Deck 10: The Share Market

Question 1

In the Australian share market, a relatively small number of very large companies dominate the market.

Answer 1

True

Question 2

Since the share market operates on a trading-day basis, it has processes for matching orders entered before the trading day starts.

Answer 2

True

Question 3

CHESS settles share trades on a T + 3 basis.

Answer 3

True

Question 4

In the Australian market, large cap companies are those in the ASX200.

Question 5

Companies no longer have to maintain their share registry because CHESS holds this information.

Question 6

The ASX's continuous disclosure policy requires companies to advise the ASX of any new price-sensitive information in a timely fashion.

Question 7

The share market is a market for corporate control.

Question 8

The ASX is the Australian Stock Exchange Limited.

Question 9

The central limit order book is the list of limit and market orders that have not yet resulted in a transaction.

Question 10

The ASX has a second board for those companies that do not meet its listing requirements but for which there is substantial investor interest.

Question 11

The share market is both the primary and secondary market for shares.

Question 12

The ASX was formed from the amalgamation of the state-based exchanges.

Question 13

The settlement of share trades is cumbersome because sellers must supply share certificates to the clearinghouse before receiving payment from the buyer.

Question 14

All else the same, trading on the ASX is cheaper under an ATS than under open outcry.

Question 15

Market capitalisation is the market value of a company's assets.

Question 16

Market integrity on the ASX is monitored by ASX Markets Supervision Pty Ltd.

Question 17

The ASX is listed on the ASX.

Question 18

Good corporate governance ensures that members of a company's top management are held accountable for their actions.

Question 19

The share market performs price discovery, for example by determining entry and exit values for investors.

Question 20

The ASX uses an automatic trading system that matches buy and sell orders.

Question 21

The turnover of shares in the market is much greater for large-cap firms than for smaller firms.

Question 22

Narrow bid-offer spreads are an indicator of an illiquid market.

Question 23

The All Ordinaries Index (AOI)comprises all the ordinary shares listed on the ASX.

Question 24

As a monopoly, the ASX does not have to contend with competition.

Question 25

A share price index aims to measure the overall movement in the value of the shares included in the index.

Question 26

The firms in the ASX 20 are not included in the ASX 200.

Question 27

Traders with loss-making positions in CFDs are required to make margin payments.

Question 28

A retail sized trade cannot be conducted in a 'dark pool'.

Question 29

The liquidity of listed shares is rather variable, depending generally on the size of the listed firms.

Question 30

Chi-X provides Australian retail and wholesale investors with an alternative trading venue to the ASX.

Question 31

A buy-and-hold investment strategy is more prevalent in the bond market than in the share market.

Question 32

High frequency trading relies on computer programs to identify arbitrage opportunities and automatically trade to take advantage of those opportunities.

Question 33

A share price index level considered in isolation conveys no useful information.

Question 34

High-frequency trading usually involves large-value parcels of shares.

Question 35

There is evidence that the entry of Chi-X to Australia has increased efficiency by lowering transaction costs.

Question 36

All else the same, an accumulation index is a better benchmark for a broad equity portfolio's return than is an otherwise identical price (non-accumulation)index.

Question 37

A short position in a CFD contract profits from increases in the share-price without the expense of buying the share.

Question 38

The main investors in Australian shares are foreign investors, fund managers and retail investors.

Question 39

The advantage of crossings through 'dark pools' is they facilitate large trades with the least possible market price impact.

Question 40

Free float is the estimated proportion of a company's shares that are available for trade.

Question 41

The ASX's share price indices are:

A)the sum of the share prices of the constituent companies
B)weighted by share turnover
C)weighted by market capitalisation
D)the sum of the share prices of the constituent companies divided by the number of shares
E)all accumulation indices.

Question 42

A company requires a record of its shareholders for:

A)facilitating communication between management and shareholders
B)authorising voting at general shareholder meetings
C)paying dividends
D)monitoring significant changes in share ownership.
E)All of these.

Question 43

Chi-X:

A)is an organisation that has established a second exchange in Australia
B)specialises in servicing the retail share trading market
C)is the new trading system that has replaced CLICK XT
D)trades all listed shares.
E)None of these.

Question 44

The approximate percentage of total ASX market capitalisation accounted for by all of the shares in the ASX 100 as at September 2013 is:

A)46 per cent
B)63 per cent
C)74 per cent
D)80 per cent
E)81 per cent

Question 45

'Small-cap companies' are those:

A)not in the ASX 100
B)not in the ASX 200
C)the 200 companies in the ASX 300 but not in the ASX 100
D)the 100 companies in the ASX 200 but not in the ASX 100
E)the 200 smallest listed companies.

Question 46

CFDs are both OTC and exchange-traded.

Question 47

The main benchmark index for Australia's share market is the:

A)All Ordinaries Index (AOI)
B)ASX 200
C)ASX 100
D)S&P 500
E)SPI.

Question 48

In order to conduct a secondary market for shares, the ASX:

A)sets the rules for the admission of companies to the market
B)establishes trading and settlement arrangements
C)discloses trading information, such as individual share prices
D)promotes itself as a market for securities.
E)All of these.

Question 49

The settlement of share market trades:

A)requires the exchange of share certificates
B)is performed electronically by CHESS
C)occurs on a T + 1 basis
D)is carried out by Computershare.
E)None of these.

Question 50

The criteria used by the S&P Australian Index Committee to determine the constituents of an index are:

A)market capitalisation, 'free-float', liquidity, shares from a range of sectors and being institutionally tradeable
B)market capitalisation, 'free-float', liquidity and shares from a range of sectors
C)market capitalisation, 'free-float' and liquidity
D)market capitalisation and 'free-float'
E)market capitalisation.

Question 51

Large-cap shares have much greater liquidity than the shares of smaller companies.This is reflected in their:

A)greater daily turnover
B)greater daily turnover and wider bid-ask spreads
C)greater daily turnover, wider bid-ask spreads and lower price resilience
D)greater daily turnover, narrower bid-ask spreads and lower price resilience
E)greater daily turnover, narrower bid-ask spread and greater price resilience.

Question 52

The functions of the share market do NOT include:

A)performing price discovery by revealing the value of shares
B)endowing listed securities with liquidity
C)setting the price for IPOs
D)disciplining the behaviour of a company's top management.
E)developing a pool of investors.

Question 53

Market discipline refers to:

A)the role of ASIC in administering securities law
B)the influence of share price movements on a company's senior management
C)the ASX's company listing and disclosure requirements
D)the decision making processes used by a company's top management and how management is made accountable for its decisions.
E)None of these.

Question 54

The ASX is facing competition from:

A)Chi-X and CFDs
B)high frequency trading and CFDs
C)high frequency trading and Chi-X
D)Chi-X and 'dark pools'
E)'dark pools" and CFDs.

Question 55

The automated trading system used by the ASX:

A)can be accessed by individual retail investors
B)stores unmatched at-market orders
C)ranks unmatched orders in terms of time
D)matches the highest priced buy orders and the lowest priced sell orders first
E)is called SEATS.

Question 56

Identify the INCORRECT statement regarding 'dark pools'.

A)'Crossings' are arranged by brokers.
B)'Crossings' are a new development in share trading in Australia.
C)'Dark pools' facilitate large trades with the least possible market price impact.
D)Trading in 'dark pools' has grown because of advances in technology.
E)Traders can avoid the exchanges trading fees when trading through 'dark pools'.

Question 57

The average value of a trade in shares listed on the ASX has fallen since 2008 because of:

A)the emergence of high-frequency trading
B)the prevalence of a 'buy-and-hold' attitude in the share market
C)share prices being generally lower
D)greater participation in the market by retail investors
E)reduced investor interest in shares since the GFC.

Question 58

Which of the following is NOT an admission requirement or rule of listing on the ASX?

A)Securities must be issued in circumstances that are fair to existing security holders.
B)The listed entity must have a minimum number of shareholders.
C)Firms must immediately advise the ASX of any new price-sensitive information.
D)The entity be making a substantial profit.
E)None of these.

Question 59

ASX Trade:

A)is the ATS currently used by the ASX
B)consists of three automated trading sub-systems
C)was introduced by the ASX to improve its ability to compete with alternative trading arrangements
D)operates on the principle of priority trading.
E)All of these.

Question 60

The ASX automated trading system does NOT:

A)facilitate trading on a 24/7 basis
B)conduct auctions to determine a single opening and closing price
C)close (except for enquiries)between 7 p.m.and 7 a.m.
D)allow brokers and online investors to enter orders during the 7 a.m.to 10 a.m.pre-opening phase
E)permit brokers to amend or cancel orders during the after-hours adjust phase.

Question 61

Consider the following market depth information for Fosters Group Ltd: (a)What would be the outcome if you placed an at-market order to sell 3000 Fosters shares?
(b)How much would you pay to buy 5000 Fosters shares 'at-market'?
(c)Explain what would happen to the order queue after the transactions in (a)and (b), assuming no other changes.(d)Explain what would happen to your order if you placed an order to sell 1500 Fosters shares at $5.78 (assuming the transactions in (a)and (b)do not take place).

Question 62

Give an overview of the ASX's admission and listing rules.Refer to the ASX website for additional information.

Question 63

List some of the factors for which a company share registry is necessary.How do most companies now maintain their share registries?

Question 64

Discuss the trading and settlement arrangements used by the Australian Securities Exchange.

Question 65

Discuss the role of the share market and how it influences the corporate governance of listed companies.

Question 66

An investment in a CFD contract finishes when:

A)the contract expires
B)the contract is sold in the secondary market
C)the trader closes-out the position with a reversing trade
D)90 days after issue.
E)None of these.

Question 67

The index level yesterday was 6000 points.At that time, the combined market capitalisation of the shares in the index was $800 billion.The next day the market capitalisation of the shares in the index was $825 billion.Given this information, calculate the new index level.

Question 68

Provide a brief overview of the ASX's admission and listing rules.

Question 69

Explain how share markets contribute to good corporate governance.

Question 70

If the index level today is 6188 points and the index level yesterday was 6000 points, what was the weighted average of the changes in the share prices between day one and day two?

Question 71

High-frequency trading refers to computerised trading that:

A)identifies profitable opportunities that are then executed by a trader
B)profits from positions held for very short periods
C)executes many high-value transactions
D)responds to events in a manner described as 'high latency'.
E)All of these.

Question 72

What is a share price index? Explain the calculation of ASX share price indices.What advantage does an accumulation index have over a share price index?

Question 73

Identify and briefly explain the competitive pressures faced by the ASX.

Question 74

Describe the structure of Australia's share market in terms of the number of listed companies, their relative size and their liquidity.

Question 75

Describe the trading and settlement arrangements used in the Australian share market.

Question 76

What is the role of the ASX 200? Describe how the S&P Australian Index Committee determine the shares in this index.

Question 77

Contracts for difference:

A)are only available to institutional investors
B)are a low risk product that allows an investment in shares without the cost of buying the shares
C)are exchange traded only
D)enable investors to trade shares on a geared (or leveraged)basis
E)have no risk of default

Question 78

Briefly explain the contributions made by the share market to the financial system.

Question 79

Hamish is a day trader who forms the opinion that JB Hi Fi will fall from its current price of $18.50 to $18.He has $5000 to risk.The initial margin payment is 10%, ignoring brokerage costs.(a)What CFD order should Hamish place and what exposure does this achieve?
(b)Later that day, JB Hi Fi shares are trading at $18.Explain how Hamish can close-out his position and the profit or loss achieved.(c)Say instead the price increased to $19.Again explain how Hamish can close-out his position and the profit or loss achieved.

Question 80

Explain high-frequency trading.Why is a retail trader unable to use the same trading strategy?