Question 1

Approximately ________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

Accepted Answer

Only about 25% of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the NYSE. The majority of trades are conducted electronically through alternative trading platforms.

Question 2

The term inside quotes refers to ________.

Accepted Answer

The term inside quotes refers to the best available bid price and ask price in the limit order book. The inside quote is represented by the highest bid price and the lowest ask price. Therefore, the correct answer is (B) the difference between the highest bid price and the lowest ask price in the limit order book.

Question 3

The bulk of most initial public offerings (IPOs) of equity securities goes to ________.

Accepted Answer

Institutional investors, such as pension funds, mutual funds, and insurance companies, are typically the main buyers in an IPO because they have the funds to invest large sums of money and are seen as long-term investors. Individual investors and day traders may also participate, but they usually only receive a small portion of the shares. Current shareholders may sell some of their shares in the IPO, but the proceeds from the sale would go to them, not to the company.

Question 4

The fully automated trade-execution system installed on the NYSE is called ________.

Accepted Answer

Direct+ is the fully automated trade-execution system used by the NYSE.

Question 5

When matching orders from the public, a specialist is required to use the ________.

Accepted Answer

In order to match orders from the public, the specialist needs to find the best price at which the orders can be filled. This means that the specialist should use the highest outstanding bid price (which is the highest price that a buyer is willing to pay for a security) and the lowest outstanding ask price (which is the lowest price that a seller is willing to accept for a security). Therefore, the correct choice is D, highest outstanding bid price and lowest outstanding ask price.

Question 6

The ________ was established to protect investors from losses if their brokerage firms fail.

Accepted Answer

SIPC (Securities Investor Protection Corporation) was established to protect investors from losses if their brokerage firms fail. SIPC can replace missing stocks, bonds, and other securities that were purchased on margin or held in a brokerage account up to a maximum of $500,000, including $250,000 in cash balances. The CFTC (Commodity Futures Trading Commission) regulates futures and options markets, while the SEC (Securities and Exchange Commission) oversees the securities industry. AIMR (Association for Investment Management and Research) is now known as CFA Institute and provides certifications for investment professionals.

Question 7

The term latency refers to ________.

Accepted Answer

Latency in the context of trading and financial markets generally refers to the amount of time it takes to accept, process, and deliver a trading order. This includes the time from when an order is submitted until it is completed.

Question 8

The ________ system enables exchange members to send orders directly to a specialist over computer lines.

Accepted Answer

SUPERDOT (Super Display Order Entry) is the system used by the New York Stock Exchange (NYSE) that allows exchange members to send electronic orders directly to a specialist on the trading floor. The system increases efficiency and reduces the time needed to execute trades. The other choices (FAX, Direct Plus, and NASDAQ) are not relevant to the NYSE trading system.

Question 9

The NYSE Hybrid Market allows ________.

Accepted Answer

The NYSE Hybrid Market allows brokers to send orders either to an electronic system or to a specialist. This provides flexibility for market participants to choose the best execution method for their orders. Individuals are not able to send orders directly to either the specialist or electronic system in the NYSE Hybrid Market.

Question 10

The ________ is the most important dealer market in the United States, and the ________ is the most important auction market.

Accepted Answer

The NYSE is the most important auction market in the United States, and the NASDAQ is the most important dealer market. Therefore, option B is the correct answer. Options A, C, and D are incorrect.

Question 11

According to multiple studies by Ritter, initial public offerings tend to exhibit ________ performance initially and ________ performance over the long term.

Accepted Answer

According to Ritter's studies, IPOs tend to have good initial performance, but this eventually tapers off to bad long-term performance.

Question 12

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

Accepted Answer

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called book building. This process allows the underwriters to gauge demand and determine the optimal price for the IPO. It involves creating a "book" of indications of interest from potential investors, which helps the underwriters set the offering price and allocate shares.

Question 13

On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

Accepted Answer

(1,003.25 - 1,000.50)500 = $1,375

Question 14

The inside quotes on a limit order book can be found ________.

Accepted Answer

The inside quotes on a limit order book can be found at the top of the list, where the highest bid and lowest ask prices are displayed.

Question 15

Specialists try to maintain a narrow bid-ask spread because:
I. If the spread is too large, they will not participate in as many trades, losing commission income.
II. The exchange requires specialists to maintain price continuity.
III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

Accepted Answer

Specialists are market makers who facilitate trading by posting buy and sell orders for securities they are responsible for on the exchange. They earn a profit by buying securities at the bid price and selling them at the ask price. If the bid-ask spread is too wide, it will discourage trading and reduce the number of transactions, resulting in lower commission income for the specialist. Additionally, exchanges require specialists to maintain price continuity to prevent large price swings and ensure fair and orderly markets. While specialists are not for-profit entities, they do earn a profit through bid-ask spreads and may face competition from other market makers if their spreads are too wide. Therefore, maintaining a narrow bid-ask spread is beneficial for both the specialist and the market as a whole.

Question 16

If an investor places a ________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a ________ order, the stock will be bought if its price rises above the stipulated level.

Accepted Answer

The first blank asks for an order that sells a stock if its price falls to a certain level, which is a stop-loss order. The second blank asks for an order that buys a stock if its price rises above a certain level, which is a buy stop order. Therefore, the correct choice is C.

Question 17

In a ________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

Accepted Answer

In a firm-commitment underwriting arrangement, the underwriter guarantees to purchase all shares from the issuing company and assumes the full risk of not being able to sell them to the public at the offering price. This is different from a best-efforts underwriting, where the underwriter does not guarantee the sale of all shares and assumes less risk. Private placement is not relevant to this question.

Question 18

The ________ price is the price at which a dealer is willing to purchase a security.

Accepted Answer

The bid price is the price at which a dealer is willing to purchase a security. The ask price is the price at which a dealer is willing to sell a security. The clearing price is the price at which the supply of a specific good matches the demand for it. The settlement price is the price at which the final transactions for a particular day are settled.

Question 19

Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

Accepted Answer

Studies have shown that IPOs are usually underpriced, which means the offer price is lower than the price at which the stock is expected to trade in the secondary market. This underpricing can range from a few percentage points to as much as 100%. The reason for this is that underpricing enables the company to attract more buyers and create more demand for its shares, thereby ensuring a successful IPO.

Question 20

Advantages of ECNs over traditional markets include all but which one of the following?

Accepted Answer

The advantages of ECNs over traditional markets include lower transaction costs, anonymity of the participants, and a small amount of time needed to execute an order. The ability to handle very large orders is also an advantage of ECNs. Therefore, all options (A), (B), and (C) are advantages of ECNs over traditional markets, and the correct answer is (D) which is not an advantage of ECNs over traditional markets.

Quiz 3: Securities Markets