Question 1

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 can be legitimate if the consultants divulge only information that is already public. However, there are concerns about the consultants providing inside information, which could violate regulations such as Regulation FD. Therefore, choices B and C are both accurate.

Question 2

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 on non-public information, and can lead to significant fluctuations in a company's stock price.

Question 3

Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price

Accepted Answer

Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, regardless of the most recent trade result.

Question 4

Dark pools:

Accepted Answer

Dark pools are privately operated stock markets that are primarily used by institutional investors. They allow for large trades to be executed without affecting the market price of the security being traded. Dark pools are typically less transparent than public exchanges and do not provide pre-trade information on the securities being traded.

Question 5

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

Accepted Answer

The Division of Corporate Finance is responsible for reviewing registration statements, corporate filings, and proxy statements related to corporate governance and voting issues. The Division of Market Regulation oversees securities markets, and the Division of Enforcement investigates potential violations of securities laws.

Question 6

An advantage of trading in dark pools is that:

Accepted Answer

All of the above advantages are true for trading in dark pools. The anonymity and lack of transparency in dark pools can often result in more favorable bid or ask prices than those available in public stock exchanges. Dark pools also enable investors to accumulate shares without impacting the stock price as much as they would in a public exchange. Additionally, high-frequency traders using computer algorithms can take advantage of the speed and convenience of dark pools to find market inefficiencies and make profitable trades.

Question 7

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

Accepted Answer

The sentence states that the defendants were connected with the Galleon Fund and that wiretap evidence was used to prosecute them. Therefore, the most likely charge is insider trading, making C the correct answer.

Question 8

In naked short selling, short-sellers sell a stock short that they presently own.

Accepted Answer

In naked short selling, short-sellers sell a stock that they do not presently own, which is illegal and unethical.

Question 9

A criticism of dark pools is that they:

Accepted Answer

Dark pools are criticized for reducing transparency in the market as the trades executed on these platforms are not visible to the public until after they have been completed. This lack of transparency can lead to concerns about market manipulation and insider trading.

Question 10

It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information.

Accepted Answer

It is illegal for both investors and insiders to use inside information to make trades. This is known as insider trading and is prohibited by securities laws.

Quiz 12: Market Microstructure and Strategies