Chapter 14; Secondary Markets

By taking the opposite side of a trade when there are no other orders, the dealer prevents the price from ________ from the price at which a recent trade was consummated. A) materially diverging B) immaterially concurring C) materially converging D) immaterially diverging

materially diverging

Investors need brokers to help ________. A) negotiate for good prices. B) execute their orders. C) find other parties wishing to sell or buy. D) All of these

All of these

Which of the below statement is FALSE? A) Although there is a common clearinghouse for bonds, there is none for common stocks. B) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process. C) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process. D) The exchange system is quite different rom the dealer-to-customer systems and has potentially significantly greater value added.

Although there is a common clearinghouse for bonds, there is none for common stocks.

________ are necessary to the smooth functioning of a secondary market. A) Investment bankers B) Inexperienced investors C) Initial public offerings D) Brokers and dealers

Brokers and dealers

________, orders are grouped together for simultaneous execution at the same price. A) In a bear market B) In an efficient market C) In a call market D) In a bull market

In a call market

Which of the below statements is FALSE? A) In a call market, a market maker holds an auction for a stock at the same time each day. B) Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders. C) In a call market, a market maker holds an auction for a stock at certain times in the trading day (or possibly more than once in a day). D) An auction in a call market may be oral or written.

In a call market, a market maker holds an auction for a stock at the same time each day.

Which of the below statements is TRUE? A) In a passive strategy, investors seek to capitalize on what they perceive to be the mispricing of a security or securities. B) In a market which seems to be price efficient, one investment strategy is simply to buy and hold a broad cross section of securities in the market C) Matching in an investment strategy that has the goal of matching the performance of some financial index from the market. D) In a market that is price efficient, active strategies will not consistently generate a return after ignoring transactions costs and the risks associated with a strategy of frequent trading.

In a market which seems to be price efficient, one investment strategy is simply to buy and hold a broad cross section of securities in the market

Which of the below statements is TRUE? A) In the United States, secondary shares are traded on major national stock exchanges (the largest of which is the American Stock Exchange) and regional stock exchanges. B) In the United States, some bonds are traded on exchanges, but most trading in bonds in the United States and throughout the world occurs in the OTC market. C) In the United States, the dominant OTC market for stocks in the United States is the New York Stock Exchange. D) In the United States, significant trading in stock takes place on the so-called over-the-counter or OTC market, which involves specific geographical locations.

In the United States, some bonds are traded on exchanges, but most trading in bonds in the United States and throughout the world occurs in the OTC market.

Which of the following statements is FALSE? A) It is important to realize that the brokerage activity requires the broker to buy and sell or hold in inventory the financial asset that is the subject of the trade. B) The broker receives, transmits, and executes investors' orders with other investors. C) Services provided by brokers include research, recordkeeping, and advising. D) A broker is an entity that acts on behalf of an investor who wishes to execute orders. In economic and legal terms, a broker is said to be an agent of the investor.

It is important to realize that the brokerage activity requires the broker to buy and sell or hold in inventory the financial asset that is the subject of the trade.

________ refers to a market where prices at all times fully reflect all available information that is relevant to the valuation of securities. A) External efficiency B) Pricing efficiency C) Operational efficiency D) Internal inefficiency

Pricing efficiency

Which of the following statements is FALSE? A) An unmatched or unbalanced flow of buy and sell orders causes a problem in that buyers may have to pay higher than market-clearing prices (or sellers accept lower ones) if they want to make their trade immediately. B) The fact of imbalances in buy and sell orders cannot explain the need for the dealer or market maker, who stands ready and willing to buy a financial asset for its own account (to add to an inventory of the financial asset) or sell from its own account (to reduce the inventory of the financial asset). C) An unmatched or unbalanced flow of buy and sell orders causes a problem in that the security's price may change abruptly, even if there has been no shift in either supply or demand for the security. D) A real market might also differ from the perfect market because of the possibly frequent event of a temporary imbalance in the number of buy and sell orders that investors may place for any security at any one time.

The fact of imbalances in buy and sell orders cannot explain the need for the dealer or market maker, who stands ready and willing to buy a financial asset for its own account (to add to an inventory of the financial asset) or sell from its own account (to reduce the inventory of the financial asset).

Which of the below statement is FALSE? A) Single-dealer systems are based on a customer dealing with a single, identified dealer over the computer. B) Multi-dealer systems provide some advancement over the single- dealer method since a customer can select from any of several identified dealers whose bids and offers are provided on a computer screen. C) The multi-customer system simply computerizes the traditional customer-dealer market making mechanism. D) Dealer-to-customer systems can be a single-dealer system or multiple-dealer system.

The multi-customer system simply computerizes the traditional customer-dealer market making mechanism.

There are several related reasons for the transition to the electronic trading of bonds. Which of the below reasons is NOT one of these? A) The profitability of bond market making has declined and their bid-offer spreads have decreased. B) The increase in the volatility of bond markets has increased the capital required of bond broker-dealers. C) The profitability of bond market making has declined since many of the products have become less commodity-like. D) Making markets in bonds has become more risky for the market makers because the size of the orders has increased tremendously.

The profitability of bond market making has declined since many of the products have become less commodity-like.

Because the bond business has been ________ rather than ________ business, the capital of the market makers is critical. A) an accounting; a financial B) an agency; a principal C) a principal; an agency D) a financial; an accounting

a principal; an agency

In its "Big Bang" of 1986, the London Stock Exchange ________. A) abolished competitive brokerage commissions. B) shot down all types of brokerage commissions. C) abolished fixed brokerage commissions. D) adopted fixed brokerage commissions.

abolished fixed brokerage commissions.

In ________, investors can obtain transaction services as cheaply as possible, given the costs associated with furnishing those services. A) a pricing efficient market B) an externally efficient market C) an operationally efficient market D) an internally inefficient market

an operationally efficient market

The ________ can be viewed as the price charged by dealers for supplying immediacy together with short-run price stability (continuity or smoothness) in the presence of short-term order imbalances. A) bid-ask imbalance B) bid-ask fee C) bid-ask price D) bid-ask spread

bid-ask spread

A market is not perfect only because market agents are price takers but is also free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. Frictions include ________. A) financial liability that a buyer or seller may take and taxes on capital gains. B) costs of acquiring information about the financial asset and restrictions on market takers. C) bid-ask spreads charged by dealers and order handling and clearance charges. D) taxes (but not on capital gains) and government-imposed transfer fees.

bid-ask spreads charged by dealers and order handling and clearance charges.

The key distinction between a primary market and a secondary market is that, in the secondary market, ________. A) funds flow from the seller of the asset to the buyer. B) funds flow from the buyer of the asset to the seller. C) the issuer of the asset receives funds from the buyer. D) the existing issue changes hands in the primary market.

funds flow from the buyer of the asset to the seller

In the United States, secondary trading of common stock occurs ________. A) in each major city. B) in Dallas, Texas. C) in a number of trading locations. D) None of these

in a number of trading locations.

Investors in financial assets receive ________. A) increased the costs of searching for likely buyers and sellers of assets. B) information about the assets' fair or consensus values. C) illiquidity for their assets. D) the disadvantage of higher transaction costs.

information about the assets' fair or consensus values.

Effective August 24, 2000, the minimum spread was reduced to ________ ("decimals"), with trades on all stocks in decimals beginning on August 9, 2001. A) one-sixteenth B) one cent C) two cents D) one-eighth

one cent

Among the overall advantages of electronic trading are ________. A) trading and portfolio management inefficiencies. B) providing liquidity to the government. C) price discovery (particularly for less liquid markets). D) utilization of old technologies.

price discovery (particularly for less liquid markets).

A perfect market results when all buyers and sellers are ________, and the market price is determined where there is ________. A) price-takers; inequality of supply and demand. B) price-makers; equality of supply and demand. C) price-takers; equality of supply and demand. D) price-makers; inequality of supply and demand.

price-takers; equality of supply and demand

Without a secondary market, issuers would be unable to ________, or they would have to pay a higher rate of return, as investors would ________ in compensation for expected illiquidity in the securities. A) buy new securities; decrease the price B) sell new securities; increase the discount rate C) sell new securities; decrease the discount rate D) sell new securities; increase the price

sell new securities; increase the discount rate

This practice of selling securities that are not owned at the time of sale is referred to as ________. A) buying and selling simultaneously. B) selling short. C) selling long. D) buying short.

selling short

The same Wall Street firms that have been the major market makers in bonds have also been the ________ of electronic trading in bonds. A) supporters B) attackers C) cynics D) detractors

supporters

There are a variety of types of electronic trading systems for bonds. The two major types of electronic trading systems are ________. A) the customer-to-dealer systems and the exchange systems. B) the dealer-to-customer systems and the leverage systems. C) the dealer-to-customer systems and the exchange systems. D) the broker-to-dealer systems and the exchange systems.

the dealer-to-customer systems and the exchange systems.

Perfect market results when ________. A) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price. B) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price. C) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price. D) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price.

the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price.

Dealers also have to be compensated for bearing risk. A dealer's position may involve carrying inventory of a security (a long position) or selling a security that is not in inventory (a short position). There are three types of risks associated with maintaining a long or short position in a given security. Two of these include ________. A) the risk of trading with someone who has inferior information and the uncertainty about the future price of the security. B) the certainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty. C) the uncertainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty. D) the risk of trading with someone who has inferior information and the expected time it will take the dealer to unwind a position and its uncertainty.

the uncertainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty.

One indication of the usefulness of secondary markets is that they exist throughout ________. A) the world. B) Europe and Asia. C) the United States. D) each state.

the world

In the absence of an effective short-selling mechanism, security prices will tend to be biased toward the ________, causing a market to depart from the standards of a perfect price-setting situation. A) view of more optimistic investors B) view of the market maker C) view of the market taker D) view of more pessimistic investors

view of more optimistic investors

In a continuous market, prices may vary ________. A) are determined discontinuously throughout the trading day. B) with the pattern of orders reaching the market. C) are determined continuously throughout the trading day even if buyers and sellers are not submitting orders. D) because of the basic situation of supply and demand.

with the pattern of orders reaching the market.