Question 1

Two roles that dealers play include: providing reliable price information to market participants, and, in certain market structures, providing the services of an auctioneer in bringing order and fairness to a market.

Accepted Answer

Dealers play an important role in providing reliable pricing information to market participants. In some market structures, they also act as an auctioneer to bring order and fairness to the market.

Question 2

Trace the historical evolution of transaction costs charged by the brokerage industry.

Accepted Answer

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Question 3

In the secondary market, an issuer of securities (whether it is a corporation or a governmental unit) may obtain regular information about the value of the asset. Describe the nature of this information and value that a secondary market offers.

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Question 4

What can investors expect to obtain in an operationally efficient market? Does this efficiency vary throughout the world?

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Question 5

Name and describe the two different major types of exchange systems.

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Question 6

Commissions are all of the brokerage costs of transacting.

Accepted Answer

Commissions are part of the brokerage costs, but there can also be other fees involved in transacting, such as transaction fees, account maintenance fees, and others depending on the brokerage firm's policies.

Question 7

A dealer acts as an auctioneer in all market structures, thereby providing order and fairness in the operations of the market.

Accepted Answer

While a dealer does provide liquidity and facilitate trades in the market, they do not act as an auctioneer in all market structures. In many markets, trades are executed through electronic matching systems rather than a dealer or auctioneer. Additionally, some markets use different mechanisms for determining prices, such as algorithms or continuous trading.

Question 8

In the United States, secondary trading of common stock occurs in a number of trading locations. Describe these locations.

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Question 9

A perfect market does not allow the sale of borrowed securities.

Accepted Answer

A perfect market does allow the sale of borrowed securities, through a process known as short selling. Short selling involves borrowing securities from a broker or other financial institution, selling them on the market, and then buying them back at a later time to return to the original lender. This is a common practice in many financial markets and can be used to speculate on falling prices or hedge against potential losses.

Question 10

A perfect market is free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. In regards to financial markets, describe four of impediments or frictions.

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Question 11

Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders. Give an example of this.

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Question 12

The combination of the decreased risk and the increased profitability of bond market making has induced the major market markets to deemphasize this business in the allocation of capital.

Accepted Answer

The combination of decreased risk and increased profitability would typically encourage major market makers to emphasize, rather than deemphasize, bond market making in the allocation of capital, as it becomes a more attractive investment.

Question 13

Pricing efficiency refers to a market where prices at all times fully reflect all available information that is relevant to the valuation of securities.

Accepted Answer

Pricing efficiency is a fundamental concept in financial markets, which assumes that prices of securities incorporate all publicly available information. This means that investors cannot achieve superior returns by using public information, as the prices of the securities will always reflect the news and events that have occurred in the market. However, pricing efficiency does not imply that prices are always correct, as there can be unexpected events or non-public information that could impact prices.

Question 14

What is a broker and how can a broker act on behalf of an investor.

Accepted Answer

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Question 15

Call auctions provide for fixed price auctions (that is, all the transaction or exchanges occur at the same "fixed" price) at specific times during the day and are appropriate for less liquid bonds such as corporate bonds and municipal bonds.

Accepted Answer

Call auctions consolidate orders to buy or sell securities at specific times during the day, determining a single price at which all transactions occur, making them suitable for less liquid assets like corporate and municipal bonds by providing a more orderly and efficient trading process.

Quiz 14: Secondary Markets