Series 7: Trading Markets (NASDAQ Market / OTC Market)
All of the following terms are synonymous EXCEPT:
dealer An agent is a broker who is middleman in a transaction, earning a commission. A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down.
A market maker enters a quote of $31.50 Bid; $32.00 Ask; with a size of "3 x 5" into the NASDAQ System. If a market order to sell is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to buy:
300 shares at $31.50 A market order to sell will be matched, in sequence, against the "Bid" quotes in the system, from highest to lowest. Such a market order "sweeps" the book from high to low price, until it is filled. Because this dealer's Bid of $31.50 is only for 300 shares, this is the amount that the system will match. It will then move to the next Bid quotes from other dealers, in sequence, until the order is filled for 500 shares
Which of the following will result in a "locked-in" trade?
A market order placed for a NASDAQ issue quoted in the NASDAQ System (Single Book) A "locked-in" trade is one in which all of the terms and conditions of the trade are accepted by buyer and seller. Once the trade is executed, last-sale reporting to NASDAQ and reporting to the clearance corporation (NSCC) are done electronically. System trades of NASDAQ stocks are "locked-in" - the NASDAQ System is both an automated quotation and execution system. Anyone who enters a quote or order into the System agrees to accept automated executions. Note that the previous name for the System was Single Book, and this may still show on the exam. The OTCBB and Pink Sheets are quotation mediums only. There is no automated trading; rather, trades are still negotiated "over-the-phone" or "on-line" and thus, are not locked-in.
The system that compares trades of NASDAQ issues and reports the trades to the Network C Tape is called:
ACT The ACT system takes the details of completed trades and reports the trade to the Network C (NASDAQ) Tape; to the contra-party to the trade for comparison; and to the clearing corporation for settlement. ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance in SingleBook (not tested on Series 7). OATS is the Order Audit Trail System - which automates order entry. The ADF is the Alternate Display Facility. It is where ECNs display their quotes if they choose not to link to an exchange for quote display.
Which of the following describes a riskless principal or simultaneous transaction?
After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. Choice A describes a "proceeds" transaction; Choice B describes a "principal" transaction; and Choice C describes an "arbitrage" transaction.
Which of the following persons trades securities over-the-counter?
Market maker Over-the-counter dealers are called market makers. Two dollar brokers and Specialists (now renamed DMMs - Designated Market Makers) trade on stock exchanges. Registered representatives cannot trade securities - they can enter orders on behalf of customers to be executed by traders in the market.
All of the following terms are synonymous EXCEPT:
agent A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down. An agent is a broker who is middleman in a transaction, earning a commission.
Broker-dealers are permitted to execute all of the following over-the-counter transactions EXCEPT:
Agency trades where the customer is charged a fair and reasonable mark-up or mark-down In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction.
A NASDAQ security is bid at $30.25 and offered at $30.75. An over-the-counter trader effects a trade at $30.75 and charges a commission of $.50 to the customer. The price that will show on the tape is:
$30.75 Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $30.75, and this is the price that will show on the tape.
A NASDAQ security is bid at $42 and offered at $42.25. An over-the-counter trader effects a trade at $42.25 and charges a commission of $.13 to the customer. The price that will show on the tape is:
$42.25 Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $42.25, and this is the price that will show on the tape.
Which of the following describes an arbitrage transaction?
Buying and selling short the same security in different markets to lock in a price differential If a security is bought on one market; and simultaneously sold on another market; this is known as an arbitrage transaction and is used to exploit price differences for the same security that may exist in those markets. Choice A describes a "proceeds transaction;" Choice B describes a "principal" transaction, or "position" trade; while Choice D describes a riskless principal transaction.
What is the primary function of a market maker?
Buying and selling the security in which the market is made into, and out of, the firm's own account The term "market maker" means that the firm maintains an inventory of that stock. The firm sells that stock out of its own account to customers who wish to buy, and buys that stock into its own account from customers who wish to sell. Choice A describes a broker - someone who matches buyers and sellers of a security for a commission. Market makers disseminate a bid and ask quote for the subject security, but it does not have to be the "best" quote in the market. Choice D describes a stock exchange, not a market maker.
All of the following quotes would be found in the Pink Sheets EXCEPT:
DNR In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found. An offer made AON in the Pink Sheets is "All or None" - either the whole size stated is traded or the quote is invalid. DNR means "Do Not Reduce" and is a designation on an order placed "below the market" if the customer does not want the price reduced automatically on ex date.
Quotes found in the ADF are primarily bids and offers from:
ECNs The "ADF" - Alternate Display Facility - was established under an SEC rule in 2002 as a place for ECNs that did not wish to place their quotes in the NASDAQ System because these ECNs felt that NASDAQ's order processing algorithms favored NASDAQ Market Makers over ECNs. NASDAQ market makers post their quotes in the NASDAQ System. CQS - Consolidated Quotations Service - displays quotes for exchange listed issues (NYSE) from DMMs (Designated Market Makers) and Third Market Makers (firms such as Weeden and Jefferies that are OTC market makers in exchange listed issues, providing competition for exchange DMMs).
Last sale reports are available for trades of all of the following securities EXCEPT:
Eurodollar bonds Trades of exchange listed securities and all OTC equity issues (OTCBB and Pink Sheets) are reported on a real-time basis. Trades of corporate bonds and municipal bonds effected OTC are also reported on a real-time basis. Corporate and agency bond trades are reported via TRACE, while municipal bond trades are reported via RTRS. Note, however, that trades of Eurodollar bonds are not reported since the trades take place in Europe, not in the United States.
Dark Pools are: I regulated as broker-dealers II regulated as exchanges III subject to Regulation ATS IV not subject to Regulation ATS
I and III An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape.The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such).
Position trading by "over-the-counter" firms is: I buying securities into, or selling securities from, the firm's inventory account II buying customer positions from, or selling customer positions to, other market markers III permitted under FINRA rules IV a prohibited practice under FINRA rules
I and III Position trading is the buying of securities into a dealer's inventory account; and the selling of securities out of the dealer's inventory account. The profit to the dealer is the spread between the bid and ask quote. This is the basic function of an over-the-counter market maker; and is, of course, permitted under FINRA rules.
Which of the following statements are TRUE about the Pink Sheets? I Equity issues too small to be included on NASDAQ are found in the Pink Sheets II Equity issues listed on stock exchanges are found in the Pink Sheets III Bid and ask quotes are found in the Pink Sheets IV Last sale reports are found in the Pink Sheets
I and III The Pink Sheets give bid and ask quotes for over-the-counter stocks that do not meet exchange listing standards. They do not show trades as they occur. All trade reporting for OTC equity securities occurs through the ORF - the Over-The-Counter Reporting Facility.
An over-the-counter firm's trading department: I must stay open during the hours that the market is open II may be closed due to inclement weather III can execute orders for the firm's own account before executing customer orders at the same price IV must execute orders for customer accounts before executing orders for the firm's own account at the same price
I and IV An over-the-counter firm's trading department: I must stay open during the hours that the market is openII may be closed due to inclement weatherIII can execute orders for the firm's own account before executing customer orders at the same priceIV must execute orders for customer accounts before executing orders for the firm's own account at the same price
In an over-the-counter agency trade, the member firm executing the order: I is a broke rII is a dealer III charges a mark-up IV charges a commission
I and IV In an over-the-counter agency transaction, the firm acts as a broker, matching a customer who wishes to buy with a seller (and vice-versa). For this service, the member firm earns a commission. In contrast, in an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell.
Which statements are TRUE when comparing the NYSE and NASDAQ markets? I The Specialist (DMM) trades on the NYSE II The Specialist (DMM) trades on NASDAQ III The Market Maker trades on the NYSE IV The Market Maker trades on NASDAQ
I and IV Specialists (now called Designated Market Makers) are the assigned market makers that trade a given stock on the NYSE floor. There is only 1 DMM assigned to each stock traded, and the Specialist/DMM must make a fair and orderly market in that stock and must stand ready to trade at all times that the market is open. Market Makers trade NASDAQ stocks through the NASDAQ System. NASDAQ has multiple competing market makers - it is competition that creates the "best" market. Market makers are not obligated to make a continuous competitive market in a stock (like NYSE Specialists/DMMs), but it is in their best interests to do so.
Which statements are TRUE when comparing the NYSE and NASDAQ markets? I There is 1 Specialist (DMM) per stock on the NYSE II There are multiple Specialists (DMMs) trading each stock on the NYSE III There is 1 Market Maker per stock on NASDAQ IV There are multiple Market Makers trading each stock on NASDAQ
I and IV Specialists (now called Designated Market Makers) are the assigned market makers that trade a given stock on the NYSE floor. There is only 1 Specialist assigned to each stock traded, and the Specialist/DMM must make a fair and orderly market in that stock and must stand ready to trade at all times that the market is open. Market Makers trade NASDAQ stocks through the NASDAQ System. NASDAQ has multiple competing market makers - it is competition that creates the "best" market. Market makers are not obligated to make a continuous competitive market in a stock (like NYSE Specialists/DMMs), but it is in their best interests to do so.
Which statements are TRUE? I OATS intakes orders for NASDAQ issues II ACT intakes orders for all NASDAQ issues III OATS matches and reports completed trades of NASDAQ issues IV ACT matches and reports completed trades of NASDAQ issues
I and IV The ACT system takes the details of completed trades and reports the trade to the Network C (NASDAQ) Tape; to the contra-party to the trade for comparison; and to the clearing corporation for settlement. OATS is the Order Audit Trail System - which automates order entry for NYSE, NYSE American (AMEX), NASDAQ and OTC issues.
Quotes shown in the NASDAQ System (Single Book) are: I Firm II Unfirm III 1-Sided IV 2-Sided
I and IV The NASDAQ System only accepts Firm 2-Sided (Bid and Ask) quotes.
Over-the-Counter price quotes for equity securities can be found in which of the following? I Pink Sheets II Black List III Yellow Sheets
I only Over-the-counter "penny" stock price quotes can be found in the Pink Sheets which are now only on the Internet. The Yellow Sheets, now out of business, used to contain corporate bond quotes. The "Black List" is a generic term for a listing of undesirables.
Which of the following securities are generally traded "Over-the Counter"? I Treasury issues II Municipal issues III Corporate debt issues IV Options
I, II, III All trades in Treasury issues and municipal bonds are effected "over-the-counter." The vast majority of corporate debt also trades "OTC," with the exception of a small amount of bond trading performed on the NYSE. All options trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange).
Which of the following can result in the establishment of a short position? I Arbitrage transaction II Sale of a security "against the box" III Position trades of borrowed shares
I, II, III Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades (position trading is trading for the firm account, using the firm's "positions") of borrowed shares are short sales.
Which of the following statements are TRUE regarding NASDAQ Level II? I It shows bid and ask quotes of each market maker with the quote size II Each market maker must trade at the quoted price when matched by the System III If a market maker refuses to honor a quote, this is called "backing away" IV Market makers must be registered with NASDAQ
I, II, III, IV All of the statements are true about NASDAQ Level II. It shows bid and ask quotes of each market maker with the quote size. Each market maker must trade at the quoted price when matched by the System. If a market maker refuses to honor a quote, this is called "backing away," which is a prohibited practice under FINRA rules. Market makers must be registered with NASDAQ.
Which of the following securities can be purchased in the "over-the-counter" market? I American Depositary Receipts II Initial Public Offerings III Mutual Fund Shares IV Limited Partnership Interests
I, II, III, IV Initial Public Offerings of all securities are made "over-the-counter". Once the offering is complete, the securities are either listed on an exchange or trade in the over-the-counter market. Purchases of mutual funds are also made "OTC." However, fund shares do not trade. Instead, they are redeemable with the Sponsor of the fund. American Depositary Receipts, (ADRs) may either be listed on an exchange or trade "OTC." Limited partnership interests are sold "OTC" and generally do not trade, or have very limited trading.
Which of the following statements are TRUE regarding quotes provided on NASDAQ Level II? I Quotes are shown for round and mixed lots II Quotes are shown for up to 999,999 shares III Bid and ask quotes are shown IV The minimum quote size is 100 shares
I, II, III, IV NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot). Quotes for odd lots (less than 100 shares) can be entered into the system, but are not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or over. A mixed lot is an order that has both a round lot and an odd lot component (such as an order for 143 shares - which is composed of a 100 share round lot and a 43 share odd lot). Just like odd lots, any portion of the order that is less than 100 shares is not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or more. The maximum quote that can be entered and displayed is for 999,999 shares.
Which of the following are entered into OATS? I Orders to buy NASDAQ issues II Orders to sell NASDAQ issues III Orders to buy OTC issues IV Orders to sell OTC issues
I, II, III, IV OATS stands for "Order Audit Trail System." It electronically captures order information for equity securities (no more paper order tickets). OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues.The "idea" is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered.
Over-the counter traders perform which of the following functions? I Position trading for the firm's inventory account II Filling customer orders III Giving quotes to customers IV Setting the spread for each security traded
I, II, III, IV OTC traders position trade (that is, trade for the firm's inventory account): fill customer orders to buy and sell; establish spreads (the difference between the bid and ask quote that is the profit for the dealer): and give quotes to customers. Clerical duties are handled by clerks.
Last sale information is available for: I Exchange listed securities II Over-the-counter securities III Municipal securities IV Over-the-counter Pink Sheet securities
I, II, III, IV Real time transaction reporting occurs for all exchange trades and for OTC equity trades (OTCBB, and Pink Sheet) trades. Corporate and agency bond trades are reported via TRACE, while municipal bond trades are reported via RTRS.
Interdealer transactions in which of the following are reported through ACT? I NASDAQ Global Market Stocks II NASDAQ Capital Market stocks III Listed issues traded in the Third Market IV OTC Bulletin Board Stocks
I, II, III, IV The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape - it's a big source of revenue for the exchange). The TRFs run by ACT include: NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape); NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own); ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues; TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate Network A, B or C Tape.
Over-the-counter traders perform which of the following functions? I Giving quotes to customers II Taking positions in securities III Performing clerical duties IV Establishing spreads
I, II, IV OTC traders position trade (that is, trade for the firm's inventory account), establish spreads (the difference between the bid and ask quote that is the profit for the dealer), and give quotes to customers. Clerical duties are handled by clerks.
Which of the following can result in the creation of a short position? I Buying a stock on one exchange and simultaneously selling it on another exchange II Selling stock for a customer that is owned by that customer III Selling stock for a customer that is not owned by that customer IV Selling stock for the firm's account that is not owned by the firm
I, III, IV Short sales are sales of borrowed shares, so Choices III and IV are clearly short sales. Choice II is a long sale - selling stock that is owned. Choice I is an arbitrage transaction, where stock is bought on one exchange and simultaneously sold short on another exchange to lock in a price difference. The long position is delivered later to replace the borrowed shares.
Dark Pools are: I sources of displayed liquidity II sources of undisplayed liquidity III regulated IV unregulated
II and III An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such).
Which statements are TRUE about reporting of trades in NASDAQ stocks? I The initiating member must report II The executing member must report III Trades must be reported within 10 seconds of execution IV Trades must be reported by the end of the day
II and III Trades of NASDAQ stocks must be reported by the executing member within 10 seconds of execution to the Network C tape. This is FINRA's reporting rule for trades of NASDAQ stocks and all OTC equity trades, including OTC trades of NYSE-listed issues (Third Market trades), OTCBB trades and trades of Pink Sheet issues. Note that the NYSE operates under the same rule.
When a firm "position trades," it: I trades on an agency basis for customers II trades on a dealer basis for its own account III takes inventory positions, both long and short IV interpositions itself between a customer and another dealer
II and III only Position trading is trading for a firm's own account. The firm can take both long and short positions as it speculates in the market. Interpositioning is a prohibited practice under FINRA rules. If a customer wishes to buy or sell, a firm is obligated to go directly to the market maker. It cannot interposition another firm (another middleman) between the customer and the best available market.
If a firm effects trades solely on an agency basis, the firm: I carries inventory II does not carry inventory III is a market maker IV is not a market maker
II and IV If a firm effects trades solely on an agency basis, it carries no inventory and is not a market maker.
Which of the following securities do NOT trade on NASDAQ? I Global Market stocks II Options on Global Market stocks III Capital Market stocks IV Options on Capital Market stocks
II and IV NASDAQ is divided into 2 tiers of stock listings. The larger NASDAQ listings such as Microsoft or Intel are included in the "Global Market." The lower tier of smaller stocks is called the NASDAQ Capital Market. NASDAQ does not trade any options.
An approximate market value with no bid or offer would define what kind of quote?
Nominal quote A nominal quote is really no quote - it is simply an approximate price. The dealer is not obligated to trade at this quote and must identify it as a nominal quote. A subject quote is essentially the same thing as a nominal quote. A firm quote means that the dealer is willing to trade the amount stated at the price given. A "work-out" quote is sometimes given for very thinly traded issues, where there is no current trading in the issue, but the trader believes that the trade can be executed in a given price range. After giving the "work out" quote, the trader will search the market to "work out" the trade within the stated price range.
Which of the following describes a proceeds transaction?
Selling stock at the direction of a customer and using the proceeds to buy another stock for that customer In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. Choice A describes position trading; Choice B describes a riskless principal transaction; and Choice C describes an arbitrage transaction.
Comparing the first and second markets, which statement is FALSE?
The Second Market has listing standards Each exchange with a trading floor is an auction market (First Market). The over-the-counter market (Second Market) is a negotiated market. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards.
Which statement is TRUE about the NASDAQ Regular Market trading session?
The session coincides with NYSE trading hours NASDAQ's Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time - the same as NYSE hours.
The "OATS" system is an:
electronic order record maintenance system OATS stands for "Order Audit Trail System" - it is FINRA's system for electronic capture of order information. This information is later compared to the actual trade execution via the ACT system - Automated Confirmation of Trade system. OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues.
When a dealer says "The price is 42.25," the quote is considered a:
firm quote When a dealer says "the price is," the quote is firm for a normal trading unit at the stated price. A nominal quote is a dealer's guess at the current price - he or she is not committed to trading at that quote. A "work-out" quote is sometimes given for very thinly traded issues, where there is no current trading in the issue, but the trader believes that the trade can be executed in a given price range. After giving the "work out" quote, the trader will search the market to "work out" the trade within the stated price range. A subject quote is subject to confirmation and can change - it is very close to a nominal quote.
A bond trader believes that he has too much inventory in 25-year ABC corporation bonds. The dealer would most likely:
hedge the bond positions The answer you are looking for - sell some of the bond position - is not here! The next best choice is to hedge the position in case prices fall, which can be done with options. Increasing the mark-up or lowering the reoffering yield will increase the price of the bonds, making them even harder to sell - so these are wrong answers. Placing an "OW" in Bloomberg is an "Offers Wanted." This indicates that the dealer wants to buy more of the bonds, which is not the case - he or she wants to sell them, not buy them! Rather, the dealer would want to place a "BW" - Bids Wanted - in Bloomberg, telling potential buyers that he or she is interested in selling.
A member firm may use a third party to execute over-the-counter agency transactions for customer orders:
if the resultant price is better than the best available market at the time As a general rule, interpositioning a third firm between the customer and the market maker is prohibited unless it can be demonstrated that the use of the "middleman" firm will result in a better execution for the customer.
An OTC equity trader has received a large influx of buy orders for ABC stock and, to fill them, has taken a short position in the firm's inventory account. The dealer would most likely:
increase the ask price in the OTCBB The dealer's Ask price is too low - that is why the buyers are pouring in! The dealer will raise the Ask price - this will discourage buyers. If the dealer were to decrease the Bid price, this would discourage sellers to the dealer - and this dealer needs to buy to cover the current short inventory position. Therefore, the dealer is likely to increase the bid price as well. Decreasing the mark-up charged to customers would encourage more buyers at the Ask, which the dealer does not want. Placing a "BW" in the OTCBB is a "Bids Wanted." This indicates that the dealer wants to sell more of the stock to any willing buyers, which is not the case - the dealer wants to buy the stock, not sell it! Rather, he or she would want to place an "OW" - Offers Wanted - in the OTCBB, telling potential sellers that the dealer is interested in buying.
The highest bid and lowest ask found on NASDAQ Level I, is known as the:
inside market The "inside market" is the highest bid and lowest ask. These are the best prices at which to trade. (One wants to buy at the lowest price asked by dealers; one wants to sell at the highest price bid by dealers). Another name for the inside market is the "NBBO" - National Best Bid and Offer.
The ACT system:
intakes entries of completed trades for reporting, matching and clearance The ACT system is where the details of completed trades are entered by market participants (The NASDAQ System does ACT reporting automatically; the information must be entered manually for OTCBB and Pink Sheet trades). The ACT system then reports the trade to the tape; to the contra-party to the trade for matching; and to the clearing corporation. FQCS - the Firm Quote Compliance System - is used to file reports of backing away violations (this is not tested on Series 7). ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance. The NASDAQ Market Center Execution System is the automated quotations and execution system for trades of NASDAQ issues.
All of the following orders can be placed in the NASDAQ System (Single Book) EXCEPT:
not held order Single Book is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders (a limit order at the current inside price) and limit orders that are away from the market. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the NASDAQ system does not accept stop orders, as is the case with the NYSE DisplayBook system. Member firms take stop orders into their internal systems and feed them to the appropriate exchange if they are triggered.
Over-the counter traders perform all of the following functions EXCEPT:
perform clerical duties OTC traders position trade (that is, trade for the firm's inventory account), establish spreads (the difference between the bid and ask quote that is the profit for the dealer), and give quotes to customers. Clerical duties are handled by clerks.
An agency cross transaction performed in the over-the-counter market occurs when a broker-dealer:
receives a buy order from one customer and a sell order from another customer on the same stock and matches the orders An agency cross transaction, as performed in the "over-the-counter" market occurs when, at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price. Under FINRA rules, such transactions must comply with the 5% Policy. In this transaction, the firm is acting as an agent (since it is not buying or selling the securities from its inventory) and may only charge a commission on each side of the trade. These commissions must be "fair and reasonable" under the 5% Policy. Remember, 5% commissions (in agency trades) or mark-ups (in principal trades) are only "guidelines" - not rules. Each commission or mark-up must be "fair and reasonable," taking into consideration all relevant factors surrounding that transaction.
Over-the-counter stocks that are too small to be included on NASDAQ would be found in:
the OTCBB Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the "Over-The-Counter Bulletin Board" (run by FINRA) or in the privately run "Pink Sheets" - now renamed the Pink OTC Markets.
