be sold.
In a firm commitment underwriting, the managing underwriter will sign up a syndicate in order to: I share potential liability with the other syndicate members II share potential liability with the issuer III share selling responsibility with other syndicate members IV share selling responsibility with the issuer
I and III The manager forms a syndicate because in a firm commitment underwriting, the underwriter buys the issue outright from the issuer. By syndicating the deal, the manager spreads the capital requirements among syndicate members. This also reduces the risk to each syndicate participant if the issue proves difficult to sell.
Which of the following can guarantee a signature for good delivery of a stock certificate? I FINRA member firm II Customer III Registrar IV Commercial bank
I and IV Signatures can be guaranteed by any member of the Medallion Signature Guarantee Program. These include commercial banks and FINRA member firms. The customer cannot guarantee his or her own signature. The registrar is responsible for insuring the integrity of a company's shareholder list and has nothing to do with signature guarantees.
Which statements are true? I The Network A Tape reports trades of NYSE listed issues II The Network A Tape reports trades of AMEX listed issues III The Network B Tape reports trades of NYSE listed issues IV The Network B Tape reports trades of AMEX listed issues
I and IV The Network A Tape reports trades of NYSE listed issues, wherever the trade occurred. The Network B Tape reports trades of AMEX listed issues, wherever the trade occurred. The Network C Tape reports trades of NASDAQ listed issues, wherever the trade occurred.
ABC, Inc. has completed its IPO. Joann, a purchaser of the newly issued ABC shares decides to dispose of her ABC shares immediately. Which statements are true? I The IPO of ABC shares occurred in the primary market II The IPO of ABC shares occurred in the secondary market III Joann's sale of ABC shares will occur in the primary market IV Joann's sale of ABC shares will occur in the secondary market
I and IV When a company raises fund by selling its first common stock offering to the public, this is called an "IPO" - Initial Public Offering. The market for IPOs is called the "Primary Market." Once the IPO is complete, the shares are either listed on an exchange or trade OTC. The trading market for the shares is called the "Secondary Market."
Trading on the floor of an exchange is: I known as the Primary Market II known as the First Market III an auction market IV a negotiated market
II and III Exchange markets are "auction" markets in which specialists (who are the designated market makers (DMMs) in exchange listed issues) act as the auctioneer when there is an active trading crowd at the specialist's trading post. The trading crowd consists of floor brokers who have customer orders to buy or sell. The specialist conducts the "auction" of the security, which sets the price based on the prices that floor brokers are willing to trade with each other. When there is no floor broker trading interest, then the specialist firm acts as a market maker, taking the other side of the trade; buying into its inventory when a customer wishes to sell and selling from its inventory when a customer wishes to buy. The primary market is the new issue market. The secondary market is the trading market, of which exchange floors are one part. The secondary market is categorized into 4 submarkets, arranged in chronological order. These are the: First Market: Trading of listed securities on an exchange floor. Exchange floors are called the "First Market" because this was the first way that securities were traded in the U.S. (since the 1780s). Second Market: Trading of securities that are not listed on an exchange in the OTC (over-the-counter market). The second market started in the early 1900s with the invention of the telephone. Now, instead of having to meet on an exchange floor to trade, trading could occur "over the phone." The OTC (over-the-counter) market is known as the "Second Market." There is no exchange floor - rather, trading is done over the phone and trades can be negotiated in this manner. Now, most OTC trades are done electronically. Third Market: Trading of securities that are exchange listed between OTC market makers. This is competition for exchange specialists. Fourth Market: Direct trading of securities between institutions through "ECNs" - Electronic Communications Networks such as Instinet.
Who sets the "ex" date and when is it set for common stock cash dividends? I Fund II NASDAQ III 1 business day prior to the record date IV business day following the payable date
II and III For dividends paid on individual stocks, the exchange where the security trades (NASDAQ in this example) sets the "ex" date. For cash dividends, the date is set at 1 business day prior to record date. Anyone who buys on the ex date or later in a regular way trade will settle after the record date and will not receive the dividend. Therefore, the price of the stock is reduced on this date for the dividend that will no longer be received by the purchaser of the stock.
In a firm commitment underwriting, the investment banker agrees that it will: I sell as many of the shares as it can, up to the maximum specified in the offering II buy the entire issue outright from the issuer III take responsibility for any unsold shares IV take no responsibility for unsold shares
II and III In a firm commitment underwriting, the underwriter agrees to buy the issue outright from the issuer; and will then resell it to the public at a higher price. The underwriter takes on full financial liability for any shares that cannot be sold. Best efforts underwritings are agency relationships, where the underwriter uses its "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer.
Selling group members: I share in liability for unsold shares II have no liability for unsold shares III act as agent when selling for the syndicate IV act as principal when selling for the syndicate
II and III Selling group members simply act as agents for the syndicate, finding customers. They take no liability and earn a selling concession (the syndicate member "concedes" a portion of the underwriting spread to a selling group member for each customer that the selling group member finds).
A best efforts underwriting is a(n): I principal relationship between the issuer and the underwriter II agency relationship between the issuer and the underwriter III commitment where the underwriter takes full financial liability IV commitment where the underwriter takes no financial liability
II and IV Best efforts underwritings are agency relationships, where the underwriter uses his "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer. In a firm commitment underwriting, the underwriter agrees to buy the issue outright from the issuer; and will then resell it to the public at a higher price. The underwriter takes full financial liability for any shares that cannot be sold.
Trading of securities OTC that are not exchange listed is: I known as the First Market II known as the Second Market III an auction market IV a negotiated market
II and IV Exchange markets are "auction" markets in which specialists (who are the assigned market makers in exchange listed issues) will act as the auctioneer when there is an active trading crowd at the specialist's trading post. The trading crowd consists of floor brokers who have customer orders to buy or sell. The specialist (also called the Designated Market Maker) conducts the "auction" of the security to set the price based on the prices that floor brokers are bidding or asking for their customers in the market. The primary market is the new issue market. Exchange floors are part of the secondary market, which is trading of issued securities. Exchange floors are called the "First Market" because this was the first way that securities were traded in the U.S. (since the 1780s). In contrast, the second way that securities began trading was "over-the-phone" starting in the early 1900s with the telephone's invention. The OTC (over-the-counter) market is known as the "Second Market." There is no exchange floor - rather, trading is done over the phone and trades can be negotiated in this manner. Now, most OTC trades are done electronically.
Big Firm, a FINRA member, executes a trade for which it receives a mark-up. Which of the following is true about the transaction? I Big Firm is acting as a broker II Big Firm is acting as a dealer III This is an agency transaction IV This is a principal transaction
II and IV OTC firms are known as broker-dealers, because they can execute transactions in either of 2 ways: When a firm acts as a broker, it is an agent, matching a buyer to a seller (or vice-versa) and the firm earns a commission. When a firm acts as a dealer, it is a principal, selling the security to a customer from its inventory, or buying the security into its inventory from a customer. For each round-turn trade completed, the dealer earns the spread. In addition, under FINRA rules, when a dealer sells to a customer, it may charge a mark-up over the ask price; and when it buys from a customer, it may deduct a mark-down from the bid price. OTC dealers can only wear one hat in a transaction - they can either act as an agent, earning a commission, or can act as a dealer, earning a mark-up or mark-down. They cannot act as both at the same time.
A trade of a large block of stock between a bank and an insurance company is matched directly by an ECN via a computer network. This trade could have occurred on (the):
INSTINET Instinet and Archipelago are so-called "ECNs" - Electronic Communications Networks, that allow institutions to trade directly with each other, avoiding the costs of going to an exchange floor or through an OTC market maker.
Which of the following securities is only offered in the OTC market?
IPOs All Initial Public Offerings (IPOs) occur in the "Primary Market" and always occur OTC. Once the Initial Public Offering is completed, the shares are listed and start to trade, either on an exchange or OTC. Stocks trades on exchanges and OTC. Closed-end fund shares are also called Exchange Traded funds. Unlike mutual funds, which do not trade, closed-end fund shares are like any other stock and trade on exchanges such as the NYSE and NASDAQ. ADRs are the way in which foreign stocks are traded in the U.S. ADRs (American Depositary Receipts) are listed on exchanges and NASDAQ.
Which of the following statements describes the First Market?
It is the trading of listed securities on exchanges Offerings of securities occur in either the Primary (New Issue) or Secondary (trading of issued securities) Market. The Secondary Market (trading market) is broken down into the: First Market: Trading of listed stocks on an exchange such as the NYSE; and on NASDAQ. Second Market: Trading of stocks that are not listed on an exchange floor that takes place in the OTC market. This includes OTCBB (Over-The-Counter Bulletin Board stocks) and stocks quoted in the Pink Sheets. Third Market: Trading of listed stocks in the OTC market. Instead of trading listed stocks on the exchange where they are listed, trades can also occur OTC if the price is better or if the exchange is closed. This is mainly an institutional market. Fourth Market: Trading of both listed and unlisted stocks directly between institutions on so-called "ECNs" - Electronic Communication Networks such as Instinet or Archipelago.
An investor places an order for 200 shares of ABC Corporation common stock on Thursday, July 15. To meet the requirements for a "cash" settlement, the investor must pay for the shares by:
July 15th Cash settlement occurs the same day as trade date. Very few trades are settled for cash; the vast majority are settled regular way. A customer would request a cash settlement when selling if he or she needed the funds that day - and it costs more to find a buyer willing to pay that day for the securities.
An investor places an order for 200 shares of ABC Corporation common stock on Thursday, July 15. To meet the requirements for a "regular way" settlement, the investor must pay for the shares by:
July 19th Regular way settlement occurs 2 business days after trade date. This trade took place on Thursday, July 15th, therefore the trade will settle on Monday, July 19th. Note that weekend days do not count - only business days.
Lawns R Us Inc. has filed a registration statement for a new issue that is in the 20-day cooling-off period. During this time, the underwriters for the Lawns R Us Inc. offering are permitted to:
distribute a "red herring" prospectus The 20-Day Cooling Off Period is called the "quiet" period because the underwriters and the issuer must be "quiet" about the issue. The worry of the SEC is that the underwriters will hype the offering to raise the potential offering price (which is not set until the very end of the cooling off period). Thus, during the cooling off period, the issue may not be sold, recommended, or advertised. The only permitted activities during the cooling off period are the distribution of a preliminary prospectus and the acceptance of indications of interest. The preliminary prospectus is called a "red herring" because it has a red disclaimer on it that essentially says that the document does not do anything that is prohibited. It states that "this is not an offer to sell the security; this is not a solicitation for you to buy the security; and this is not a recommendation of the security." So the potential buyer is put on notice that the red herring is an information document only; it is not promotional. The underwriters can accept non-binding indications of interest for potential buyers (that means, simply building a list of interested potential buyers) during the 20 day cooling off period; but they cannot accept orders.
A new registered security offered by Laserscape Technology, Inc. is in the 20-day cooling-off period. Which of the following statements concerning this offering is correct? Laserscape's underwriter may:
distribute a preliminary prospectus called a red herring The 20-Day Cooling Off Period is called the "quiet" period because the underwriters and the issuer must be "quiet" about the issue. The worry of the SEC is that the underwriters will hype the offering to raise the potential offering price (which is not set until the very end of the cooling off period). Thus, during the cooling off period, the issue may not be sold, recommended, or advertised. The only permitted activities during the cooling off period are the distribution of a preliminary prospectus and the acceptance of indications of interest. The preliminary prospectus is called a "red herring" because it has a red disclaimer on it that essentially says that the document does not do anything that is prohibited. It states that "this is not an offer to sell the security; this is not a solicitation for you to buy the security; and this is not a recommendation of the security." So the potential buyer is put on notice that the red herring is an information document only; it is not promotional. The underwriters can accept non-binding indications of interest from potential buyers (that means simply building a list of interested potential buyers) during the 20 day cooling off period, but they cannot accept orders. The due diligence meeting is held towards the end of the cooling off period. At the meeting, the issuer, attorneys, accountants and underwriters review the offering material to make sure that all relevant facts are disclosed to potential purchasers.
All of the following statements about the OTC market are true EXCEPT:
fewer stocks trade there than on exchange floors The Over-The-Counter market is a negotiated market, as compared to an exchange floor, which is an auction market. The OTC market is bigger than you might think! All new issue offerings occur OTC, and this includes mutual fund offerings, where every share is "newly issued" by the fund company when an investment is made. The equities portion of the OTC market consists of the OTCBB (the "OTC Bulletin Board") and the Pink Sheets. Finally, almost the entire bond market is OTC - U.S. Governments, Agencies and Municipals all trade OTC; and virtually all corporate bond trades occur OTC. The OTC market has a greater number of companies that trade as compared to exchange listings. For example, the NYSE trades the stocks of about 3,000 companies. There are about another 6,000 issues traded in the OTCBB (Over-The-Counter Bulletin Board). In addition, trading volume OTC is greater than that of the exchanges.
All of the following statements concerning the NASDAQ Stock Market are correct EXCEPT trading:
is by open outcry auction in one location The NASDAQ Stock Market is an electronic networked marketplace, where trading can take place between FINRA member firms. There is no central marketplace like an exchange floor, so there is no open outcry auction as can occur on exchanges. Rather, trades are executed electronically, with market participants accessing electronic quotes and trading against them. The regulator for the NASDAQ Stock Market is FINRA.
The Third Market is trading of stocks of companies:
listed on exchanges that takes place over-the-counter through market makers First Market: Trading of listed stocks on an exchange floor such as the NYSE; and on the NASDAQ System. Second Market: Trading of stocks that are not listed on an exchange floor that takes place in the OTC market. This includes the OTCBB (Over-The-Counter Bulletin Board stocks) and stocks quoted in the Pink Sheets. Third Market: Trading of listed stocks in the OTC market. Instead of trading listed stocks on the exchange where they are listed, trades can also occur OTC if the price is better or if the exchange is closed. This is mainly an institutional market. Fourth Market: Trading of both listed and unlisted stocks directly between institutions on so-called "ECNs" - Electronic Communication Networks such as Instinet or Archipelago.
The First Market is trading of:
listed stocks on an exchange The definitions of the markets are (based on the history of how trading has evolved over time): First Market: Trading of listed stocks on an exchange such as the NYSE; and on NASDAQ. Second Market: Trading of stocks that are not listed on an exchange floor that takes place in the OTC market. This includes OTCBB (Over-The-Counter Bulletin Board stocks) and stocks quoted in the Pink Sheets. Third Market: Trading of listed stocks in the OTC market. Instead of trading listed stocks on the exchange where they are listed, trades can also occur OTC if the price is better or if the exchange is closed. This is mainly an institutional market. Fourth Market: Trading of both listed and unlisted stocks directly between institutions on so-called "ECNs" - Electronic Communication Networks such as Instinet or Archipelago.
All of the following actions are required as part of due diligence performed by the underwriter(s) during the 20 day cooling off period EXCEPT:
obtaining the SEC's approval to sell the new issue Under the Securities Act of 1933, "omissions or misstatements of material fact in a registration statement or prospectus" are fraudulent. Any person that signs the registration statement (this includes the officers of the issuer; the attorneys preparing the registration statement and prospectus; the accountants that certify the financial statements and the underwriters for the offering) is potentially liable. Thus, at the due diligence meeting, all of these parties get together to review the offering to insure that all relevant information is disclosed and that there are no omissions or misstatements of material fact. The due diligence meeting is typically held towards the end of the 20 Day Cooling Off Period. The SEC does not approve nor disapprove of any new issue. If they did "approve" of new issues, then buyers could sue the SEC if there were omissions or misstatements - and the Federal government does not want this. View the SEC as a big filing cabinet - if enough information is filed and disclosed, then the issue can be sold. If there is insufficient disclosure, the issue cannot be sold.
All of the following terms apply to brokers EXCEPT:
principal A broker is an agent or intermediary in a transaction, finding the best market for a customer that wishes to buy or sell. For this, the broker earns a commission.
All of the following are functions of the investment banker EXCEPT:
registering the new issue of securities with the SEC The investment banker (underwriter) negotiates the type of underwriting commitment with the issuer; establishes the offering price based on market conditions; negotiates the spread (underwriter's compensation) with the issuer; and markets the issue to the public. The issuer has the responsibility for registering the issue with the SEC, not the underwriter.
The compensation that the underwriter earns when a new issue of securities is sold to the public is called the:
spread The underwriter's compensation in a new issue offering is the "spread" - the difference between the POP (Public Offering Price) and the price paid by the underwriter to the issuer for the security. Commissions and mark-ups only apply to transactions in the Secondary Market; not to Primary Market transactions (an underwriting is a primary market transaction). A concession is paid by an underwriter out of the spread when it uses a selling group member to help find buyers for the issue. The underwriter "concedes" part of the spread to the selling group member that brings in a customer for the new issue.
The Fourth Market is trading of:
stocks directly from one institution to another institution First Market: Trading of listed stocks on an exchange floor such as the NYSE; and on the NASDAQ System. Second Market: Trading of stocks that are not listed on an exchange floor that takes place in the OTC market. This includes the OTCBB (Over-The-Counter Bulletin Board stocks) and stocks quoted in the Pink Sheets. Third Market: Trading of listed stocks in the OTC market. Instead of trading listed stocks on the exchange where they are listed, trades can also occur OTC if the price is better or if the exchange is closed. This is mainly an institutional market. Fourth Market: Trading of both listed and unlisted stocks directly between institutions on so-called "ECNs" - Electronic Communication Networks such as Instinet or Archipelago.
Syndicate members in a firm commitment underwriting have more responsibility than selling group members because:
syndicate members assume potential liability for any unsold securities but selling group members have no such liability Syndicate members in a firm commitment underwriting are principals that share in the selling responsibility and liability for the issue. In firm commitment underwritings, they are liable for any unsold shares. Selling group members act as agents only, helping the syndicate find customers. They take no liability. Both the syndicate and the selling group firms must be FINRA members to join in the underwriting. It is true that syndicate members have a business relationship with the issuer while selling group members do not - but this does not affect the level of responsibility assumed by each. The syndicate manager chooses the syndicate members, not the issuer, but again, this has no bearing on why syndicate members have more responsibility than selling group members.
The Second Market is trading of:
unlisted stocks in the OTC market First Market: Trading of listed stocks on an exchange floor such as the NYSE; and the NASDAQ System Second Market: Trading of stocks that are not listed on an exchange floor that takes place in the OTC market. This includes OTCBB (Over-The-Counter Bulletin Board stocks) and stocks quoted in the Pink Sheets. Third Market: Trading of listed stocks in the OTC market. Instead of trading listed stocks on the exchange where they are listed, trades can also occur OTC if the price is better or if the exchange is closed. This is mainly an institutional market. Fourth Market: Trading of both listed and unlisted stocks directly between institutions on so-called "ECNs" - Electronic Communication Networks such as Instinet or Archipelago.
