Question 1

Dark pools:

Accepted Answer

Dark pools are private markets used by institutional investors such as hedge funds and investment banks to trade large blocks of securities anonymously. They are not available to the general public and are not subject to regulations and transparency requirements of traditional stock exchanges.

Question 2

Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants ("experts") by a hedge fund to provide insight about the company:

Accepted Answer

Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants by a hedge fund to provide insight about the company are legitimate if the consultants divulge only information that is already public. However, they have raised concerns that the consultants provide inside information, which would be illegal under Regulation FD. Hence, both options B and C are correct.

Question 3

When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred.

Accepted Answer

Insider trading involves trading of a company's securities by individuals who have access to non-public information about the company. If the price of a company's stock changes significantly before a public announcement, it suggests that someone with insider information may have traded on that information, which is illegal.

Question 4

Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.

Accepted Answer

Regulation Fair Disclosure (FD) requires firms to disclose information in a fair and non-discriminatory manner to all investors at the same time. Firms cannot selectively disclose information to a few important clients before making it available to the public.

Question 5

The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms.

Accepted Answer

The answer of The SEC's Division of Market Regulation assesses...

Question 6

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

Accepted Answer

Regulation FD actually requires firms to disclose relevant information to analysts and investors at the same time. Therefore, statement D is incorrect as it prohibits firms from communicating with analysts after the news announcement is made to all investors.

Question 7

A trading halt prevents a stock from experiencing a loss in response to news.

Accepted Answer

A trading halt temporarily pauses trading activity in a stock, typically in response to news, in order to provide all market participants with time to digest the information and make informed decisions. It does not prevent a stock from experiencing a loss when trading resumes.

Question 8

A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.

Accepted Answer

A margin call is a demand from a broker that requires an investor to deposit additional money or securities into their account to meet minimum margin requirements. If the investor is unable to satisfy the margin call, the broker may sell the securities in the account to cover the shortfall.

Question 9

The bid-ask spread is negatively related to

Accepted Answer

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) for a security and the lowest price a seller is willing to accept (ask). Trading volume refers to the total number of shares or contracts traded in a particular market or period. A high trading volume indicates that there are many buyers and sellers for a particular security, which reduces the bid-ask spread. Therefore, the bid-ask spread is negatively related to trading volume.

Question 10

____ offer advice to customers on stocks to buy or sell.

Accepted Answer

Full-service brokers provide personalized advice to their customers and may have access to research and analysis on various stocks, which allows them to offer recommendations on which stocks to buy or sell. Discount brokers, floor brokers, specialists, and market makers typically do not offer personalized advice and may only execute trades for their customers.

Question 11

____ from a broker requires the investor to put up additional collateral.

Accepted Answer

Margin call is when the broker requires the investor to put up additional collateral. Maintenance margin refers to the minimum amount of collateral that the investor needs to maintain in their account to keep their position open, while initial margin is the amount of money the investor needs to initially deposit to open their position. Trading halt refers to a temporary suspension in trading activity for a particular security.

Question 12

Trading halts are intended to prevent insider trading.

Accepted Answer

Trading halts are primarily implemented to provide the market with time to absorb significant news, maintain orderly trading, and reduce price volatility, not specifically to prevent insider trading.

Question 13

When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3 percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.

Accepted Answer

When the ratio of short positions to total shares outstanding is 3 percent or higher, it indicates a significant amount of negative sentiment towards the stock, with many investors anticipating a drop in its price.

Question 14

The SEC's ____ reviews the registration statement filedwhen a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board membersorother corporate issues.

Accepted Answer

The Division of Corporate Finance is responsible for reviewing the registration statements filed by firms going public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues. The Division of Market Regulation oversees the workings of securities markets while the Division of Enforcement investigates and prosecutes violations of securities law.

Question 15

To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence.

Accepted Answer

The sentence mentions that the government used wiretap evidence to prosecute defendants connected with the Galleon Fund for a particular crime. The only option listed that is commonly investigated using wiretap evidence is insider trading. Therefore, the correct answer is C: insider trading.

Question 16

Which of the following is incorrect with regard to taxes imposed on stock transactions?

Accepted Answer

The maximum federal tax on dividends and long-term capital gains is currently 20 percent, not 14 percent.

Question 17

Which of the following is incorrect in regard to short selling?

Accepted Answer

The SEC's uptick rule requires that a security must tick up in price before a short sale can be executed, but it does not have a 15% threshold or exception for upticks resulting from the most recent trade. This statement is incorrect.

Question 18

A criticism of dark pools is that they:

Accepted Answer

Dark pools are known for their lack of transparency because they are not regulated in the same way as public stock exchanges. This can make it difficult for investors to assess the true market value of a stock and can potentially lead to market manipulation.

Question 19

Which of the following statements is incorrect with respect to the structure of the SEC?

Accepted Answer

The SEC (Securities and Exchange Commission) is composed of five commissioners, not seven, appointed by the president of the United States.

Question 20

When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.

Accepted Answer

When investors sell short, they borrow the stock from a broker, sell it, and then hope to buy it back later at a lower price to return it to the broker, not to the investor from whom they borrowed.

Quiz 12: Market Microstructure and Strategies