TRADING MARKETS: BASICS

"ECNs" - Electronic Communications Networks

"electronic matching services" -stay open 24 hours a day -MAJOR: -INSTINET -ISLAND -ARCHIPELAGO -attract trading activity from NYSE, NYSE American (AMEX) and NASDAQ when markets are closed -accept orders from institutional customers and professional traders electronically on an agency basis only -get a matching fee for each successful execution

Principal Trade

- firm maintains an inventory of the security -buying the security into inventory from the customer -selling to the customer out of inventory -firm earns a mark-up when selling to the customer out of inventory -a mark-down when buying into inventory -act as dealer

Regional stock exchanges

-Boston Stock Exchange -Pacific Stock Exchange -Philadelphia Stock Exchange, etc., (PHLX) -trade stocks of companies that are located in that region -Model trading after the NYSE Specialist/DMM and Floor Trader system - "dual list" companies that also trade on the NYSE or NYSE American (AMEX)

exchanges that trade futures

-CBOT (Chicago Board of Trade) -CME (Chicago Mercantile Exchange) -NYMEX (New York Mercantile Exchange).

INSTINET ("Institutional Network")

-Fourth Market started with this firm in 1960s -matched trades of institutions who wanted to bypass the NYSE trading floor -very expensive to trade) -evolved to institutional electronic matching service for trades of NYSE, NYSE American (AMEX) and NASDAQ stocks

Most efficient markets

-NYSE -NYSE American (AMEX) -NASDAQ, -U.S. Government bond trading markets

NOT traded in secondary market:

-New Issues -Mutual Funds -Variable Annuities -U.S. Government Savings Bonds (EE bonds) -DPPs (Direct Participation Programs)

Primary Market

-New issues sold for the first time to the public -proceeds go to the issuer.

broker-dealers

-OTC firm's term -firm can act either as a broker in a transaction; or can act as a dealer. -cannot be both an agent and a principal in the same transaction

Least efficient market

-OTC trading of non-NASDAQ issues -OTC municipal bond trading -OTC trading of direct participation programs (tax sheltered limited partnership units)

Secondary Market

-Trading of issued securities -proceeds go to a selling security holder "After Market" 1. First Market 2. Second Market 3. Third Market 4. Fourth Market

dealer

-a principal, or market maker in a transaction, earning a mark-up or mark-down -bid = price dealer is buying from the customer -ask = price dealer is selling to the customer

NASDAQ

-a virtual exchange -not an auction market -uses a computerized trade matching system

mark-up

-amount or percentage added when customer buys OTC security from FINRA member firm acting as a principal or market maker -NASDAQ stocks = the mark-up NOT usually disclosed to the customer, included in a net price

Mark-down

-amount or percentage subtracted from the bid price when a customer sells an OTC stock to a market maker in a principal transaction -no requirement to disclose the mark-down amount in principal transactions in non-NASDAQ securities -FINRA 5% Policy, mark-downs (and mark-ups) must be fair and reasonable

broker

-an agent, or middleman in a transaction, earning a commission

Commission

-fee charged by a broker for executing an agency trade for a customer -must be disclosed on the customer's confirmation.

agency trade

-firm is acting as a middleman in the transaction -act as broker routing the order to the best market -charging a commission for this service

New Issues

-issued in the "primary market" -after issuance they trade in the secondary market

DPPs (Direct Participation Programs)

-limited partnership tax shelter vehicles -cannot be sold unless the general partner in the venture approves

Efficient markets

-low marketability risk -low liquidity risk -most active trading volume -small dealer spreads -small transaction costs

"after hours" market

-open 24 hours a day -Third Market Makers -ECNs (Instinet, Island, Archipelago) -NYSE, AMEX, and NASDAQ -low trading volumes -Market volatility -Wide dealer bid-ask spreads -executes most trades when the formal exchanges are closed

Payment for order flow

-payment to retail member firms -made by market maker for routing their orders to that specific market maker -permitted if market maker's price is the "best available" at that time

Market maker

-permitted under SEC rules -make payments to retail member firms in return for the retail firm routing its customer orders -rebating part of the spread that it earns on a trade to the retail firm

Auction market

-phrase describes how "open outcry" trading is performed on a stock exchange -"double" auction market -buyers call out successively higher bids and sellers call out successively lower offers until a trade is arranged

DMM - Designated Market Maker

-primary exchange specialist -makes a market in the stock, regional exchanges that dual list the stock, and OTC third market makers that trade the stock

Variable Annuities

-redeemable -Not negotiable

Mutual Funds

-redeemable -not negotiable

U.S. Government Savings Bonds (EE bonds)

-redeemable -not negotiable

The Network B Tape

-reports trades of AMEX (NYSE American) and regional exchange-listed issues

The Network C Tape

-reports trades of NASDAQ-listed issues

The Network A Tape

-reports trades of NYSE listed issues

Dual Listing

-security that is traded in more than one marketplace -most common is one that is listed on both the New York Stock Exchange and a smaller regional exchange -do not occur between the 3 major national marketplaces - NYSE, NYSE American (AMEX), and NASDAQ

Stocks that are listed on the New York Stock Exchange can also be typically listed and traded on all of the following exchanges EXCEPT: A. American Stock Exchange B. Chicago (Midwest) Stock Exchange C. Boston Exchange D. Pacific Exchange

A. American Stock Exchange

Which of the following are characteristics of ECNs? I. ECNs trade listed stocks II. ECNs trade OTC stocks III. ECNs trade "away" from exchanges IV. ECN trades are not reported A. I and III B. II and IV C. I, II, III D. I, II, III, IV

A. I and III

All of the following securities are traded in the secondary market EXCEPT: A. Mutual funds B. NYSE listed stocks C. NASDAQ listed stocks D. OTC stocks

A. Mutual funds

Trading on regional stock exchanges is modeled after trading procedures used by the: A. NYSE B. NASDAQ C. AMEX (NYSE American) D. CBOE

A. NYSE

Trades of NYSE-listed securities that take place in all markets are consolidated and reported through the: A. Network A Tape B. Network B Tape C. Network C Tape D. Network D Tape

A. Network A Tape

A person who makes a secondary market in securities is called a(n): A. market maker B. registered representative C. underwriter D. retail broker

A. market maker

A securities firm does a trade for a customer and charges a mark-up. In what capacity did the firm act? A. Agent B. Dealer C. Broker D. Middleman

B. Dealer

Customers who trade NYSE listed securities during extended trading hours are: I. subject to a higher degree of price volatility than during regular trading hours II. subject to a lower degree of price volatility than during regular trading hours III. always able to obtain an execution at the market because the Specialist/DMM maintains a continuous auction market IV. not always able to obtain an execution at the market because there is no Specialist/DMM maintaining a continuous auction market A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

Which statements are TRUE? I. Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on CQS II. Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on the UQDF III. Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on CQS IV. Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on the UQDF A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

Which of the following is NOT part of the Secondary Market? A. First Market B. Primary Market C. Second Market D. Third Market

B. Primary Market

A broker-dealer will sell stock at the: A. bid price B. ask price C. midpoint price D. price of the last reported trade

B. ask price

The Second Market is a(n): A. auction market B. negotiated market C. unregulated market D. primary market

B. negotiated market

Stock options trade on the: A. NASDAQ B. CME C. CBOE D. CBOT

C. CBOE

Which of the following securities are traded in the secondary market? I. U.S. Government bonds II. U.S. Government savings bonds III. Municipal bonds IV. Municipal bond funds A. I and II only B. III and IV only C. I and III only D. I, II, III, IV

C. I and III only Government bonds and municipal bonds are traded "over-the-counter"

The NYSE Specialist (DMM) and Floor Trader system is the model for trading used by which of the following markets? I. NASDAQ II. AMEX (NYSE American) III. PHLX IV. BATS A. I and III B. I and IV C. II and III D. II and IV

C. II and III

All of the following statements are true if a customer places an order for an NYSE listed issue EXCEPT the order: A. must be directed by the member firm to the NYSE trading floor for execution if the customer so requests B. can be directed by the member firm to any trading venue if the customer does not direct the order to a specific market C. can be matched internally by the member firm and is not required to be sent to a public trading venue D. can be directed by the member firm to a trading venue that "pays for order flow" as long as this is disclosed to the customer

C. can be matched internally by the member firm and is not required to be sent to a public trading venue

An efficient trading market is one with: A. uniform trading procedures B. centralized trading floor C. small bid/ask spreads D. publicly disseminated trade reporting

C. small bid/ask spreads

Futures contracts trade on the: A. NYSE B. AMEX (NYSE American) C. CBOE D. CBOT

D. CBOT

Which of the following first markets does NOT trade stocks? A. NYSE B. AMEX (NYSE American) C. PHLX D. CBOT

D. CBOT

Which of the following is NOT part of the secondary market? A. First Market B. Third Market C. Fourth Market D. Fifth Market

D. Fifth Market

Which of the following are part of the Second Market? I. NYSE II. Pink OTC Market III. NASDAQ IV. OTCBB A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

Which of the following is NOT a First Market? A. NYSE B. NASDAQ C. AMEX (NYSE American) D. OTCBB

D. OTCBB

Which of the following is part of the Second Market? A. NYSE B. NASDAQ C. AMEX (NYSE American) D. OTCBB

D. OTCBB

The Third Market trades: A. listed and unlisted stocks between institutions without the use of a broker B. listed securities on the trading floors of regional exchanges C. unlisted securities over-the-counter D. listed securities over-the-counter

D. listed securities over-the-counter

Typically, a dual listed stock is one that trades in: A. the First and Third Markets B. the Second and Third Markets C. the Third and Fourth Markets D. multiple First Markets

D. multiple First Markets

Retail member firms that route orders to market makers in return for compensation earn: A. mark-ups B. mark-downs C. commissions D. payments for order flow

D. payments for order flow

The Fourth Market is trading of: A. listed securities on an exchange floor B. Pink Sheet securities "over-the-counter" C. listed securities "over-the-counter" D. securities directly between institutions

D. securities directly between institutions

UQDF - the "Unlisted Trading Privileges"

Quotes for NASDAQ listed issues are aggregated from all market makers and presented on _____.

Third Market

Trading of exchange listed securities -"over-the-counter" (OTC) -negotiated market -competition for the NYSE trading floor -Weeden and Co -Jefferies and Co. -open 24 hours a day -most trading when NYSE is closed

First Market

Trading of exchange listed securities on that exchange -Any exchange floor -trade: equities, options, futures, stocks and stock options -New York Stock Exchange -American Stock Exchange ("NYSE American") -NASDAQ Stock Market -Chicago Board Options Exchange- FUTURES -regional stock exchanges -presented on CQS - the Consolidated Quotations Service

Fourth Market

Trading of securities directly between institutions -"over-the-counter" (OTC) -no auction -no negotiation -ECNs (Electronic Communications Networks) example - INSTINET ("Institutional Network") or Archipelago

Second Market

Trading of securities that not listed on a stock exchange -"over-the-counter" (OTC) -negotiated market -non-NASDAQ issues -OTCBB issues -Pink Sheet (Pink OTC Market) issues -most corporate bonds -all municipal bonds -U.S. Government bonds -Agency bonds

CQS - the Consolidated Quotations Service

aggregates and displays quotes for all market makers in exchange listed issues - both NYSE and NYSE-MKT (AMEX) listed. 9:00 AM to 6:30 PM ET

Consolidated Tape

where Trades of exchange listed issues are aggregated and reported -Network A, B, C