Nasdaq Market OTC Market

A market maker enters a quote of $31.50 Bid; $32.00 Ask; with a size of "3 x 5" into the NASDAQ System. If a market order to sell is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to buy: A.) 300 shares at $31.50 B.) 500 shares at $31.50 C.) 300 shares at $32.00 D.) 500 shares at $32.00

The best answer is A. A market order to sell will be matched, in sequence, against the "Bid" quotes in the system, from highest to lowest. Such a market order "sweeps" the book from high to low price, until it is filled. Because this dealer's Bid of $31.50 is only for 300 shares, this is the amount that the system will match. It will then move to the next Bid quotes from other dealers, in sequence, until the order is filled for 500 shares

An approximate market value with no bid or offer would define what kind of quote? A.) nominal B.) subject C.) workout D.) firm

The best answer is A. A nominal quote is really no quote - it is simply an approximate price. The dealer is not obligated to trade at this quote and must identify it as a nominal quote. A subject quote is essentially the same thing as a nominal quote. A firm quote means that the dealer is willing to trade the amount stated at the price given. A "work-out" quote is sometimes given for very thinly traded issues, where there is no current trading in the issue, but the trader believes that the trade can be executed in a given price range. After giving the "work out" quote, the trader will search the market to "work out" the trade within the stated price range.

Which of the following is a "firm" quote from a market maker? A.) 12.50 B.) 12.50 workout C.) 12.50 subject D.) 12.50 nominal

The best answer is A. 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.

NASDAQ market makers that receive trades for execution are required to report: A.) trades within 10 seconds of execution B.) trades within 60 seconds of execution C.) each bid - ask quote disseminated D.) each nominal quotation given

The best answer is A. NASDAQ market makers that execute trades are required to report to the Network C tape within 10 seconds of execution. There is no requirement to report quotes to the tape - only actual trades are reported. Note that the NYSE operates under the same rule.

Which of the following orders can be placed in the NASDAQ System (Single Book)? I Market order II Stop order III Limit order IV Not Held order A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is A. Single Book is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders (a limit order at the current inside price) and limit orders that are away from the market. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the system does not accept stop orders - the same is true for the NYSE Super Display Book system. Member firms take stop orders into their internal systems and feed them to the appropriate exchange if they are triggered.

The Pink Sheets contain quotes for: A.) OTC issues B.) NYSE issues C.) Corporate bonds D.) Municipal bonds

The best answer is A. The "Pink Sheets" give over-the-counter stock quotes for issues not included on an exchange such as the NYSE or NASDAQ. It only shows OTC stock quotes. It does not include corporate or municipal bond quotes.

Which of the following trades are reported through ACT's Trade Reporting Facilities (TRFs)? I NASDAQ Market Center trade of a NASDAQ listed stock II Super Display Book trade of an NYSE listed issue III Trade of an NYSE listed issue in the Third Market IV Trade of a listed option contract on the CBOE A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is A. The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape, it is a big source of revenue for the exchange). The TRFs run by ACT include: NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape); NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own); ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues; TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate Network A, B or C Tape. Any trade that takes place on the NYSE (which owns and runs Super Display Book) is reported to the Network A Tape by the NYSE. Options trades occurring on exchanges such as the CBOE are reported through "OPRA" - the Options Price Reporting Authority - which is not covered on Series 7.

A NASDAQ security is bid at $30.25 and offered at $30.75. An over-the-counter trader effects a trade at $30.75 and charges a commission of $.50 to the customer. The price that will show on the tape is: A.) $30.25 B.) $30.50 C.) $30.75 D.) $31.25

The best answer is C. Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $30.75, and this is the price that will show on the tape.

Which statements are TRUE regarding the NASDAQ System (Single Book)? I The System handles trades up to a maximum size of 999,999 shares II The System handles trades of any size III The System handles both agency and proprietary orders IV The System handles customer agency orders only A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is A. The automated system for trades of NASDAQ issues is the NASDAQ System (previously called Single Book). It accepts orders up to 999,999 shares. Orders can be split for entry into the system; and can be aggregated and executed as a single order (cheaper than multiple orders) within the system size limit. Both agency and principal transactions can be effected through the System.

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 A.) I and II B.) II and III C.) I and IV D.) I, II, III, IV

The best answer is A. 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.

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

The best answer is A. The dealer's Ask price is too low - that is why the buyers are pouring in! The dealer will raise the Ask price - this will discourage buyers. If the dealer were to decrease the Bid price, this would discourage sellers to the dealer - and this dealer needs to buy to cover the current short inventory position. Therefore, the dealer is likely to increase the bid price as well. Decreasing the mark-up charged to customers would encourage more buyers at the Ask, which the dealer does not want. Placing a "BW" in the OTCBB is a "Bids Wanted." This indicates that the dealer wants to sell more of the stock to any willing buyers, which is not the case - the dealer wants to buy the stock, not sell it! Rather, he or she would want to place an "OW" - Offers Wanted - in the OTCBB, telling potential sellers that the dealer is interested in buying.

All of the following statements are true about the second market for equity securities EXCEPT: A.) companies that are traded must meet listing standards B.)FINRA regulates the over-the-counter market C.)a greater number of companies trade over-the-counter than trade on any single exchange D.)the over-the-counter market is a negotiated market

The best answer is A. The over-the-counter market is a negotiated market. A greater number of companies trade OTC (about 6,000 smaller companies) than on any single exchange. For example, the NASDAQ Stock Market has about 3,000 issues; while the NYSE lists about 2,800 issues. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards. FINRA regulates the OTC market.

A member firm enters a "bogus" quote that improves the National Best Bid or Offer in order to attract other market participants to enter quotes at the improved (higher bid or lower ask) price. The original firm immediately cancels its "bogus" quote and enters orders to execute against the "improved" prices placed by others. This is a fraudulent trading practice known as: A.) spoofing B.) front running C.) backing away D.) wash trading

The best answer is A. Under FINRA rules, quotations placed in the market must be "bona fide" - meaning the member is willing to trade at those prices. FINRA has identified various manipulative practices, where this is not the case. These include: Spoofing (Choice A): Entering a "bogus" quote that improves the National Best Bid or Offer, which attracts other market participants to enter quotes at the improved (higher bid or lower ask) price. The original firm immediately cancels its "bogus" quote and enters orders to execute against the "improved" prices placed by others. In this manner, by placing a "phantom" improved quote that is immediately canceled (that is the "spoof"), the firm fraudulently induced other market participants to match that price and the firm got to trade against them at the improved price. Front Running (Choice B): Also called "trading ahead," a member firm in receipt of a large customer limit order that is likely to move market prices "front runs" that order by placing an order to buy or sell for its proprietary trading account prior to entering that client's order. Backing Away (Choice C): Giving a verbal bid or ask quote without the intent to trade at the stated price. Note that this is not possible in an electronic market like NASDAQ, but still is a potential problem in the OTC market where trades are negotiated. Wash Trades (Choice D): Entering buy and sell orders that execute against each other to create the appearance of trading activity without any change of ownership. This attracts other traders to the stock. Another name for this is "self-trading."

A market maker enters a quote of $10.50 Bid; $10.75 Ask; with a size of "1 x 1" into the NASDAQ System. If a market order to buy is entered into the system for 500 shares, and this dealer's quote is matched, the market maker will be obligated to sell: A.)100 shares at $10.50 B.) 100 shares at $10.75 C.) 500 shares at $10.50 D.) 500 shares at $10.75

The best answer is B. 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 $10.75 is only for 100 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 500 shares

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

The best answer is B. 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

A dealer offering an OTC stock in the Pink Sheets publishes a quote for 1,000 shares "AON" This means that the dealer: A.) is willing to sell part or all of the shares at the stated price B.) will only sell all of the shares at the stated price C.) does not own the shares being offered and is "interpositioning" in this transaction D.) is willing to sell more than 1,000 shares for a higher price than the published quote

The best answer is B. A quote that is published as "AON" means All or None. The dealer will sell all of the securities at that price, but will not accept a partial order at that price.

Trades of NASDAQ securities executed on an unlinked ECN are reported by: A.) CAES B.) TRACS C.) ACT D.) TRACE

The best answer is B. An unlinked ECN is one that is not linked into the NASDAQ System or another exchange, so its quotes are shown in a separate system - the ADF - Alternate Display Facility. Trades of NASDAQ securities executed by unlinked ECNs are reported through TRACS - the Trade Reporting and Comparison Service. Trades of NASDAQ securities executed by linked ECNs are reported through the TRF - the Trade Reporting Facility that is part of NASDAQ's ACT system. TRACE is the FINRA system for reporting of corporate bond trades. CAES (Computer Assisted Execution System) is an older system used for Third Market trades.

Quotes placed by market participants in unlinked ECNs can be accessed through: A.) ATS B.) ADF C.) ACES D.) ACT

The best answer is B. An unlinked ECN is one that is not placing its quotes into Single Book. The SEC mandated that the FINRA provide an Alternate Display Facility ("ADF") to publicly display these quotes. Thus, to find the best market for a NASDAQ stock, both NASDAQ and the ADF must be checked.

Which of the following are prohibited trading practices under FINRA rules? I Backing away II Interpositioning III Marking to market IV Using a correspondent A.) II only B.) I and II only C.) III and IV only D.) I, II, III, IV

The best answer is B. 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.

Which statement is TRUE about principal transactions? A.) In a principal transaction, a commission is charged B.) In a principal transaction, a mark-up or mark-down is charged C.) In an principal transaction, both a commission and a mark-up or mark-down are charged D.) In a principal transaction, neither a commission, nor a mark-up nor mark-down are charged

The best answer is B. In a principal transaction, a mark-up or mark-down is charged; no commission is charged. It is prohibited to charge both a commission; and a mark-up or mark-down; in the same transaction.

A customer directs his broker to "Sell 100 shares of ABCD stock and use the proceeds to buy 100 shares of XPDQ stock." This is a: A.) riskless transaction B.) proceeds transaction C.) agency cross transaction D.) prohibited transaction

The best answer is B. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. A riskless principal transaction is where a firm receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. An agency cross transaction is where at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price.

In an over-the-counter agency trade, the member firm executing the order: I is a broker II is a dealer III charges a mark-up IV charges a commission A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is B. In an over-the-counter agency transaction, the firm acts as a broker, matching a customer who wishes to buy with a seller (and vice-versa). For this service, the member firm earns a commission. In contrast, in an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell.

A member firm receives a large block order to buy 100,000 shares of XYZ stock, which is not actively traded. Which customer(s) of the firm can buy XYZ stock prior to the filling of the block trade? A.) The registered representative who received the order B.) Other customers of the firm who place buy orders, if the firm has information barriers in place C.) Any customer of the firm who places an unsolicited order D.) No customer can buy the stock until the block order to buy is filled

The best answer is B. In its "front running" rule, FINRA gives an exception to the prohibition on a member firm placing orders to trade a stock prior to the filling of a large block order if the firm has information barriers in place. If this is the case, the front running prohibition only falls on the people at the firm who know about the existence of the large block order. Persons placing orders to buy XYZ stock at the firm who have no knowledge of the impending block purchase are exempted from the "front running" rule because, with effective information barriers in place, they could not have known about the large trade that is about to be placed.

Broker-dealers are permitted to execute all of the following over-the-counter transactions EXCEPT: A.) Agency trades where the customer is charged a fair and reasonable commission B.) Agency trades where the customer is charged a fair and reasonable mark-up or mark-down C.) Principal trades where the customer is charged a fair and reasonable mark-up or mark-down D.) Simultaneous transactions where both buyer and seller are charged a fair and reasonable commission

The best answer is B. In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction.

Broker-dealers are permitted to execute the following over-the-counter transactions? I Agency trades where the customer is charged a commission II Agency trades where the customer is charged a mark-up or mark-down III Principal trades where the customer is charged a commission IV Principal trades where the customer is charged a mark-up or mark-down A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is B. In over-the-counter transactions, for effecting an agency trade, only a commission can be charged; while in a principal transaction, only a mark-up or mark-down can be charged. It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction. Furthermore, it is prohibited to charge both a commission; and a mark-up or mark-down; in any transaction.

The regular hours of operation of the NASDAQ system are: A.) 9:00 AM - 4:00 PM ET B.) 9:30 AM - 4:00 PM ET C.) 9:30 AM - 6:00 PM ET D.) 9:00 AM - 8:00 PM ET

The best answer is B. NASDAQ's Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time.

Which of the following persons trades securities over-the-counter? A.) Two dollar broker B.) Market maker C.) Specialist (DMM) D.) Registered Representative

The best answer is B. Over-the-counter dealers are called market makers. Two dollar brokers and Specialists (now renamed DMMs - Designated Market Makers) trade on stock exchanges. Registered representatives cannot trade securities - they can enter orders on behalf of customers to be executed by traders in the market.

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

The best answer is B. 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 statements are TRUE when comparing the NYSE and NASDAQ markets?I There is 1 Specialist (DMM) per stock on the NYSEII There are multiple Specialists (DMMs) trading each stock on the NYSEIII There is 1 Market Maker per stock on NASDAQIV There are multiple Market Makers trading each stock on NASDAQ A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is B. Specialists (now called Designated Market Makers) are the assigned market makers that trade a given stock on the NYSE floor. There is only 1 Specialist assigned to each stock traded, and the Specialist/DMM must make a fair and orderly market in that stock and must stand ready to trade at all times that the market is open. Market Makers trade NASDAQ stocks through the NASDAQ System. NASDAQ has multiple competing market makers - it is competition that creates the "best" market. Market makers are not obligated to make a continuous competitive market in a stock (like NYSE Specialists/DMMs), but it is in their best int

All of the following trades are reported through ACT's Trade Reporting Facilities (TRFs) EXCEPT: A.) NASDAQ System (Single Book) trade of a NASDAQ listed stock B.) Super Display Book trade of an NYSE listed issue C.) Trade of an NYSE listed issue in the Third Market D.) Trade of an OTCBB issue in the Second Market

The best answer is B. The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells their tape - its a big source of revenue for the exchange). The TRFs run by ACT include: NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape); NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own); ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues; TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate Network A, B or C Tape. Any trade that takes place on the NYSE (which owns and runs Super Display Book) is reported to the Network A Tape by the NYSE.

Which statement is TRUE about the Gray Market? A.) It is the trading venue for unsponsored ADRs B.) It is illiquid and nontransparent C.) It is not subject to regulation by FINRA D.) It is another name for a Dark Pool

The best answer is B. The Gray Market is a term for the quoting and trading OTC of securities not found in the OTCBB or Pink OTC markets. These are typically smaller and bankrupt companies. The market is illiquid and nontransparent - most often these companies are not reporting to the SEC. The market is still regulated by FINRA and trades must be reported to FINRA. A Dark Pool is a private trading venue for listed securities operated by a major broker-dealer that is used by institutional investors that don't want their quotes shown on NASDAQ or the NYSE (hence the term "dark"). While quotes are not shown publicly, when trades occur, they are still publicly reported. Dark Pools now account for about 25% of equity trading volume in the U.S. The advantage for institutions is that they can hide the level of their trading interest. For example, an institution that wants to unload a huge block of stock would not want to place that sell order on the NYSE or NASDAQ because it is visible to the world and other investors would rush to sell once they see that order, depressing the price.

Bid and Ask quotes for non-NASDAQ "over-the-counter" stocks can be obtained from the: I Pink Sheets II Yellow Sheets III OTC Bulletin Board IV Consolidated Quotations Service A.) I and II only B.) I and III only C.) II and IV only D.) I, III and IV

The best answer is B. The Pink Sheets give bid and ask quotes for over-the-counter stocks that are not included on NASDAQ. FINRA has the "Non-NASDAQ OTC Bulletin Board," which gives electronic quotes for stocks that do not meet NASDAQ listing standards. When NASDAQ became a "stock exchange" in late 2006, it did not want the OTCBB, which went to FINRA.The OTCBB originally had about 6,000 listings - but FINRA did nothing with it, while the Pink Sheets moved to the web and included a trade negotiation system in its software that the OTCBB does not have. Because of this, most of these quotes have moved to Pink OTC Markets, leaving the OTCBB with about 300 quoted issues. The Yellow Sheets, now out of business, used to provide quotes for corporate bonds traded OTC. The Consolidated Quotations Service (CQS) provides bid and ask quotes for Exchange listed stocks.

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

The best answer is B. The answer you are looking for - sell some of the bond position - is not here! The next best choice is to hedge the position in case prices fall, which can be done with options. Increasing the mark-up or lowering the reoffering yield will increase the price of the bonds, making them even harder to sell - so these are wrong answers. Placing an "OW" in Bloomberg is an "Offers Wanted." This indicates that the dealer wants to buy more of the bonds, which is not the case - he or she wants to sell them, not buy them! Rather, the dealer would want to place a "BW" - Bids Wanted - in Bloomberg, telling potential buyers that he or she is interested in selling.

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

The best answer is B. 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 the dealer were to decrease the Ask price, this would encourage sellers to the dealer - and this dealer does not need to buy any more of the stock, he already has an overly large long position.Decreasing the mark-down charged to customers would encourage more sellers at the Bid, which the dealer does not want, because the dealer does not want to buy any more stock. Placing an "OW" in the OTCBB is an "Offers Wanted." This indicates that the dealer wants to buy more of the stock from any willing sellers, which is not the case - the dealer wants to sell the stock, not buy it! Rather, the dealer would want to place a "BW" - Bids Wanted - in the OTCBB, telling potential buyers that he or she is interested in selling.

The NASDAQ Market Center Execution System (Single Book) is the automated trading and order maintenance system for which of the following? I NASDAQ Global Market issues II NASDAQ Capital Market issues III Pink Sheet issues IV OTCBB issues A.) I only B.) I and II only C.) III only D.) I, II, III, IV

The best answer is B. The system for automated trading and order maintenance of NASDAQ issues (Global Market and Capital Market stocks) is the NASDAQ Market Center Execution System, or simply, the "System." The predecessor name was Single Book. OTCBB and Pink Sheet issues, which do not have listing standards, cannot be traded through the System.

Last sale reports are available for trades of all of the following securities EXCEPT: A.) Municipal bonds B.) Eurodollar bonds C.) Stocks listed on a stock exchange D.) Stocks listed in the Pink Sheets

The best answer is B. Trades of exchange listed securities and all OTC equity issues (OTCBB and Pink Sheets) are reported on a real-time basis. Trades of corporate bonds and municipal bonds effected OTC are also reported on a real-time basis. Corporate and agency bond trades are reported via TRACE, while municipal bond trades are reported via RTRS. Note, however, that trades of Eurodollar bonds are not reported since the trades take place in Europe, not in the United States.

A client believes that XYZZ stock has topped out in price and is ready for a steep drop. What recommendation would give the customer the smallest profit if this occurs? A.) Buy an XYZZ put option B.) Sell short XYZZ stock C.) Sell an XYZZ call option D.) Buy 1 XYZZ warrant

The best answer is C. A long put option gives ever-increasing profit as the market drops, as does selling the stock short. The maximum profit for either strategy occurs if the stock drops to "0." A short call option will expire when the market drops, giving the writer a gain only equal to the premium collected. Warrants allow the owner to buy the common stock at a fixed price, typically good for up to 5 years from issuance. They are attached to the sale of new bond and preferred stock offerings, to help make them more marketable. If the market falls, the warrant will expire worthless, and the customer will have a loss - not a gain

Which of the following securities are generally traded "Over-the Counter"? I Treasury issues II Municipal issues III Corporate debt issues IV Options A.) I only B.) II and III only C.) I, II, III D.) II, III, IV

The best answer is C. All trades in Treasury issues and municipal bonds are effected "over-the-counter." The vast majority of corporate debt also trades "OTC," with the exception of a small amount of bond trading performed on the NYSE. All options trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange).

All of the following terms are synonymous EXCEPT: A.) agent B.) broker C.) dealer D.) middleman

The best answer is C. An agent is a broker who is middleman in a transaction, earning a commission. A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down.

Dark Pools: I display their quotes with size II do not display their quotes with size III are obligated to report completed trades to the tape IV are not obligated to report completed trades to the tape A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is C. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape.

Which of the following describes an arbitrage transaction? A.) Selling a security and using the proceeds to purchase a different security B.) Buying a security into inventory direct from a customer with a mark-down C.) Buying and selling short the same security in different markets to lock in a price differential D.) After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer

The best answer is C. If a security is bought on one market; and simultaneously sold on another market; this is known as an arbitrage transaction and is used to exploit price differences for the same security that may exist in those markets. Choice A describes a "proceeds transaction;" Choice B describes a "principal" transaction, or "position" trade; while Choice D describes a riskless principal transaction.

Proceeds transactions are: I matching a buy order from one customer to a sell order for the same security from another customer II selling a security for a customer, and buying another security for the same customer III permitted under FINRA rules IV prohibited under FINRA rules A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is C. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. Choice I describes an agency cross transaction. Both of these types of transactions are permitted under FINRA rules.

In a riskless principal transaction, the dealer: I has risk II has no risk III earns a mark-up IV does not earn a mark-up A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is C. In a riskless principal or simultaneous transaction, a dealer gets an order from a customer to buy a security, and then the dealer buys the stock into his inventory to sell to the customer. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer.

An index arbitrage trading desk places sequential buy orders at the market opening for securities included in the index to raise their price against the current index value. Which statement is TRUE? A.) These transactions can only be effected on an upbid B.) This is an illegal practice known as Marking To Market C.) This is an illegal practice known as Marking The Open D.) This is an illegal practice known as Painting The Tape

The best answer is C. Marking The Open is trading at the open, or falsely reporting trades at the open, just to affect the stock's opening price. FINRA has disciplined program traders for "marking the open" violations. These firms attempt to arbitrage the difference between an index option's value (which can be based on market open, depending on the index option) against the actual prices of the securities that are included in the index. The illegal practice was placing sequential orders at the open for the securities in the index to either move their price up (or down), so that the index arbitrage position would show a profit.

All of the following statements are true regarding quotes provided on NASDAQ Level II EXCEPT: A.) bid and ask quotes are shown B.) the size of the quote is shown C.) quotes are shown for NYSE listed issues D.) quotes are shown for round lots and mixed lots

The best answer is C. NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot). Quotes for odd lots (less than 100 shares) can be entered into the system, but are not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or over. A mixed lot is an order that has both a round lot and an odd lot component (such as an order for 143 shares - which is composed of a 100 share round lot and a 43 share odd lot). Just like odd lots, any portion of the order that is less than 100 shares is not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or more.Quotes for NYSE listed issues are not found on NASDAQ - rather they are found on CQS - the Consolidated Quotations Service.

Which statement is TRUE about the NASDAQ Regular Market trading session? A.) The session starts earlier than the NYSE opening B.) The session ends later than the NYSE closing C.) The session coincides with NYSE trading hours D.) The session starts later than the NYSE opening and closes later than the NYSE closing

The best answer is C. NASDAQ's Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time - the same as NYSE hours.

The "OATS" system is an: A.) automated order routing and execution for customer market orders B.) electronic trade negotiation system between dealers C.) electronic order record maintenance system D.) automated trade reporting and comparison system

The best answer is C. OATS stands for "Order Audit Trail System" - it is FINRA's system for electronic capture of order information. This information is later compared to the actual trade execution via the ACT system - Automated Confirmation of Trade system. OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues.

Over-the-counter stock price quotes can be found in which of the following? A.) Red herring B.) Yellow List C.) Pink Sheets D.) Black List

The best answer is C. Over-the-counter "penny" stock price quotes can be found in the Pink Sheets which are now only on the internet. The Yellow Sheets, now out of business, used to contain corporate bond quotes. A "red herring" is a preliminary prospectus that is used to collect indications of interest for a new securities issue that is in registration. The "Black List" is a generic term for a listing of undesirables.

The OTCBB includes quotes for: I NASDAQ Global Market stocks II NASDAQ Capital Market stocks III Non-NASDAQ issues A.) I only B.) II only C.) III only D.) I, II, III

The best answer is C. Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the "Over-The-Counter Bulletin Board" (run by FINRA) or can be found in the privately run "Pink Sheets" - now renamed the Pink OTC Markets.

Over-the-counter stocks that are too small to be included on NASDAQ would be found in: A.) Single Book B.) the Yellow Sheets C.) the OTCBB D.) Super Display Book

The best answer is C. Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the "Over-The-Counter Bulletin Board" (run by FINRA) or in the privately run "Pink Sheets" - now renamed the Pink OTC Markets.

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 A.) I and II only B.) III and IV only C.) I, III, IV D.) I, II, III, IV

The best answer is C. 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.

Quotes found in the ADF are primarily bids and offers from: A.) NASDAQ market markers B.) Third market makers C.) ECNs D.) Designated market makers

The best answer is C. The "ADF" - Alternate Display Facility - was established under an SEC rule in 2002 as a place for ECNs that did not wish to place their quotes in the NASDAQ System because these ECNs felt that NASDAQ's order processing algorithms favored NASDAQ Market Makers over ECNs. NASDAQ market makers post their quotes in the NASDAQ System. CQS - Consolidated Quotations Service - displays quotes for exchange listed issues (NYSE) from DMMs (Designated Market Makers) and Third Market Makers (firms such as Weeden and Jefferies that are OTC market makers in exchange listed issues, providing competition for exchange DMMs).

OTC securities that are not currently quoted in the OTCBB or Pink OTC markets are: A.) traded on regional stock exchanges B.) traded in the black market C.) traded in the gray market D.) not permitted to be traded

The best answer is C. The "Gray Market" is the quoting and trading of securities OTC that are not eligible for inclusion in the OTCBB or Pink OTC Markets, usually because the company is too small, bankrupt, or is not currently reporting to the SEC. This market is quite illiquid, but if a trade occurs, it must still be reported - so these companies have trading symbols assigned to them.

The "Gray Market" is: A.) unlisted securities quoted in the OTCBB or Pink OTC Markets that are traded OTC B.) listed securities quoted in CQS that are traded in the Third Market C.) unlisted securities that are not quoted in the OTCBB or Pink OTC Markets that are traded OTC D.) listed securities that are not quoted in the OTCBB or Pink OTC Markets that are traded on exchanges

The best answer is C. The "Gray Market" is the quoting and trading of securities OTC that are not eligible for inclusion in the OTCBB or Pink OTC Markets, usually because the company is too small, bankrupt, or is not currently reporting to the SEC. This market is quite illiquid, but if a trade occurs, it must still be reported - so these companies have trading symbols assigned to them.

The inside market found on NASDAQ Level I, is the: A.) lowest bid and lowest ask B.) lowest bid and highest ask C.) highest bid and lowest ask D.) highest bid and highest ask

The best answer is C. The "inside market" is the highest bid and lowest ask. These are the best prices at which to trade. (One wants to buy at the lowest price asked by dealers; one wants to sell at the highest price bid by dealers). Another name for the inside market is the "NBBO" - National Best Bid and Offer.

Over-the counter traders perform which of the following functions? I Position trading for the firm's inventory account II Filling customer orders III Giving quotes to customers IV Setting the spread for each security traded A.) I and IV only B.) II and III only C.) I, II, III D.) I, II, III, IV

The best answer is D. OTC traders position trade (that is, trade for the firm's inventory account): fill customer orders to buy and sell; establish spreads (the difference between the bid and ask quote that is the profit for the dealer): and give quotes to customers. Clerical duties are handled by clerks.

Which of the following describes a riskless principal or simultaneous transaction? A.) Selling a security and using the proceeds to purchase a different security B.) Buying a security into inventory direct from a customer with a mark-down C.) Buying and simultaneously selling short the same security in different markets to lock in a price differential D.) After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer

The best answer is D. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. Choice A describes a "proceeds" transaction; Choice B describes a "principal" transaction; and Choice C describes an "arbitrage" transaction.

An agency cross transaction performed in the over-the-counter market occurs when a broker-dealer: A.) buys stock on one exchange and sells it on another for an immediate profit B.) receives an unsolicited order to buy stock C.) receives a sell order from a customer and the customer instructs that the proceeds be used to buy another stock D.) receives a buy order from one customer and a sell order from another customer on the same stock and matches the orders

The best answer is D. An agency cross transaction, as performed in the "over-the-counter" market occurs when, at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price. Under FINRA rules, such transactions must comply with the 5% Policy. In this transaction, the firm is acting as an agent (since it is not buying or selling the securities from its inventory) and may only charge a commission on each side of the trade. These commissions must be "fair and reasonable" under the 5% Policy. Remember, 5% commissions (in agency trades) or mark-ups (in principal trades) are only "guidelines" - not rules. Each commission or mark-up must be "fair and reasonable," taking into consideration all relevant factors surrounding that transaction.

Last sale information is available for which of the following? I NYSE listed issues II NASDAQ listed issues III Pink Sheet issues IV CBOE listed issues A.) I only B.) II and III only C.) I, II, and IV only D.) I, II, III, IV

The best answer is D. Any exchange reports last sale information for securities traded there. Thus, the NYSE, NYSE American (AMEX), NASDAQ and regional exchanges, as well as the CBOE all report trades as they occur. Regarding the "over-the-counter" market, last sale reports are provided for all OTC equity issues - OTCBB, and Pink Sheets.

A member firm may use a third party to execute over-the-counter agency transactions for customer orders: A.) under no circumstances B.) if the resultant price is reasonably related to the inside market at that time C.) if the resultant price is equal to the best available market at the time D.) if the resultant price is better than the best available market at the time

The best answer is D. As a general rule, interpositioning a third firm between the customer and the market maker is prohibited unless it can be demonstrated that the use of the "middleman" firm will result in a better execution for the customer.

A trader enters an order to buy ABCD stock into NASDAQ at 5 cents higher than the current best bid, establishing a new best bid, and then immediately cancels the order. This is a prohibited practice known as: A.) front running B.) interpositioning C.) trading within the inside market D.) spoofing

The best answer is D. Assume that the current NBBO (National Best Bid and Offer) for the stock is $10.00 - $10.20. Also assume that a firm has a holding of the stock that it wishes to sell, which it can do right now at $10 (the best bid). The firm enters a buy order into NASDAQ at $10.05, which cannot be executed right now. It is the highest bid and moves the displayed best bid up to $10.05. This attracts other buyers to match the price by entering bids at $10.05, at which point the firm cancels the buy order and then sells its holding at $10.05 - a better price! This is "spoofing" - the firm really only wanted to sell stock - it did not want to buy. It put in the "fake" bid of $10.05 only to attract other buyers to match the price (the placing of the fake bid is the "spoof") and cancels that bid as soon as possible so it can sell against the now higher bid price in the market. FINRA considers this to be a manipulative practice, because all quotes placed in NASDAQ must be "bona-fide" - the firm placing the quote must be willing to trade at that price.

If a firm effects trades solely on an agency basis, the firm: I carries inventory II does not carry inventory III is a market maker IV is not a market maker A.) I and III B.) I and IV C.) II and III D.) II and IV

The best answer is D. If a firm effects trades solely on an agency basis, it carries no inventory and is not a market maker.

Which of the following quotes are found in the Pink Sheets? I Firm Bid II Firm Ask III Bids Wanted (BW) IV Offers Wanted (OW) A.) I and II only B.) III and IV only C.) I and III only D.) I, II, III, IV

The best answer is D. In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found.

All of the following quotes would be found in the Pink Sheets EXCEPT: A.) BW B.) OW C.) AON D.) DNR

The best answer is D. In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found. An offer made AON in the Pink Sheets is "All or None" - either the whole size stated is traded or the quote is invalid. DNR means "Do Not Reduce" and is a designation on an order placed "below the market" if the customer does not want the price reduced automatically on ex date.

Which statement is FALSE about OATS? A.) Orders for NASDAQ-listed issues are entered into OATS B.) Orders for OTCBB issues are entered into OATS C.) Orders for Pink Sheet issues are entered into OATS D.) Orders for CBOE-listed options are entered into OATS

The best answer is D. OATS stands for "Order Audit Trail System." It electronically captures order information for U.S equities securities (no more paper order tickets). OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues. The "idea" is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered. It does not apply to options orders because there is unique information on each options order (basically whether the transaction is an opening or closing transaction) that OATS does not capture.

Which of the following are entered into OATS? I Orders to buy NASDAQ issues II Orders to sell NASDAQ issues III Orders to buy OTC issues IV Orders to sell OTC issues A.) I and II only B.) III and IV only C.) II and IV only D.) I, II, III, IV

The best answer is D. OATS stands for "Order Audit Trail System." It electronically captures order information for equity securities (no more paper order tickets). OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues. The "idea" is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered.

A client believes that XYZZ stock has bottomed in price and is ready for a steep rebound. What recommendation would give the client the smallest profit if this occurs? A.) Buy an XYZZ put option B.) Sell short XYZZ stock C.) Buy XYZZ rights D.) Buy XYZZ stock and sell an XYZZ call

The best answer is D. Rights allow the owner to buy the stock at a fixed price, typically good for 30-60 days from issuance, and a long stock position has unlimited upside gain potential. Of course, the purchase of XYZZ stock would give the customer a gain in a rising market, but if the customer also sold an XYZZ call, the stock would be called away in a rising market at the strike price, and the customer would not enjoy the upside gain. Buying a put or selling short the stock are profitable when the market drops, not when it rises.

All of the following can result in the establishment of a short position EXCEPT: A.) Arbitrage transaction B.) Sale of a security "against the box" C.) Position trades of borrowed shares D.) Selling a long position

The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades of borrowed shares are short sales. Selling a long position is just selling a position that was originally purchased. The purchased shares are delivered to satisfy the sale - there is no borrowing of share

All of the following orders can be placed in the NASDAQ System (Single Book) EXCEPT: A.) market order B.) marketable limit order C.) limit order D.) not held order

The best answer is D. Single Book is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders (a limit order at the current inside price) and limit orders that are away from the market. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the NASDAQ system does not accept stop orders, as is the case with the NYSE DisplayBook system. Member firms take stop orders into their internal systems and feed them to the appropriate exchange if they are triggered.

Interdealer transactions in which of the following are reported through ACT? I NASDAQ Global Market Stocks II NASDAQ Capital Market stocks III Listed issues traded in the Third Market IV OTC Bulletin Board Stocks A.)I and II only B.) III and IV only C.) I, II, III D.) I, II, III, IV

The best answer is D. The "TRF" is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate "TRFs" were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape - it's a big source of revenue for the exchange). The TRFs run by ACT include: NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape); NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own); ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues; TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate

The ACT system: A.) is used to report backing away violations to FINRA for real-time resolution B.) permits NASDAQ Order Entry firms to contract with a market maker to enter and maintain its limit orders C.) routes market and limit orders electronically to market makers for locked-in execution and settlement D.) intakes entries of completed trades for reporting, matching and clearance

The best answer is D. The ACT system is where the details of completed trades are entered by market participants (The NASDAQ System does ACT reporting automatically; the information must be entered manually for OTCBB and Pink Sheet trades). The ACT system then reports the trade to the tape; to the contra-party to the trade for matching; and to the clearing corporation. FQCS - the Firm Quote Compliance System - is used to file reports of backing away violations (this is not tested on Series 7). ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance. The NASDAQ Market Center Execution System is the automated quotations and execution system for trades of NASDAQ issues.

The system for automated trading of NASDAQ issues is called: A.) OTCBB B.) Super Display Book C.) Pink Sheets D.) NASDAQ System (Single Book)

The best answer is D. The automated trading and order maintenance of NASDAQ issues is now called the NASDAQ System - this has replaced the previous Single Book name. Super Display Book is the NYSE's automated execution system. The Pink Sheets give a listing of the bid and ask prices of thinly traded OTC stocks not included on NASDAQ. The OTCBB (OTC Bulletin Board) is an electronic system that disseminates real-time quotes for smaller OTC non-NASDAQ stocks.

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 A.) I and III B.) II and IV C.) I, II, III D.) I, II, III, IV

The best answer is D. The over-the-counter market is a negotiated market. A greater number of companies trade OTC (about 6,000 smaller companies) than on any single exchange. For example, the NASDAQ Stock Market has about 3,000 issues; while the NYSE lists about 2,800 issues. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards. FINRA regulates the OTC market.

A client believes that XYZZ stock has bottomed in price and is ready for a steep rebound. Which recommendation has the lowest profit potential? A.) Buy an XYZZ call option B.) Buy XYZZ rights C.) Buy XYZZ warrants D.) Buy XYZZ stock and sell an XYZZ call

The best answer is D. The purchase of a call gives unlimited potential gain in a rising market. Rights allow the owner to buy the stock at a fixed price, typically good for 30-60 days from issuance. These also have unlimited upside potential. Warrants allow the owner to buy the common stock at a fixed price, typically good for up to 5 years from issuance. They are attached to the sale of new bond and preferred stock offerings, to help make them more marketable. This would also give unlimited profit in a rising market. Of course, the purchase of XYZZ stock would give the customer a gain in a rising market, but if the customer also sold an XYZZ call, the stock would be called away in a rising market at the strike price, and the customer would not enjoy the upside gain. The customer's gain would be limited to the premium collected, net of any difference between the stock cost and the strike price of the call.