Trading Markets: Trading Markets Basics

A customer calls her broker to discuss her account. The broker recommends that the customer buy 500 shares of DEF stock. The customer tells the broker to do it, and the broker enters the order and gets a trade execution report back less than a minute later. The broker informs the customer that the trade was executed and tells her the price of the trade. This is an example of a: A Market order B Market - Not Held order C Limit order D Stop order

A. Market orders are first in line to be filled at the current market price. They do not specify a price - they get an immediate execution at the "market." In contrast, a market-not held order is "not held" to an immediate execution. It goes to a human trader who can "work" the order - these are often used by institutions to fill very large orders that can distort pricing on automated exchange trading systems. Limit orders specify either a minimum price to buy or a maximum price to sell. Stop orders (also called stop loss orders) specify a trigger price at which to sell in a falling market to stop a loss on a long stock position; or a trigger price at which to buy in a rising market to stop a loss on a short stock position.

Fill-or-kill order (FOK)

An order that instructs the floor broker to fill the entire order immediately; if the entire order cannot be executed immediately, it is canceled.

What is a Cancel / Rebill record

a requirement of FINRA, a written record detailing any change of account designation to a customer order or position A customer places an order to buy 1,000 shares of ABC stock at the market in his cash account. The order is executed and, when reporting the trade back to the customer, the registered representative notices that the trade was executed in the customer's margin account. Which statement is TRUE? The registered representative can move the trade to the customer's cash account: A to correct the error without needing to take any additional action since these accounts are related to each other B as long as a signed statement requesting the transfer is obtained from the customer C as long as a cancel/rebill record is created that documents the reasons for the account designation change and the manager approves in writing D as long as FINRA is sent a quarterly report detailing all account designation changes whenever transactions were placed in incorrect customer accounts ----- C. FINRA requires that anytime there is a change of account name or designation relating to an executed order, a written record must be made of the change. This is called a "Cancel-Rebill" record. A branch manager or compliance officer must know the reasons for the change and must approve the change in writing. Such a record must be created for any change of account designation - even for something as minor as moving a trade from a customer's cash account to the same customer's margin account.

Stocks that are listed on the New York Stock Exchange can also typically be listed and traded on: A the American Stock Exchange (NYSE American) B the Chicago (Midwest) Stock Exchange C the Chicago Board Options Exchange D Instinet

B. Stocks that are listed on the NYSE are typically not listed on the AMEX or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. In the past, the AMEX (now renamed the NYSE American) and NASDAQ were so-called "breeding grounds" for growing companies. As a company grew, it might qualify for the tougher NYSE listing requirements, and could move to the "Big Board." A dual listed stock is one which trades in more than one marketplace - for example, a young New England company might have listed on the Boston exchange when it was still small; and then listed on the NYSE when the company became large enough. An ECN, such as Instinet, is not a marketplace that lists stocks. It is simply an electronic order matching service.

A dual listed stock is one which trades in two different: A. countries B. U.S. markets C. cities D. states

B. A dual listed stock is one which trades in more than one marketplace - for example, a young West Coast company might have listed on the Pacific exchange when it was still small; and then listed on the NYSE when the company became large enough. Finally, note that most companies are only listed on 1 major market because each exchange charges listing fees, and corporations see no reason to pay multiple listing fees.

Which orders are lower in price than the current market? I Open Buy Limits II Open Buy Stops III Open Sell Limits IV Open Sell Stops A I and III B I and IV C II and III D II and IV

B. Buy limits and sell stops are orders that are placed below the current market and are filled as the market drops (remember OBLOSS - Open Buy Limits and Open Sell Stops - as the orders placed below the current market).

A market maker that compensates a retail member firm for sending its customer orders to that market maker is: I paying for order flow II interpositioning III engaging in a prohibited practice under SEC rules IV permitted to do so, subject to best execution requirements A I and III B I and IV C II and III D II and IV

B. If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price.

Sell long means what? do you own the securities etc

selling securities that a customer owns - i.e., liquidating an existing long position. (compare Sell short)

Circuit breaker

slang for the SEC rule that requires the U.S. equity markets to be shut for specified time periods if the market drops by a large amount (currently 7%, 13% and 20% as measured by the S&P 500 Index)

GTC / Open order

"Good till cancelled" - a time notation that can be placed on orders that are "away from the market" meaning "good-til-canceled." Subject to periodic renewal, the order remains in the market until it is executed or expires.

Rule 605 of Regulation NMS requires: A each market center to prepare monthly electronic reports about its quality of executions and effective spreads B each broker-dealer to prepare quarterly reports on its routing of non-directed orders, including the 10 largest venues where orders were routed C market makers in OTC stocks to display any customer limit orders that are better-priced than the dealer's own quote D any order execution facility to execute the order at the NBBO, even if that execution facility is posting an inferior quote

A. Rule 605 of Regulation NMS ("National Market System") requires market centers to make monthly electronic reports about the quality of execution in each stock traded, including how market orders of various sizes are executed relative to public quotes. The reports must also include information about effective spreads. In addition, market centers must provide reports on the extent to which they were able to "improve" execution prices for limit orders as compared to the public quote at that time. Do not confuse Rule 605 with Rule 606. Rule 605 covers the quality of trade executions by exchanges; Rule 606 covers broker-dealers and how they routed their orders to exchanges for execution.

A securities dealer is quoting ABCD stock at 10.00 - 11.00 (15 x 20). This means that the dealer is willing to: A buy 1,500 shares at $10 and sell 2,000 shares at $11 B sell 1,500 shares at $10 and buy 2,000 shares at $11 C buy 1,000 shares at $15 and sell 1,100 shares at $20 D sell 1,000 shares at $15 and buy 1,100 shares at $20

A. Securities dealers quote stocks with a bid and ask. The bid is the price at which the dealer is willing to buy from the customer (therefore, the customer is selling to the dealer at the bid). The ask is the price at which the dealer is willing to sell to the customer (therefore, the customer is buying from the dealer at the ask). Within the brackets is the "size" of the quote - how many shares the quote is good for. This dealer is willing to buy 1,500 shares at $10 and is willing to sell 2,000 shares at $11. The "size" is 15 x 20 is denoted in round lots of 100 shares- this translates into 1,500 shares bid at $10 and 2,000 shares offered at $11 by the dealer.

A buy limit order is executed when the market is: I falling II rising III at or below the limit price IV at or above the limit price A I and III B I and IV C II and III D II and IV

A. A buy limit order is an order to buy at a price that is lower than the current market. The limit is the maximum price at which the customer will buy. (Remember the old adage: Buy Low; Sell High - that's how limit orders are placed in the market)

In order to protect a gain on a long stock position, a customer should place a: A sell stop order B sell limit order C not held order D fill or kill order

A. 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). If the market begins to fall, the stop is triggered and the stock is sold out at the market price.

How do you know what price on the order ticket the stock can be bought at - it lists "Buy" and shows a price of "85" on right hand side

A. A price of 85 is specified on the order ticket, so this is a limit order to buy. A limit order to buy can be filled at that price of better - meaning at 85 or lower than 85. Because this is an order to buy $5,000 face amount of bonds, it can be filled at 85% of $5,000 = $4,250 or lower.

A technical analyst has identified a resistance level for ABC stock at $81 and a support level at $75. The stock is currently trading at $77 and the analyst expects the stock to break the resistance level. Which order is appropriate to profit if the resistance level is broken? A Buy 100 ABC @ $82 Stop B Buy 100 ABC @ $80 C Buy 100 ABC @ Market D Buy 100 ABC @ $80 Stop

A. A stock breaks a "resistance" level as the market rises. If the stock breaks this level ($81), the investor feels that the price will "skyrocket." To profit, he wants to buy if the market breaks $81 on the upside, so the order is: Buy @ $82 Stop. The order must be a buy stop because it is placed higher than the current market. If the market rises to $82, the order is triggered and becomes a market order to buy. The order can then be executed at the next available price. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit. A buy limit order cannot be used because it would be placed lower than the current market.

A securities firm does a trade for a customer and charges a commission. In what capacity did the firm act? A Agent B Dealer C Principal D Market Maker

A. Agent

An order placed "market - at the open" will: A either be executed at the opening price that day or will be canceled B be executed as close to the opening price that day C be executed as close to the opening price the next trading day D be executed during the day at the discretion of the trader

A. An order placed "market - at the open" receives an execution at the opening price that trading day, or is to be canceled.

Buy stop orders are: I placed above the current market II placed below the current market III triggered as the market rises IV triggered as the market falls A I and III B I and IV C II and III D II and IV

A. Buy stop orders are placed above the market and are triggered as the market rises. If there is a large pool of buy stop orders at a certain price, when the market hits that level, they are triggered and become market orders to buy - fueling the rise in the market.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $41 and $46 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed? A Sell (Short) ABC @ $40 Stop GTC B Sell (Short) ABC @ $41 Stop GTC C Sell (Short) ABC @ $46 Stop GTC D Sell (Short) ABC @ $47 Stop GTC

A. If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $41. If the stock moves through this price, it is expected that it will move sharply downward. To sell below the current market, a sell stop order must be used. Therefore, the order to sell (short) ABC @ $40 Stop GTC is appropriate. This would be a short sale (the sale of borrowed shares), so that these shares could be purchased at a lower price after the market drops and used to cover the short position at a profit. A sell limit order cannot be used, since these are orders to sell higher than the current market.

In an "either / or" order - what happens to both halves of the order

A. In an "either / or" order, if one side of the order is filled, that cancels the other side. If one side of the order is partially filled, the other side is reduced by a similar amount.

If the NYSE closes the market for the balance of the trading day under the circuit breaker rule, any market-on-close orders are: A canceled B immediately filled C saved and re-entered on the next trading day D returned to the entering firm

A. Market-On-Close (MOC) orders are to be filled at the closing price or they must be canceled. If the NYSE closes the market because the "circuit breaker" is tripped (a 20% decline in the S&P 500 Index will cause all U.S. equity markets to close for the balance of the day), then there is no closing price. Thus, any MOC orders placed that day will be canceled.

An all or none order: I requires the trader to execute the order in full II allows the trader to execute the order in part or in full III allows the trader to make more than one attempt to fill the order IV requires the trader to make only one attempt to fill the order

A. Order is to be executed in full, but if trader can't fill the order, he is free to attempt execution at a later time. I and III An "all or none" order requires the trader to execute the order in full on the floor of the exchange, however, if execution cannot be performed, the trader may attempt to fill the order at a later time.

he SEC regulation that requires market centers to accept automated executions that do not discriminate against any class of users of their systems is: A Regulation NMS B Regulation ATS C Regulation SHO D Regulation M

A. Rule 610 of Regulation NMS requires all market centers to electronically link and provide automated execution within 1 second for orders that are executable. It also mandates that market centers cannot discriminate against customers who access their quotes.

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: A refuse to accept the order B route the order to an ATS C route the order to an exchange D accept the order and round the price to $16.11

A. 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).

An order for a New York Stock Exchange listed issue is routed by the member firm to an Electronic Communications Network (ECN) rather than to the exchange floor. This practice is permitted: A if the price offered by the ECN is better B only if the customer consents C only if an attempt to fill the order on the NYSE fails D only if the NYSE is closed

A. SEC rules require that execution must occur at the "best market." If a stock is traded in multiple markets, then the order must be routed by the member firm to the market that is posting the best quote.

Which statement is TRUE? A A securities dealer will buy stock at the bid price and sell stock at the ask price B A securities dealer will sell stock at the bid price and buy stock at the ask price C A securities dealer will buy stock and sell stock at the midpoint between the bid and ask price D A securities dealer will buy and sell stock at the price of the last reported trade

A. Securities dealers quote stocks with a bid and ask. The bid is the price at which the dealer is willing to buy from the customer (therefore, the customer is selling to the dealer at the bid). The ask is the price at which the dealer is willing to sell to the customer (therefore, the customer is buying from the dealer at the ask).

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. Stocks that are listed on the NYSE are typically NOT listed on the AMEX (now renamed the NYSE American) or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. A dual listed stock is one which trades in more than one marketplace, and the typical example is a company that listed on a regional exchange when it was small, and then grew large enough to list on a national exchange. For example, a young New England company might have listed on the Boston exchange when it was still small; and then listed on the NYSE when it became large enough; and it kept its Boston exchange listing to maintain its New England "ties." Review

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '45 @ 90 Stop Limit GTC." After the order is elected, at which of the following prices may the order be executed? I 89 II 90 III 91 IV 92 A I and II only B III and IV only C II, III, IV D I, II, III, IV

A. The customer places a buy stop limit order to buy 5M - or 5 $1,000 par bonds at 90% of par or better. Buy stop limit orders are placed at a price that is higher than the current market. If the market price rises to 90, the order is elected, but instead of becoming a market order to buy, it becomes an order to buy at the limit price of 90 or lower. Thus, the two possible choices where the order can be executed are 89 and 90. The choices of 91 and 92 are too expensive and exceed the limit placed by the customer.

A customer places the following instructions with his registered representative:"Buy 100 shares of ABC if the market rises to $45, but don't buy the stock for more than $50." What is the appropriate order to be placed? A Buy ABC @ 45 Stop 50 Limit B Buy ABC @ 50 Stop 45 Limit C Buy ABC @ 45 Stop D Buy ABC @ 50 Stop

A. This customer wishes to buy the stock if the market rises to $45 per share. The only order that allows the purchase of stock at a price above the current market is a buy stop order. A buy limit order cannot be used because this type of order is placed below the current market.Therefore, the order must be: Buy 100 ABC @ $45 Stop. However, there is a problem. If the market moves to $45 or higher, the order is elected and becomes a market order to buy. The execution could occur at any price, and this customer doesn't wish to pay more than $50 per share. Therefore, the order must be: Buy 100 ABC @ 45 Stop; 50 Limit. If the market rises to $45, the order is elected, and becomes an order to buy at the limit price of $50 (or lower). Thus, it will only be filled at $50 or less per share.

Rule 606 of Regulation NMS requires: A each market center to prepare monthly electronic reports about its quality of executions and effective spreads B each broker-dealer to prepare quarterly reports on its routing of non-directed orders, including the 10 largest venues where orders were routed C market makers in OTC stocks to display any customer limit orders that are better-priced than the dealer's own quote D any order execution facility to execute the order at the NBBO, even if that execution facility is posting an inferior quote

B. Rule 606 of Regulation NMS requires member firms to prepare a quarterly report on the routing of their non-directed customer orders. The report, which is publicly available, details the percentage of customer orders that were "non-directed;" the identity of the 10 largest markets or market makers to whom non-directed orders were routed; and details the member firm's relationship with that market maker (for example, many larger retail member firms own their own market maker subsidiaries to whom they route orders); and any arrangement for payment for order flow or profit-sharing.In contrast, Rule 605 of Regulation NMS requires market centers to make monthly electronic reports about the quality of execution in each stock traded, including how market orders of various sizes are executed relative to public quotes. The reports must also include information about effective spreads. In addition, market centers must provide reports on the extent to which they were able to "improve" execution prices for limit orders as compared to the public quote at that time. Do not confuse Rule 606 with Rule 605.

Which statements are TRUE regarding sell stop orders? I Sell stop orders will be elected at the stop price or lower II Sell stop orders will be elected at the stop price or higher III Once elected, sell stop orders will be executed at the stop price specified only IV Once elected, sell stop orders may be executed at, above, or below the stop price specified A I and III B I and IV C II and III D II and IV

B. Stop orders are placed "away" from the current market - sell stop orders are placed below the current market price (and elected at or below the stop price) while buy stop orders are placed above the current market price (and elected at or above the stop price). Once the "stop" price is reached, the order is elected and becomes a market order to be filled at the next price - which could be higher, lower, or the same as the stop price. Review

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

B. The Second Market is trading of unlisted securities "over-the-counter." This is a negotiated market. For example, a stock quoted in the OTCBB is actually traded by picking up the phone, calling the market maker posting the quote, and negotiating a price.

Prior to the opening of the options exchange, an investor wishes to place an order to sell an option contract at a premium that is higher than the previous day's close. The order type to be placed is a(n): A At the open order B Limit order C Stop order D Not Held order

B. The orders that are placed higher than the current market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Thus, to sell at a price higher than the current market, an open sell limit order would be placed.Conversely, the orders that are placed lower than the current market are "OBLOSS" - Open Buy Limit orders and Open Sell Stop orders. Thus, to sell an option at a premium that is lower than the closing price, an open sell stop order would be placed.

A customer places an order to either buy 1,000 shares of ABC stock at 100 GTC; or to buy 1,000 shares of ABC stock at 110 Stop GTC when the market price of ABC is 104. The order is taken by the member firm's internal order system and 200 shares are filled at 100. The order that will appear on the firm's internal order system after the partial execution is: A Buy 800 ABC at 100 GTC / The order to Buy 1,000 ABC at 110 Stop GTC is canceled B Buy 800 ABC at 100 GTC / Buy 800 ABC at 110 Stop GTC C Buy 800 ABC at 100 GTC / Buy 1,000 ABC at 110 Stop GTC D Buy 1,000 ABC at 110 Stop GTC / The order to Buy 1,000 ABC at 100 GTC is canceled

B. This is known as an "either / or" order. If one side of the order is filled, that cancels the other side. If one side of the order is partially filled, the other side is reduced by a similar amount. This customer wishes to either Buy 1,000 ABC at $100 per share; or Buy 1,000 ABC at $110 Stop. After the partial execution of the purchase of 200 shares of ABC at $100, the adjusted order will now show: Buy 800 ABC @ $100 GTCorBuy 800 ABC @ $110 Stop GTC

The SEC regulation that requires large ECNs to publicly display their quotes so that they can be traded against electronically is: A Regulation NMS B Regulation ATS C Regulation SHO D Regulation M

B. Under Regulation ATS, any ECN (Electronic Communications Network) or ATS (Alternative Trading System) must register with FINRA as a broker/dealer (therefore it comes under some market regulation). Once an ECN is big enough (5% of the trading volume in a given stock in the past 6 months), it must publicly display its orders so that they can be accessed and traded against electronically.Regulation NMS (National Market System) requires that all exchanges publicly display their quotes and that they must be able to electronically access and trade against the best quote within 1 second. Regulation SHO consists of rules covering short sales. Regulation M consists of rules covering trading of a stock when an additional share offering of that company is being made in the market.

The First Market is the: A trading of OTCBB stocks B issuance of listed stocks C trading of listed stocks on the floor of an exchange D issuance of listed and unlisted stocks

C. The First Market is trading of listed stocks on that exchange. The major stock exchanges with trading floors are the NYSE and AMEX. The AMEX is a wholly owned subsidiary of the NYSE, and it has renamed its equities market "NYSE American." In late 2006, NASDAQ was recognized by the SEC as the first completely electronic exchange with no physical trading floor. Exchanges have listing standards for the companies that trade there and accessible order books, where orders can be posted and traded against. Any companies that do not meet exchange listing standards are quoted in either the OTCBB (Over The Counter Bulletin Board) or the Pink OTC Markets. These constitute the Second Market. Both the OTCBB and Pink OTC Markets are classified by the SEC as "quotations vendors" - they are not exchanges. To trade an OTCBB or Pink OTC Markets stock, the trade must be negotiated, usually over the phone. Choices B and D are definitions of the primary (new issue) market - not the secondary (trading) markets.

The "after hours" market is characterized by: I Narrow Spreads II Wide Spreads III Low Trading Volume IV High Trading Volume A I and III B I and IV C II and III D II and IV

C. After hours trading is characterized by much lower trading volumes than during the regular trading day and, correspondingly, dealer bid-ask spreads are much wider.

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. Efficient markets are characterized by high trading volumes and narrow bid/ask spreads. Whether or not there is a centralized trading floor has no bearing on efficiency. For example, the U.S. Government debt trading market is an OTC screen-based trading system and it is highly efficient. Uniform trading procedures and public disclosure of trade prices help foster efficiency, but if trading volumes are low, the market will still be "inefficient."

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

C. II and III All of the regional stock exchanges, such as the Philadelphia Stock Exchanges (PHLX), as well as the American Stock Exchange (now renamed the NYSE American), model their trading after the NYSE Specialist/DMM and Floor Trader system. NASDAQ is an all electronic market, while BATS (Better Alternative Trading System) is an all electronic market that started as an ECN, but has grown so large that the SEC now recognizes it as an exchange. Note: The regional exchanges as independent entities are a dying breed. At the end of 2007, NASDAQ purchased the PHLX and the Boston stock exchanges. The NYSE has purchased the Pacific and American stock exchanges and has renamed the Pacific as the "ARCA" exchange and the American as the "NYSE American." These must still be known for the exam, since these are being run as separate subsidiaries of the major markets.

Which orders guarantee price but not execution? I Buy Limits II Buy Stops III Sell Limits IV Sell Stops A I and II B III and IV C I and III D II and IV

C. If a "Stop" order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are only filled at that price or better. If the market never reaches that price, they are never filled.

If a customer directs that a marketable order be sent to a specific trading venue, then the trade must be: A rejected B sent to the NYSE for execution C sent to the market specified by the client D sent to the market with the largest display size

C. If the customer directs that the trade be sent to a specific trading venue, follow the customer's instructions. When the trading venue gets the order, it must either fill the order at the best price available in all markets; or it must re-route the order to the better-priced market (the "trade-through" rule); so the customer will get the best price, no matter where the order is actually sent!

Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose which of the following information? I Fill rates II Speed of executions III Rates of price improvement IV Trading Volumes

C. SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on: Effective spreads (narrow spreads are better!); How market orders of various sizes were executed relative to the public quote (executions at, or very close to the public quote are better!); Speed of execution (fast execution is better!); Fill rates (a larger percentage of orders being filled is better!); and Price improvement or disimprovement (getting a better price than expected is better!). Trading volumes are not included in the monthly report on execution quality required under Rule 605 because trading volumes are reported every day by the exchanges.

Sell limit orders: I used to sell securities at prices that are lower than the current market price II used to sell securities at prices that are higher than the current market III guarantee a specific execution price or better IV do not guarantee a specific execution price or better A I and III B I and IV C II and III D II and IV

C. Sell limit orders are used to sell securities at prices that are higher than the current market. They may only be filled at the limit price or higher - so they do guarantee a specific execution price or better.

The orders that are higher in price than the current market are: I Open Buy Limits II Open Buy Stops III Open Sell Limits IV Open Sell Stops A I and III B I and IV C II and III D II and IV

C. Sell limits and buy stops are the orders that are placed above the current market and are elected as the market rises. Remember OSLOBS - Open Sell Limits and Open Buy Stops as the orders placed above the current market.

A customer places an order to sell bonds. The order reads "Sell 5M ABC 9s M '45 @ 90 GTC." At which of the following prices may the order be executed? I 89 II 90 III 91 IV 92 A I and II only B III and IV only C II, III, IV D I, II, III, IV

C. The customer places a limit order to sell 5M - or 5 $1,000 par bonds at 90% of par value or more, if possible. The order must be executed at 90% or more, so selling at 90, 91 and 92 are OK. Selling at 89 is not high enough to satisfy the customer's limit.

A customer has asked his registered representative to sell 100 XYZ if the market falls to 50, but he does not want to sell for less than 45. This type of order is a: A stop order B limit order C stop limit order D split order

C. The order is a stop limit order - the customer wishes to sell if the market falls to $50 per share (this is the stop price). If the market falls to $50 or lower, the order is elected and becomes a limit order to sell at $45, meaning that the customer wants at least $45 per share to sell. There is no such thing as a "split" order. Note that the stop price and the limit price do not have to be the same. Review

A customer places an order to "Buy 100 ABC @ 90 Stop." The customer wishes to buy the stock at: A $90 per share B the market price, if the market falls to $90 per share or lower C the market price, if the market rises to $90 per share or higher D a price that is no higher than $90 per share

C. This order is a Buy Stop order, which is placed above the current market value. If the market price rises to $90, the order is elected and becomes a market order to buy. Once elected, the order is executed at the next available price as a market order. The order is executed, but the specific execution price is unknown.

A registered representative receives a telephone call from a customer who tells the representative to: "Sell my 500 shares of ABC stock at the market." The representative has the record of the customer purchasing the shares 2 years ago, but the shares were transferred into the customer's name and shipped to the customer at his home address. The representative asks the customer where the shares are and the customer responds as follows: "The shares are in a fireproof safe in my bedroom." The representative should: A not accept the sell order because the stock is not in custody of the broker-dealer B accept the sell order, but mark the order ticket short because the shares are not in custody of the broker-dealer C accept the sell order, but mark the order ticket long because it can be reasonably expected that the customer will deliver the shares by settlement D not accept the sell order because the stock is not in good deliverable form

C. Under SEC rules, a sell order can be marked "long" if the representative determines the location of the shares and it can reasonably be expected that the shares will be delivered on settlement. The representative has determined that the customer has the shares at home, and since this is a long-time customer (the shares were purchased through that firm 2 years ago), it can be assumed that the customer will deliver them on settlement.

A buy stop order is executed: I in falling markets II in rising markets III at the price specified IV at the market price A I and III B I and IV C II and III D II and IV

D. A buy stop order is an order to buy at a price that is higher than the current market. It is used to stop a loss on a short stock position, by buying in as the market rises. The "stop" price is a trigger, that, once hit, "elects" the order and turns it into a market order to buy. Thus, the actual execution price in unknown - it will be at the prevailing market.

A sell limit order is executed when the market is: I falling II rising III at or below the limit price IV at or above the limit price A I and III B I and IV C II and III D II and IV

D. A sell limit order is an order to sell at a price that is higher than the current market. The limit is the minimum price needed to sell (Remember the old adage: Buy Low; Sell High - that's how limit orders are placed in the market)

Which of the following statements are TRUE about stop orders? I Buy stop orders can accelerate price advances in bull markets II Sell stop orders can accelerate price declines in bear markets III Buy stop orders limit losses on short stock positions IV Sell stop orders limit losses on long stock positions A I and II only B III and IV only C II and IV only D I, II, III, IV

D. Buy stop orders are placed above the market and are triggered as the market rises. If there is a large pool of buy stop orders at a certain price, when the market hits that level, they are triggered and become market orders to buy - fueling the rise in the market. Sell stop orders are placed below the market and are triggered as the market falls. If there is a large pool of sell stop orders at a certain price, when the market hits that level, they are triggered and become market orders to sell - fueling the drop in the market. Buy stop orders can be used to buy in short stock positions as the market rises, cutting losses. Conversely, sell stop orders can be used to sell out long stock positions in falling markets, cutting losses.

Which of the following is NOT an ECN? A INSTINET B ISLAND C ARCHIPELAGO D PENINSULA

D. ECNs - Electronic Communications Networks - only accept orders for actively traded securities - that is, NYSE listed and NASDAQ stocks. Essentially they are electronic matching services, matching customer buy and sell orders for a very low fee (often as low as $1 per trade). ECNs do not act as dealers - only as agents, earning a fee on each successful transaction. ECN volumes have been growing, as institutions use them to reduce trading costs. The major ECNs are Island, Instinet and Archipelago. (Also note that in 2006, the NYSE purchased Archipelago, and NASDAQ purchased Instinet and Island (which had merged into INET), and are running them as separate trading systems).

Which orders, if executed do NOT guarantee a specific price or better? I Buy Limits II Buy Stops III Sell Limits IV Sell Stops A I and II B III and IV C I and III D II and IV

D. If a "Stop" order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are filled at that price or better.

If an order is placed "immediate or cancel":

D. If an order is placed "Immediate or Cancel," it can be filled in its entirety or in part at that time, with any unfilled portion being canceled. There can be no attempt at re-execution if the order is not filled immediately.

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

D. The NYSE trades stocks. The AMEX trades stocks and stock options. The AMEX is a wholly owned subsidiary of the NYSE, and it has renamed its equities market "NYSE American," while its options market is still called the AMEX. The CBOE trades stock options and index options. The CBOT - Chicago Board of Trade - is not a securities exchange. Rather, it is a futures market. Review

The Primary Market is the: A trading of exchange listed securities on that exchange floor B trading of securities that are not exchange listed in the over-the-counter market C trading of exchange listed securities in the over-the-counter market D sale of new issues for the first time

D. The Primary Market is the sale of new issues for the first time; no trading takes place in the Primary Market. The trading of exchange listed securities on that exchange floor is the definition of the First Market. The trading of securities that are not exchange listed in the over-the-counter market is the definition of the Second Market. The trading of exchange listed securities in the over-the-counter market is the definition of the Third Market.

The Secondary Market is divided into the: I First Market II Second Market III Third Market IV Fourth Market A I and II only B III and IV only C I, II, III D I, II, III, IV

D. The Secondary Market is categorized into 4 sub-markets: the First; Second; Third; and Fourth Markets. The First Market is trading of exchange listed securities on that exchange. The Second Market is trading of securities that are not exchange listed in the over the counter market. The Third Market is trading of exchange listed securities in the over the counter market. The Fourth Market is trading of securities directly between institutions in the over the counter market via ECNs (Electronic Communications Networks) such as Instinet.

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '45 @ 90 Stop GTC." After the order is elected, at which of the following prices may the order be executed? I 89 II 90 III 91 IV 92 A I and II only B III and IV only C II, III, IV D I, II, III, IV

D. The customer places a stop order to buy 5M - or 5 $1,000 par bonds at 90% of par. Buy stop orders are placed at a price that is higher than the current market. If the market price rises to 90 or higher, the buy stop order is elected (at 90% of par or higher), and the order is executed at the next available price - either at, above, or below the stop price. Thus, the order can be executed at any of the listed prices.

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. The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (also known as dealers) and traders. Both market makers (dealers) and traders deal with the public through registered representatives (retail brokers).

All of the following securities are traded in the secondary market EXCEPT: A corporate stocks B corporate bonds C municipal bonds D mutual funds

D. There is no trading of mutual funds - these securities are not tradable - rather, they are issued by the fund and redeemed with the fund. Corporate stocks exchanges and "over-the-counter." Most corporate bonds trade OTC, with a tiny amount traded on the NYSE. Municipal bonds are only traded "over-the-counter." Review

ECNs trade: A stocks B stock options C bonds D mutual funds .

Explanation The best answer is A. ECNs - Electronic Communications Networks - only accept orders for actively traded securities - that is, NYSE listed and NASDAQ stocks. Essentially they are electronic matching services, matching customer buy and sell orders on an agency basis only for a very low fee (often as low as $1 per trade). Stock options are not traded through ECNs since the ECNs are not members of the Options Clearing Corporation - thus they do not have the capability of reporting trades to the OCC for recordkeeping and margin purposes. Mutual funds do not trade - rather they are redeemable securities. Most bonds are traded through dealers in the OTC market

Order Ticket Information The order ticket must be completed prior to entering a trade. The information on the ticket must include:

The ticket must include the size of the trade, desired execution price, and customer identification. Customer name or account number Buy or sellIf a sell order - sell long or sell short Size of the trade Desired execution price Duration of order (e.g., Day or Good-Til-Canceled) Any special execution information such as "All or None;" "Fill or Kill;" etc. Not included on the order ticket is the commission amount, nor is accrued interest included for a bond trade.

limit order

an order to buy a security (buy limit) at a specified price or lower, or to sell a security (sell limit) at a specified price or higher. A buy limit order is placed below the current market price of the security, and is executed if the market falls to, or through, that price. A sell limit order is placed above the current market price of the security, and is executed if the market rises to, or through, that price.

sell short

to borrow a security and sell it; A short sale is a sale of borrowed shares. The customer does not own the shares that he or she is selling; and borrows the shares from another person to make delivery on settlement. selling securities in anticipation of a market decline. The customer borrows the securities to be sold through his or her brokerage firm with the intent of buying them back (and replacing them to the lender) once the price has declined. (compare Sell long)