Series 7 Chapter 8
If a contract calls for a delivery between brokers of 500 shares of stock, all of the following trading units would be good delivery EXCEPT
10 certificates for 30 shares each and 4 certificates for 50 shares each Good delivery between brokers requires delivery of certificates of 100 shares, multiples of 100, or the ability to stack certificates in piles of 100 shares. Note that the 10 certificates each for 30 shares could not be stacked in units of 100. THIS IS IMPORTANT
Which of the following is NOT good delivery for 470 shares of stock?
2 100-share certificates and 3 90-share certificates. Shares must add up to 100 or be in multiples of 100, with the exception of odd lots. ONLY allowed to have ONE odd lot in the bunch unless multiples of 100. So even if you have 8 50-share certificates, 1 40-share certificate, and 1 30-share certificate, that's ok because it only has one odd lot (30). Versus the 3 90-share certificates don't work because it's 3 odd lots and you can only have 1.
The Three Contact Rule does NOT apply to the purchase or sale of a non-Nasdaq security provided at least:
2 priced quotations are available electronically. Provided there are at least 2 priced quotations available electronically, the Three Contact Rule does not apply.
If a broker/dealer erroneously reports the purchase of 100 shares of ALF at 28.65 on a market order, and the firm later finds the actual price paid at execution was 29, what price does the customer pay for the shares?
29 If the actual price was 29, the customer must accept the trade at that price even though the trade was confirmed erroneously at a different price. Note that at the execution price of 29 the transaction is still within the parameters of the order instruction given which was to purchase 100 shares at the market.
A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order?
80.1 The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain. DOESNT TOTALLY MAKE SENSE (Given that with the short sale he wants the position to go down so going up more would cause him to LOSE more)
A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at 14, and he wants to protect his gain, which of the following orders should he place?
A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading.
To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker for 800 shares. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell:
A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share.
A customer's sell-at-market order was reported as executed at 29.75. Later it was discovered that the report was an error; the trade actually was executed at 29.50. Which of the following is TRUE?
A market order means the customer states that he is willing to accept the best price at the time of execution. A mistake made in reporting does not alter that fact.
A New York Stock Exchange specialist (designated market maker) is employed by:
A member of the exchange Designated market makers are employed by firms which must be exchange members.
If a registered representative is suspended by FINRA's Department of Enforcement, his first appeal would be to:
A registered representative may appeal decisions of the DOE to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.
A specialist (designated market maker) is permitted to do all of the following EXCEPT
A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a DMM cannot accept any order that requires the exercise of discretion. A not-held order is one in which the floor broker can choose the price or time of execution.
All of the following are reasons for entering a stop order EXCEPT to
A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. (that's what a limit order is for)
An order to sell at 38.65 stop limit is entered before the opening. The subsequent trades are 38.85, 38.50, and 38.35. The order:
A stop limit order is a stop order that becomes a limit order once the stop price has been triggered. When the limit price is the same as the stop price on a stop limit order, the order may be executed only at, or better than, the limit price. In this case, the order has not yet been executed because no transaction has occurred at, or above, 38.65 since the stop was triggered at 38.50.
After receiving and accepting securities from another firm, a broker/dealer discovers that the securities received were not in good deliverable form. Recourse for the broker/dealer is to
After receiving the securities, the broker/dealer can file a reclamation and demand good delivery.
A customer has his broker enter an order to buy GHI stock at the opening. Though transmitted promptly, the order does not reach GHI's trading post in time to be filled at the opening. How is the order handled?
An at-the-open order is to be filled at the opening price or not at all. An at-the-open order arriving later must be canceled.
A representative enters a customer's immediate or cancel order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur?
An immediately or cancel order will take a partial fill. Time is the limiting factor in an IOC.
On the order book, all of the following orders are reduced on the ex-date for a cash dividend EXCEPT
Buy stop
An investor sold 100 shares of MAS short when the stock was trading at 21. If MAS is now trading at 16, and she wants to protect her gain, which of the following orders should she place?
Buy stop at 16.10 A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading. In this case with the stock trading at 16, a buy stop of 16.10 is the best choice.
All of the following disputes may be resolved using arbitration under the Code of Arbitration EXCEPT
Class actions brought against member firms are not subject to arbitration under the Code of Arbitration.
Establishing short positions is typical for all of the following EXCEPT:
Even though there is no regulation that prohibits short sales of municipal bonds, this is rarely done. To short a security, it must be borrowed and later covered. The general illiquidity of the municipal market makes this difficult.
Every transaction made by a registered representative for a customer's account
FINRA does not approve transactions, and requiring customers to provide written instructions for each trade would be impractical. Transactions represent verbal contracts not subject to cancellation. A principal must review and approve every order either by signature or initials.
Which of the following order types is permitted in Nasdaq markets but NOT in NYSE equity markets?
Fill or kill (FOK). Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.
An order designated FOK means that the order must be executed:
Fill-or-kill (FOK) orders must be executed immediately in their entirety or they are canceled.
Which of the following is applicable to the NASDAQ OMX PHLX? Regional exchange operated by Nasdaq Offers trading in equity securities and options contracts Is a completely electronic exchange with no physical trading floor Regional exchange operated by FINRA for the execution of OTC stocks only
I and II The OMX PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on floor.
Arbitration and mediation are 2 services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are NOT true? Mediation is mandatory; arbitration is not. Arbitration always results in a binding decision; mediation may not. If arbitration is unsuccessful, the dispute moves on to mediation. A mediator in a dispute may not serve as an arbitrator in the same dispute.
I and III Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.
Which of the following orders would be executed in a rising market? Buy stops. Buy limits. Sell limits. Sell stops.
I and III Buy limits and sell stops are entered below the current market and would be executed if the market were falling. Sell limits and buy stops are entered above the current market and would be executed if the market were rising. SO BLISS ONLY SHOULD BE DONE WHEN THE MARKET IS FALLING.
Which of the following would be found on a when-, as-, and if-issued confirmation? Trade date Settlement date Price Accrued interest
I and III Information that does not appear on a when-issued confirmation can easily be remembered as SAT (settlement date, accrued interest, and total amount due). The trade date and price per bond are included on the when-issued confirmation.
The Trade Reporting and Compliance Engine (TRACE): requires that both sides of a transaction report the trade. requires only the sell side of a transaction report the trade. is a reporting system for corporate bonds trading in the OTC market. is an execution system for corporate bonds trading on exchanges.
I and III The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market. It is not an execution system. Both sides of a TRACE eligible transaction are required to report a trade when it occurs.
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.
I, II, III and IV. The 5% policy applies to both commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades.
Which of the following describe a securities exchange? Prices are set by negotiation between interested parties. The highest bid and the lowest offer prevail. Only listed securities can be traded. Minimum prices are established at the beginning of the day.
II and III 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.
SEC regulation SHO mandates a locate requirement for short sales that is applicable to corporate bonds. NYSE issues. Nasdaq securities. Municipal bonds.
II and III 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.
If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date?
If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.
If your client has a certificate registered in his own name, to be a good delivery, the certificate must be accompanied by:
If the certificate is registered in your client's name, a stock power or a properly executed assignment to the brokerage firm must appear on the reverse side of the certificate.
Your client feels that GGZ, currently trading around 39, would be a good buy at 38. Therefore, he places an order to buy 200 GGZ at 38 GTC. On the ex-date, when the stock splits 2-for-1, the order is still on the order book. How is the order adjusted on the ex-date?
In a stock split, the number of shares is increased and the price is reduced proportionately on the ex-date (200 shares × 2 = 400 shares; the new price is 38 × .5, or 19).
Which of the following describes a quote on Nasdaq Level I?
Inside Market Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market.
KLP common stock has been trading at or near to $25 per share all day. Your client would like to buy 500 shares of KLP at 25, but he is willing to accept fewer shares at that price. Which of the following orders fulfills his intentions?
Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel).
A customer enters an order to buy 1,000 ABC at 50, good for the week only. How will this order appear on the order book?
Limit orders and stop orders are entered on the order book as either GTC or day orders. Orders that are good for only a particular time frame (good for the week) will appear as GTC. It is the responsibility of the broker/dealer that entered the order to cancel it at the end of the week, if unexecuted.
When a broker/dealer makes a market, it is acting as a
Making markets is a principal activity. The broker-dealer stands ready, willing, and able to buy or sell securities for its own account. A dealer acts as a principal when it owns the securities it trades. When the broker-dealer is not acting for its own account, it acts as a broker or an agent. SO principal's are buying and selling securities for their own account, while an agent does so for the accounts of others.
All of the following securities trade in the over-the-counter market EXCEPT:
Municipal bonds, government and agency securities, and corporate securities (listed and unlisted) all trade in the OTC market. Foreign securities trade in the United States if the companies comply with SEC registration and disclosure requirements. Mutual fund shares (open-end companies) do not trade.
Which of the following orders would NOT be reduced on the order book on the ex-dividend date for a cash dividend? Buy limit order. Open sell stop order. Buy stop order. Sell limit order.
Open sell limit orders and open buy stop orders, which are placed above the current market will not be reduced on the order book when a stock goes ex-dividend for a cash dividend.
An order memorandum or ticket must be prepared
Order tickets must be prepared prior to order execution. Once execution has taken place, the order ticket is completed.
A client places a sell stop order good for the day only. Under NYSE rules, you must:
Order tickets must be written and time stamped upon receipt of the order.
Which of the following orders are reduced on the ex-dividend date for a cash dividend? Buy 100 XYZ 60 DNR. Sell 100 XYZ 70. Sell 100 XYZ 60 STOP. Buy 100 XYZ 70 STOP.
Orders placed below the market (buy limits and sell stops) are automatically reduced on the ex-date. The exception to this rule is for orders marked DNR (do not reduce). (REMEMBER BLISS)
Penalties resulting from a Code of Procedure hearing may include all of the following EXCEPT:
Penalties under the Code of Procedure may include censure, expulsion, suspension, and/or fines but not a prison sentence.
If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in:
Position Trading The dealer is buying for its inventory (position trading).
At 2:15 pm EST, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order?
Send the order to the floor immediately. The registered representative should mark the order ticket at close. His firm's floor broker will take on the responsibility for proper execution.
A certificate in the name of Smith & Company may be signed:
Smith & Company, "Smith & Co.," or "Smith and Company". Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word "and "may be substituted with "&" and the word "company" may be abbreviated.
All of the following would be considered nonpublic arbitrators EXCEPT
Susan, a corporate vice president working for a tech company listed on the NYSE Nonpublic arbitrators are any persons who have worked in the financial industry for any duration during their careers including persons associated with a mutual fund or a hedge fund, and persons associated with an investment adviser. Additionally, any financial industry professionals who regularly represent or provide services to investor parties in disputes concerning investment accounts or transactions including attorneys and accountants will also be considered non-public arbitrators if the activity has taken place within the past 5 years.
All of the following are subject to the 5% markup policy EXCEPT:
The 5% markup policy applies to markups, markdowns, and commissions. New offerings sold by prospectus are exempt from this rule.
The 5% markup policy would apply to all of the following equity transactions EXCEPT:
The 5% markup policy applies to secondary market transactions in nonexempt securities.
Riskless and simultaneous transactions by a broker/dealer are:
The 5% policy applies to all types of nonexempt secondary market transactions, including riskless and simultaneous transactions.
The market wide circuit breaker (MWCB) rule uses which of the following as the pricing reference point to measure a market decline?
The MWCBs use the S&P 500 recalculated daily as the pricing reference point to measure market declines for the purpose of triggering market circuit breakers to halt trading.
The Nasdaq stock market permits listing for all of the following EXCEPT:
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.
All of the following statements regarding the over-the-counter market are true EXCEPT:
The OTC market is a negotiated market. The exchanges are auction markets.
All of the following are TRACE eligible and require reporting EXCEPT
The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate bonds, asset backed securities, collateralized mortgage obligations and Treasury securities trading in the OTC secondary market. Money market securities and new issues (primary market) among others are specifically excluded from the TRACE reporting requirements.
A registered representative has just been disciplined under the Code of Procedure. Within how many days does the U-4 need to be updated?
The U-4 must be updated within 30 day of a qualifying event such as changing their residence address or a disciplinary action.
A day order is entered to buy 500 LMN at 24.35. By the close of the trading day the firm has been able to purchase 100 shares at 24.25 and 200 shares at 24.35. If the remainder of the order is unfilled, what is the outcome?
The customer must accept the order for 300 shares. The representative cannot guarantee that the order will be filled by the end of day.
All of the following statements regarding customer confirmations are true EXCEPT
The customer must be sent or receive a confirmation from the broker/dealer no later than completion of the transaction (on or before settlement date).
The locate requirement of Regulation SHO for short sales does not apply to:
The locate requirement is applicable to all short sales of equity securities. It is unlikely to be tested, but, just in case, for purposes of this rule, convertible bonds are considered equity securities. Convertible bonds = equity securities Locate Requirement ONLY for short sales of equity securities. SO ADRs are equity securities as well
A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of a(n):
The market maker is acting in a principal (dealer) capacity.
After the market closed yesterday, ABC announced that it would file for bankruptcy under Chapter 11. The NYSE decides not to open trading in ABC. In response to the NYSE's announcement, which of the following statements regarding the OTC market is TRUE?
The over-the-counter market is not bound by actions of the NYSE or other exchanges, and third-market trading may continue in the stock.
ZOO is trading at 50.63. Your customer, who owns 100 shares of the stock, places an order to sell ZOO at 50.25 stop limit. The tape subsequently reports the following trades: ZOO 50.63 50.75 50.13 50.17 50.27Your customer's order could first be executed at
The sell stop limit order is elected (triggered) at the first trade of 50.13, when the stock trades at or below the stop price of 50.25, the order becomes a sell limit order at 50.25. The order can be executed at that price or higher (the limit placed by the customer). The next trade reported after the trigger is reached is below the limit price. The order would be executed at the next trade of 50.25 or higher and that is the trade at 50.27.
All of the following are true regarding a fail to deliver EXCEPT
The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form. The buyer or the selling BD can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver.
An OTC trader's quote of "60 to 63, work out," in response to a broker holding a customer order to sell a block of stock, indicates which of the following?
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 market makers to get the customer's securities sold or bought.
An informal network of market makers that offers to trade securities NOT listed on an exchange is called:
This best describes the over-the-counter market which is an interdealer market linked by computer terminals to Financial Industry Regulatory Authority (FINRA) member firms across the country.
Which of the following transactions would NOT be subject to the 5% markup policy?
Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it.
If a customer does not pay for a trade regular way, how much additional time does Regulation T give the broker-dealer to deal with the problem?
Two business days Regular way settlement is two business days after the trade date (T + 2). Under Regulation T, which governs margin accounts, payment must be made within two business days after the settlement date (S+2), which gives the broker-dealer an additional two business days.
Which of the following trades settle next business day? U.S. government debt U.S. government agency debt Municipal bonds Listed options
U.S. government debt and listed options settle next day (T + 1); government agency debt and municipal bonds along with corporate securities are subject to regular way settlement of T + 2.
A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request?
Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
A customer sells $5,000 worth of a security in a cash account and on the same day purchases $8,000 worth of a different security in the same account. At the close of the 4th business day following these transactions, no payment has been received from the customer and no extension has been obtained. Assuming no change in market value, the firm must
When an investor buys and sells different securities in the same account on the same day, the two transactions can be netted against each other to determine whether money is due to the client or the client owes money to the firm. In this question the client owes the firm $3,000 (an $8,000 purchase netted against a $5,000 sale). According to Regulation T, the investor has 2 additional business days after settlement (4 days total) to pay the amount owed. Because he has failed to do so and no extension has been obtained, the unpaid-for portion of the trade, which is $3,000, will be liquidated and, according to Regulation T, the account will be frozen for 90 days.
If a customer gives his broker/dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is:
When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69 it is a stop limit order.
Which of the following must be included on a municipal securities order ticket?
Whether the trade is solicited, unsolicited, or discretionary on the order ticket. The other items, which may not be known yet, go on the confirmation.
An investor believes that ICBS, a Nasdaq security, is overpriced at 40. He can sell ICBS short in the over-the-counter market under which of the following circumstances?
With no restrictions.
Each of the following trades occurs in the secondary market EXCEPT
a corporate bond syndicate selling new issues to the public New issues sell in the primary market. Sales between investors are always in the secondary market.
Failure to honor a firm quote is called:
backing away.
A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a GTC buy stop order at 83. GM announces a stock split and an increase in the dividend. The stock starts to move up and the customer decides to cover the short sale at a loss and instructs his broker to buy 100 shares of GM at the market. The registered representative will:
buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop GTC.
A customer has an order to buy 400 ABC at 60. ABC declares a 25% stock dividend. On the ex-date, the order on the order book will read
buy 500 shares at 48 For stock dividends, all buy limit orders on the book are adjusted and the order value must be the same before and after the adjustment. Before the adjustment, 400 ABC at 60 Stop = $24,000 total value. After the adjustment, total shares on the buy order will be 500 (400 × 25% = 100 new shares, 400 + 100 = 500). To arrive at the new price, divide the total order value by the new number of shares ($24,000 / 500 shares = 48). After the adjustment the new order will read; buy 500 shares at 48.
A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is a:
buy stop limit order.
All of the following events would cause FINRA to terminate quotations in a SmallCap stock EXCEPT
having only 2 broker/dealers making a market in the stock Although 3 market makers are required initially for an issue to be included on Nasdaq, only 2 market makers are needed to continue being quoted on the system. The other answers, bankruptcy, a disclaimer opinion being rendered by auditors, or any reason FINRA deems termination to be in the general public's interest, are sufficient reason for termination of quotations.
For a client to get immediate execution on an order, it should be placed as which of the following?
market
Each of the following types of orders will remain open (working orders) until certain conditions are met EXCEPT
market orders
Which of the following are excluded from the Trade Reporting and Compliance Engine (TRACE) reporting requirements?
money market securities The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate, government agency and Treasury securities trading in the OTC secondary market. While most corporate debt securities, asset backed securities (ABS), and collateralized mortgage obligations (CMOs) are TRACE-eligible, there are exclusions such as, debt of foreign governments, money market instruments, and debt securities that are not Depository Trust-eligible.
Earlier in the day, you entered a customer order to buy 300 XYZ at 26.45 GTC. By late afternoon, you notice that XYZ is trading at your customer's limit price. At the close of trading, you contact the order desk and get a Nothing Done report because of
stock ahead All limit orders stand in time priority.
A securities firm that holds stock rather than sells the stock is:
taking a position
All of the following statements regarding the short sale of a listed security are true EXCEPT
the buyer must be advised that he is purchasing borrowed shares On an exchange floor, short sales can be effected at any time in the trade sequence. In addition, short sales may be effected at either the opening or closing. The buyer is never informed that shares being purchased represent borrowed shares.
Maintaining a fair and orderly market on the NYSE trading floor is the responsibility of
the designated market maker
All of the following statements regarding Nasdaq Level 3 are true EXCEPT that:
this level is used by registered representatives only. 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.
FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for
trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor FINRA's Trade Reporting Facility (TRF) is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.
You have just received a statement of claim from the Director of Arbitration. One of your customers is claiming that your failure to follow his instructions led to a loss of $36,000. Under FINRA rules, you must respond within:
within 45 days Under the Code of Arbitration, a respondent has 45 days to respond to both the director and the claimant.
