Trading Markets
Under SEC Rule 606 of Regulation NMS, broker-dealers are required to compile statistical information on routing of customer non-directed orders to market venues, and make this information available to customers:
Quarterly
A customer places a marketable order to buy 1,000 shares of ABCD stock, an NYSE listed company. The customer directs that the trade be routed to the BATS exchange for execution and not be sent to the NYSE. Which statement is TRUE about this? A. The customer's instructions are to be followed and the order must be sent to the BATS exchange B. The order must be sent to the NYSE for execution C. The order must be sent to the market with the largest display size D. The order cannot be accepted from the customer
A. The customer's instructions are to be followed and the order must be sent to the BATS exchange
Which of the following is a "firm" quote from a market maker? A. 12.50 B. 12.50 workout C. 12.50 subject D. 12.50 nominal
A. 12.50 Explanation: An OTC quote is considered to be "firm" for 100 shares unless it is otherwise qualified. If a dealer gives a quote of 12 - 12.50, he is willing to sell 100 shares at 12.50 or buy 100 shares at 12. A workout quote is an approximate price - the final price must be "worked out." A subject quote is subject to confirmation. A nominal quote is a "guess" at a likely price - it is really no quote.
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: A. increase the ask price in the OTCBB B. decrease the bid price in the OTCBB C. decrease the mark-up to customers that buy D. place a "BW" in the OTCBB
A. increase the ask price in the OTCBB Explanation: 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.
A customer owns 1,000 shares of ABC preferred stock trading at $120 per share. Following a 2:1 common stock split, the customer will have: A. 1,000 shares at $60 per share B. 1,000 shares at $120 per share C. 2,000 shares at $60 per share D. 2,000 shares at $120 per share
B. 1,000 shares at $120 per share Explanation: ONLY COMMON STOCK IS AFFECTED BY STOCK SPLIT NOT PREFERRED.
A market maker enters a quote of $20.50 Bid; $21.00 Ask; with a size of "5 x 5" into the NASDAQ System. If a market order to buy is entered into the system for 1,500 shares, and this dealer's quote is matched, the market maker will be obligated to sell: A. 500 shares at $20.50 B. 500 shares at $21.00 C. 1,500 shares at $20.50 D. 1,500 shares at $21.50
B. 500 shares at $21.00 Explanation: A market order to buy will be matched, in sequence, against the "Ask" quotes in the system, from lowest to highest. Such a market order "sweeps" the book from low to high price, until it is filled. Because this dealer's Ask of $21.00 is only for 500 shares, this is the amount that the system will match. It will then move to the next Ask quotes from other dealers, in sequence, until the order is filled for 1,500 shares
All of the following are considered in determining a fair and reasonable price in a municipal agency transaction EXCEPT: A. Availability of the security B. Cost of the security C. Expenses associated with effecting the transaction D. Value of services rendered by the municipal broker
B. Cost of the security Explanation: To be continued
Which of the following describes position trading? A. Selling a security for a customer and using the proceeds to purchase a different security for that customer B. Selling a security from inventory to a customer with a mark-up C. Buying and selling short the same security simultaneously in different markets to lock in a price differential D. After receiving a buy order, a dealer purchases the stock into inventory and resells it to a customer
B. Selling a security from inventory to a customer with a mark-up Explanation: Selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down; is position trading. The term position trading comes from the dealer taking "positions" for his inventory. Choice A describes a "proceeds transaction;" Choice C describes an "arbitrage transaction;" and Choice D describes a "riskless principal" transaction.
Which is NOT a good delivery for a 225 share trade of stock? A. Two 100 share certificates and one 25 share certificate B. Three 75 share certificates C. Four 50 share certificates and one 25 share certificate D. Nine 25 share certificates
B. Three 75 share certificates Explanation: 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. If there is an odd lot (a portion of the order that is less than 100 shares), it can be delivered in any form. Certificates of 75 shares each are not good because 75 + 75 = 150. A round lot of 100 shares cannot be created from these units. The other choices either allow for the creation of 100 share units; or are in multiples of 100 on 1 certificate; with the odd lot being delivered as a separate unit.
An investor has sold short 500 shares of ABC at $60. The stock has since declined to 38. All of the following can be used to protect the gain EXCEPT: A. place a buy stop order at $40 B. buy 5 ABC 40 puts C buy 5 ABC 40 calls D. sell 5 ABC 40 puts
B. buy 5 ABC 40 puts Explanation: The investor has a gain on the short stock position that will evaporate as the market rises. To protect the gain, the stock must be bought in if the market begins to rise. A buy stop order is executed in a rising market, and would be appropriate to close the short position if the market rises. The purchase of a call allows the stock to be bought in at the strike price if the market rises, protecting the gain. If a put is sold and the market rises, the put will expire worthless, and the writer will keep the premium received. This amount of premium received will reduce any loss on the short stock position if the market rises. The purchase of a put will not protect the gain, since it allows the stock to be sold at the strike price. If exercised, the long put will cause the customer to have sold the stock TWICE.
An OTC equity trader has received a large influx of sell orders for ABC stock and, to fill them, has taken an extremely large long position in the firm's inventory account. The dealer would most likely: A. decrease the ask price in the OTCBB B. decrease the bid price in the OTCBB C. decrease the mark-down to customers that sell D. place an "OW" in the OTCBB
B. decrease the bid price in the OTCBB Explanation: The dealer's Bid price is too high - that is why the sellers are pouring in! The dealer will lower the Bid price - this will discourage sellers.
If a stockholder wishes to receive a common dividend, that person must sell the stock in a regular way trade no earlier than the: A. business day prior to the ex date B. ex date C. business day following the ex date D. record date
B. ex date Explanation: If a person owns common stock and wishes to receive the dividend, that person cannot sell prior to the ex date. If the stock is sold prior to the ex date, the buyer pays for the dividend and would receive that dividend. If the stock is sold on the ex date or later, the buyer does not pay for the dividend and does not receive the dividend. Thus, if the stock is sold on the ex date or later, the seller would receive the dividend.
A bond trader believes that he has too much inventory in 25-year ABC corporation bonds. The dealer would most likely: A. increase the mark-up on the bonds B. hedge the bond positions C. lower the reoffering yield on the bonds D. place an "OW" for the bonds in Bloomberg
B. hedge the bond positions Explanation: In the event that you do not see liquidate or sell some of the position (on the test) - you can always bet on hedging a position. It is the safest and most effective method.
The "trade-through" rule of Regulation NMS: A. prohibits an order from being routed to a market that will pay for the order B. prohibits a market maker on an exchange from executing a trade at an inferior price to that posted by another market at that moment C. requires member firms to execute any order received within 1 second of execution D. requires member firms to use automated clearing and settlement of all trades
B. prohibits a market maker on an exchange from executing a trade at an inferior price to that posted by another market at that moment
Third Market Makers must report their trades of exchange listed stocks to the Consolidated Tape: A. within 10 seconds of execution during all hours of the day B. within 10 seconds of execution during the hours that the NYSE is open C. at the close of the trading day D. at the opening of the trading day
B. within 10 seconds of execution during the hours that the NYSE is open Explanation: Third market makers are over-the-counter firms who trade exchange listed stocks in competition with the exchange Specialists (now renamed DMMs - Designated Market Makers). Equity trade reporting rules are consistent for all markets - trades must be reported by the executing member within 10 seconds of execution during regular market hours.
XYZ Corporation announces a 10% stock dividend, followed by a 5% "spin off" of a subsidiary business. A customer who owns 200 shares of XYZ will receive: A. 20 shares of XYZ and 10 shares of the spin-off B. 10 shares of XYZ and 10 shares of the spin-off C. 20 shares of XYZ and 11 shares of the spin-off D. 20 shares of XYZ and cash equal to 5% of the value of the spin-off
C. 20 shares of XYZ and 11 shares of the spin-off Explanation: Because the customer owns 200 shares of XYZ stock, the 10% stock dividend will give the customer 20 additional XYZ shares for a total of 220 XYZ shares. The 5% spin off of the subsidiary that follows means that 5% of the 220 share holding = 11 shares will be spun-off to the shareholders as a separate company.
ABC Corporation has declared a 4:1 stock split to shareholders of record on November 10th. The price of the stock will be reduced on ex date by: A. 25% B. 50% C. 75% D. 150%
C. 75% Explanation: Since the stockholder has 4 times the number of shares after the split, the market price will be reduced on ex date by a factor of 4. Assume the market price of the stock is $60 before the split. After the split the new market price if $60 / 4 = $15. The new price is $45 less than the original $60 OR $45 / $60 = 75% reduction from the original price.
Which is NOT a good delivery for a 300 share trade of stock? A. One 300 share certificate B. Three 100 share certificates C. Ten 30 share certificates D. Thirty 10 share certificates
C. Ten 30 share certificates Explanation: 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 30 shares each are not good because 30 + 30 = 60; 60 + 30 = 90; and 90 + 30 = 120. A round lot of 100 shares cannot be created from these units.
Which statement is FALSE regarding the NASDAQ System (Single Book)? A. Orders may be aggregated for execution within System size limitations B. Orders may be split for execution to be within System size limitations C. The maximum order size for System execution is 100,000 shares D. Agency and Principal trades may be entered into the System
C. The maximum order size for System execution is 100,000 shares Explanation: The max order is 999,999 shares on the NASDAQ.
A due bill is used to: A. reclaim a mutilated stock certificate B. assign a stock certificate to a new owner C. claim a dividend that is sent to the wrong person D. claim against a brokerage firm in an arbitration proceeding
C. claim a dividend that is sent to the wrong person Explanation: A due bill is required when a stock is purchased in time to receive the dividend (that is, purchased prior to the ex date in a regular way trade); and for some reason, settlement is delayed beyond the normal regular way time frame of 2 business days (so that the trade settles after the record date). When this occurs, the buyer pays for the dividend in the price of the stock; but does not show on the record books to receive the dividend. Instead, the issuer sends the check to the seller - and the seller does not deserve the dividend! When the stock is delivered, a due bill check, payable from seller to buyer, is attached. This gives the dividend to the rightful owner.
A customer places an order with a member firm that is "Good through the month." The person responsible for canceling the order if it remains unexecuted after the month is up is the: A. customer B. Specialist (DMM) C. member firm D. NYSE
C. member firm Explanation: Since the Specialist (now renamed the DMM or Designated Market Maker) only accepts "Day" orders on his book, if a customer wants an order canceled at the end of a month, this is the responsibility of the member firm that entered the order. An order with a "Time in Force" longer than that day is taken into the firm's internal order system and would be routed to the NYSE as a new "Day" order each day by the member. If the order is not executed by the end of the month, would be canceled by the member.
A broker-dealer holds a limit order to buy 100 shares of ABC stock at $20.00 for a customer. Which of the following trades are acceptable? I. The purchase of 100 shares of ABC for the firm's trading account at $19.50 prior to executing the customer's order II. The purchase of 100 shares of ABC for the firm's trading account at $20.50 prior to executing the customer's order III. The long sale of 100 shares of ABC out of the firm's trading account to the customer at $20.00 IV. The short sale of 100 shares of ABC out of the firm's trading account to the customer at $20.00
Correct Answer: II, III, and IV Explanation: You can never put anything before the customer. This a gimmie
A customer has placed an order to sell 500 shares of XYZ stock, which the customer is holding in a safe deposit box. When the certificates are received by the brokerage firm, four 100 share certificates have been signed by the customer, and one 100 share certificate is unsigned. The proper procedure is to: A. return all certificates to the customer by registered mail with instructions that they must all be signed B. return only the unsigned certificate to the customer by registered mail with instructions that it must be signed C. retain all the certificates and send the customer a stock power with instructions that it must be signed D. retain and deliver all the certificates, since they are acceptable once they have been guaranteed by the broker-dealer
C. retain all the certificates and send the customer a stock power with instructions that it must be signed Explanation: A stock power represents a legal transfer document, when accompanied by the stock certificate. The proper procedure is to send the customer a stock power for his signature. When this is returned to the broker-dealer, it is attached to the unsigned certificate, and makes that certificate a "good delivery." While the customer could be returned the unsigned certificate (Choice B), this is not the best answer. It is imprudent to send stock certificates through the mail. This can be avoided by using a stock power instead.
Which of the following are prohibited trading practices under FINRA rules? I. Backing away II. Interpositioning III. Marking to market IV. Using a correspondent
Correct Answer: I and II Explanation: FINRA rules prohibit backing away from quotes and prohibit interpositioning another firm between a customer and the best available market. All securities positions are marked to market daily under capital rules. A correspondent firm can be used to handle trades as long as the customer does not pay for this service. Any cost of using the correspondent firm must be given up out of the regular commission earned by the firm on that transaction.
A customer has previously entered an order to sell 100 shares of ABCD at $9.50. The quotations terminal shows the last trade of ABCD taking place at $9.50 yet the customer's order has not been executed. Which are valid reasons for this? I. The trade at $9.50 was performed by another market maker II. There were other limit orders at the same price ahead of the customer's order III. The trading department has closed for lunch IV. The firm sold the stock for its own account at $9.50 ahead of the customer's order
Correct Answer: I and II Explanation: The customer's limit order to sell at $9.50 might not be executed even though the last trade occurred at $9.50 because there were other limit orders ahead of his order or another market maker performed a trade at that price. Trading departments must stay open at all times during the hours that the market is open. Firms are prohibited from executing orders for their own account if they compete with an existing customer order. Before the firm can sell for itself at $9.50, it must first sell for the customer at $9.50. Once the customer orders are cleared, the firm can trade at that price.
Quotes for which of the following are shown on the Consolidated Quotations Service (CQS)? I. American Stock Exchange (NYSE American) listed issues II. New York Stock Exchange listed issues III. NASDAQ Global Market issues IV. NASDAQ Capital Market issues
Correct Answer: I and II and only Explanation: CQS only reports trades of listed issues. Therefore, making the AMEX and the NYSE the only available answers.
Which of the following statements are TRUE about a stock trade effected "for cash" in a margin account? I. Payment is required in part II. Payment is required in full III. Settlement occurs the same business day IV. Settlement occurs in 2 business days
Correct Answer: I and III Explanation: All transactions that occur in a cash account settle the same business day. Margin accounts can be paid in partial.
Which of the following statements are TRUE regarding Comparisons and "Don't Know" notices? I. The comparison must be sent on trade date II. The comparison must be sent no later than settlement date III. If there is a mismatched trade, a DK must be sent on trade date IV. If there is a mismatched trade, a DK must be sent no later than settlement
Correct Answer: I and III Explanation: DK or "Don't Know" notices are sent dealer-to-dealer to reconcile unmatched trades. These notices are sent after the trade and must be reconciled the same day, within 20 minutes of receipt.
A municipal dealer purchases 100M of 7% G.O. bonds, M '45, at par. The dealer immediately reoffers the bonds. Which of the following would be considered to be fair and reasonable quotes? I. 101 II. 108 III. 6.90 net less 1/8 IV. 6.50 net
Correct Answer: I and III Explanation: The dealer must take a mark-up that is "fair and reasonable" under MSRB rules. Since the dealer bought the bonds at par, a reoffering price of 101 (1% mark-up) is more reasonable than a reoffering price of 108 (8% mark-up). Similarly, since the bonds have a 7% coupon rate, a reoffering yield of 6.90% less 1/8 point represents a much lower premium than a reoffering yield of 6.50%. Thus, the "reasonable" quotes are 101 and 6.90 net less 1/8.
Which of the following information is disclosed on an options confirmation? I. Trade date II. Trade volume III. Open interest IV. Option expiration
Correct Answer: I and IV Explanation: Disclosed on an options confirmation are the type of option; the expiration; the strike price; the execution price and any commission; the trade date and settlement date.
ABC Corporation declares a dividend on June 15th with a Record Date of Friday, August 1st. If the stock is bought on Thursday, July 31st, which of the following statements are TRUE? I. If the stock is purchased for cash, the customer will receive the dividend II. If the stock is purchased for cash, the customer will not receive the dividend III. If the stock is purchased regular way, the customer will receive the dividend IV. If the stock is purchased regular way, the customer will not receive the dividend
Correct Answer: I and IV Explanation: If the record date is set at Friday, August 1st, then the ex date is 1 business day prior or Thursday July 31st. In order to receive the dividend, the shareholder must be on record for owning the shares as of the evening of August 1st.
In a proceeds transaction: I. a customer directs that a position be sold; and the funds generated from the sale be used to buy another position II. a customer sells short securities "against the box" III. 2 separate mark-ups or commissions are charged IV. a combined mark-up or commission is charged
Correct Answer: I and IV Explanation: In a proceeds transaction, the customer directs the firm to sell an existing position, and to use the proceeds to buy another position. Under the FINRA 5% Policy, proceeds transactions are subject to a "combined mark-up" that must be fair and reasonable. In a combined mark-up, the compensation earned for liquidating the existing position is added to the mark-up that the firm earns on the new purchase. This combined compensation must be "fair and reasonable." When a customer goes "short against the box," the customer is selling short a stock that he or she owns (is "in the box") to lock in a gain. Because the customer was already long the stock, the short sale is a single transaction, not a proceeds transaction.
When comparing Specialists (DMMs) on the NYSE to market makers on NASDAQ, which statements are TRUE? I. The Specialist/DMM is obligated to make a continuous competitive market in the stock II. The Specialist/DMM is not obligated to make a continuous competitive market in the stock III. The market maker is obligated to make a continuous competitive market in the stock IV. The market maker is not obligated to make a continuous competitive market in the stock
Correct Answer: I and IV Explanation: Specialists (now renamed DMMs - Designated Market Makers) are obligated, under NYSE rules, to make a continuous competitive market in the assigned stock during the entire trading session. NASDAQ Market Makers, on the other hand, once they have traded the amount that they show in the market at a competitive firm price, are not obligated to renew that quote at the current market. They can renew at a price that is "away" from the current market, thus assuring that they will not have to trade! (Of course, it is in their best interests to actively trade that stock and maintain competitive quotes - that is how NASDAQ market makers maintain a good reputation that attracts future business.)
An investor has 300 shares of stock that have split 3:1. Which statements are TRUE? I. The investor will receive an additional 600 shares II. The investor will receive an additional 900 shares III. The investor will receive a replacement certificate for his original 300 shares IV. The investor will receive a sticker with a reduced par value to place on his or her original 300 share certificate
Correct Answer: I and IV Explanation: Stock splits are mechanically handled by giving the stockholder a new certificate for the additional shares, as well as a sticker to place on his old shares reflecting the reduced par value per share. This is cheaper than having shareholders tender all old shares, canceling them, and issuing all new shares. Since this is a 3 for 1 split, for every share held, after the split, the investor will have 3 shares. Thus, for 300 shares held, after the split, the investor will have 900 shares. He or she will receive a new certificate for the 600 additional shares; and a sticker to place on the original 300 shares, reducing the par value per share.
The Pink Sheets: I. give bid and ask quotes for OTC stocks II. give bid and ask quotes for NASDAQ stocks III. show completed trades as they occur IV. do not show completed trades as they occur
Correct Answer: I and IV Explanation: The Pink Sheets only give bid and quotes for the OTC market and never show them as they occur.
At the time of a "when, as and if issued" trade the: I. trade date is known II. settlement date is not known III. trade price is known IV. total transaction price is not known
Correct Answer: I, II, III, IV Explanation: "When, as, and if issued" trades are used for new issues where the certificates are not as yet physically printed and delivered. At the time of the "when issued" trade, the final settlement date is not known. Therefore, the amount of accrued interest due to the underwriters is not known, thus the total transaction price is not known. Of course, the trade date is known and the trade price is known at the time of the "when issued" confirmation.
Which statements are TRUE about trading of stocks in the Second market? I. The OTC market is a negotiated market II. A greater number of companies trade OTC than are listed on a single exchange III. The OTC market does not have listing standards IV. FINRA regulates the OTC market
Correct Answer: I, II, III, IV Explanation: The OTC Market hosts about 6,000 smaller companies compared to the other exchanges. The NYSE has 2,800 issues and the NASDAQ has 3,000 issues.
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
Correct Answer: I, II, IV Explanation: Clerical duties are done by the administrators.
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
Correct Answer: I, II, IV Explanation: 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.
If a corporation is making a tender offer for all of its common shares, which of the following individuals can tender 100 shares? I. An individual who is long 100 shares of ABC in a custodial account II. An individual who is long 100 shares of ABC in a cash account III. An individual who is long 100 shares of ABC, and short 200 shares of ABC in a margin account IV. An individual who is long 200 shares of ABC, and short 100 shares of ABC in a margin account
Correct Answer: I, II, and IV Explanation: Under the "short tender" rule, tendering shares for a customer who is in a "net" short position in a security is prohibited. Tenders are permitted only to the extent of the customer's net long position. Choice I is long 100 shares and can tender - the fact that the shares are held in a custodial account is of no relevance. Choice II is long 100 shares and can tender. Customer III has a net short position and cannot tender. Choice IV has a net position that is long 100 shares and can tender as well.
Which of the following statements are TRUE about a stock trade effected "for cash" in a cash account? I. Payment is required in part II. Payment is required in full III. Settlement occurs the same business day IV. Settlement occurs in 2 business days
Correct Answer: II and III Explanation: All cash settlements must be paid in full and are settled same business day. If the trade is effected in a margin account, partial payment is required on settlement.
The NYSE Specialist (DMM), when trading for his own account, trades: I. the market trend II. against the market trend III. to dampen market volatility IV. to enhance market volatility
Correct Answer: II and III Explanation: The Specialist (now renamed the DMM - Designated Market Maker) is obligated to make a "fair and orderly" market in the assigned stock. Thus, the Specialist/DMM is obligated to trade in a manner that tends to dampen market volatility - if the market is falling rapidly, the Specialist/DMM must buy that security for its own inventory account to slow down that rate of price decline. If the market is rising rapidly, the Specialist/DMM must sell that security from its own inventory account to slow down that rate of price increase. Thus, the Specialist/DMM tends to trade against the market trend.
An investor has bought 500 shares of a volatile growth stock and wishes to limit downside loss. Which strategies are appropriate? I. Place a buy stop order II. Place a sell stop order III. Buy 5 put contracts IV. Sell 5 put contracts
Correct Answer: II and III Explanation: To limit loss on a long stock position, the investor wants to sell if the market drops. To sell in a falling market, the appropriate order is a sell stop order. Another strategy that would work is the purchase of a put contract, giving the investor the right to sell at the strike price should the market drop.
Which two of the following are securities that TRADE in the over-the-counter market? I. Mutual Funds II. Government Bonds III. Variable Annuities IV. Master Limited Partnership Direct Participation Programs
Correct Answer: II and IV Explanation: Mutual Funds and Variable Annuities are redeemable securities, they are not negotiable and they do not trade. Limited Partnerships are thinly traded and are negotiable. In turn, they are traded as well as government bonds. Government Bonds are the most actively traded security.
In order to protect a gain on a long stock position, a customer could: I. place a sell stop order II. place a sell limit order III. buy a put IV. sell a put
Correct answer: I and III Explanation: A gain on a long stock position will be lost if the market falls. The sell order that is placed below the current market is a sell stop order (sell limits are placed above the current market). Alternately, the investor could buy a put which gives him or her the right to sell the stock at the strike price.
Which of the following securities are ACTIVELY traded in the Over-The-Counter Market? I. Common stocks II. U.S. Government bonds III. Real Estate Investment Trusts IV. Limited Partnership Direct Participation Programs
Correct answer: I, II, and III Explanation: DPP's do not trade. They are illiquid investments.
All of the following are arbitrage transactions EXCEPT: A. Buy a security on the NYSE / Sell that security on the PHLX B. Buy a convertible bond on the NYSE / Sell the common stock of the same issuer on the NYSE C. Buy the stock of one company that is the target of a tender offer / Sell the stock of the company that is making the offer D. Buy a security on the NYSE / Sell that security on the NYSE
D. Buy a security on the NYSE / Sell that security on the NYSE Explanation: Arbitrage transactions profit from price differences and include; buying and selling the same security simultaneously on two different markets; buying a convertible security and selling the equivalent number of shares of stock that it is convertible into; and buying the stock of a company that is the target of a tender offer while selling the stock of the acquiring company. The last type of arbitrage is called "risk arbitrage." In a tender offer, often, the acquiring company will pay for the acquired shares with its own stock.
PDQ Corporation has declared a rights offering to stockholders of record on Thursday, July 22nd, payable on Monday, August 9th. Under the offer, shareholders need 25 rights to subscribe to 1 new share at a price of $75. Fractional shares can be rounded up to purchase 1 full share. The last day to buy PDQ shares before they go ex rights is: A. Monday, July 19th B. Tuesday, July 20th C. Friday, August 6th D. Monday, August 9th
D. Monday, August 9th Explanation: The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Monday, August 9th, therefore the ex date is Tuesday, August 10th. To buy the shares before they go ex rights, the shares must be purchased before Tuesday, August 10th, meaning they must be purchased on Monday, August 9th
Comparing the first and second markets, which statement is FALSE? A. The First Market is an auction market B. The Second Market is a negotiated market C. The First Market has listing standards D. The Second Market has listing standards
D. The Second Market has listing standards Explanation: The second market is the OTC Market and there are no listed securities in this market.
All of the following statements are true about "odd lot" transactions EXCEPT: A. orders for odd lot amounts have no standing on the NYSE trading floor B. an odd lot is an order for less than the normal trading unit of 100 shares C. odd lot transactions are handled by the Specialist (DMM) D. odd lot commissions are set by the NYSE
D. odd lot commissions are set by the NYSE Explanation: The NYSE does not set commission rates - these are set by brokers and dealers themselves. Odd lots are transactions for less than the normal trading unit of 100 shares. Odd lot orders are handled by the Specialist (now renamed the DMM - Designated Market Maker), by buying the odd lot into the Specialist's (DMM's) inventory account; or selling the odd lot out of the Specialist's (DMM's) inventory account. Orders for odd lots have no priority on the NYSE trading floor - trading is in round lot units only.
he Specialist (DMM) performs all the following functions EXCEPT: A. trades for his own account B. executes orders for other brokers C. executes odd lot orders D. participates in new issue syndicates
D. participates in new issue syndicates Explanation: The Specialist (now called the DMM - Designated Market Maker) is a dealer on the exchange floor trading for his own account. He trades both round lots and "odd" lots (units of less than 100 shares for all stocks except "cabinet" stocks - very high priced stocks that trade is round lots of 10 instead of 100). The Specialist/DMM also acts as agent for other brokers, running a book of open orders to be filled if the market moves up or down. The Specialist/DMM does not participate in new issue syndicates; this is handled by retail firms who deal with the public. All new issues are initially sold over-the-counter, so the Specialist/DMM on an exchange could not participate in these offerings. Once an initial public offering is completed over-the-counter, the stock trades either on an exchange or over-the-counter.
The individuals who make a secondary market in corporate bonds include all of the following EXCEPT: A. market makers B. dealers C. traders D. registered representatives
D. registered representatives
Under Rule 606 of Regulation NMS, member firms are required to disclose all of the following to customers upon request regarding account activity over the prior 6 months EXCEPT: A. the market venues where the customer's orders were routed B. whether the customer's orders were directed C. whether the customer's orders were non-directed D. whether the customer's orders were discretionary
D. whether the customer's orders were discretionary
Over-the-counter dealers are also called:
Market makers Explanation: OTC dealers are also called market makers. Specialists are the market makers on the floor of exchanges.
Retail member firms that route orders to market makers in return for compensation earn
Payments for order flow
An NMS stock is current quoted at $16.10 Bid - $16.30 Ask. A customer wishes to place an order to buy 1,000 shares of the stock at $16.111. The registered representative should:
Refuse to accept the order Explanation: Rule 612 of Regulation NMS does not allow sub-penny orders to be entered for NMS stocks. The order must be refused under SEC rules (or the representative can tell the customer to enter it as $16.11, but this is not given as a choice).
If a customer buys a pre-refunded bond, the yield shown on the confirmation will be computed based upon the:
Yield to call Explanation: A customer who buys advance refunded bonds knows they will be called. Any yield that is shown must be computed to the call date, including any call premiums, if any. In essence, the call date becomes the new maturity date for the issue.
