Deck 14: Secondary Markets

Question 1

A perfect market results when all buyers and sellers are ________, and the market price is determined where there is ________.

A) price-takers; equality of supply and demand.
B) price-makers; equality of supply and demand.
C) price-takers; inequality of supply and demand.
D) price-makers; inequality of supply and demand.

Answer 1

A

Question 2

________ are necessary to the smooth functioning of a secondary market.

A) Inexperienced investors
B) Initial public offerings
C) Investment bankers
D) Brokers and dealers

Answer 2

D

Question 3

Which of the following statements is FALSE?

A) It is important to realize that the brokerage activity requires the broker to buy and sell or hold in inventory the financial asset that is the subject of the trade.
B) A broker is an entity that acts on behalf of an investor who wishes to execute orders. In economic and legal terms, a broker is said to be an agent of the investor.
C) The broker receives, transmits, and executes investors' orders with other investors.
D) Services provided by brokers include research, recordkeeping, and advising.

Answer 3

A

Question 4

In the United States, secondary trading of common stock occurs ________.

A) in a number of trading locations.
B) in Dallas, Texas.
C) in each major city.
D) None of these

Question 5

A market is not perfect only because market agents are price takers but is also 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. Frictions include ________.

A) bid-ask spreads charged by dealers and order handling and clearance charges.
B) taxes (but not on capital gains) and government-imposed transfer fees.
C) costs of acquiring information about the financial asset and restrictions on market takers.
D) financial liability that a buyer or seller may take and taxes on capital gains.

Question 6

Investors need brokers to help ________.

A) execute their orders.
B) find other parties wishing to sell or buy.
C) negotiate for good prices.
D) All of these

Question 7

Investors in financial assets receive ________.

A) illiquidity for their assets.
B) information about the assets' fair or consensus values.
C) increased the costs of searching for likely buyers and sellers of assets.
D) the disadvantage of higher transaction costs.

Question 8

________, orders are grouped together for simultaneous execution at the same price.

A) In a bull market
B) In an efficient market
C) In a call market
D) In a bear market

Question 9

In the absence of an effective short-selling mechanism, security prices will tend to be biased toward the ________, causing a market to depart from the standards of a perfect price-setting situation.

A) view of more pessimistic investors
B) view of the market maker
C) view of more optimistic investors
D) view of the market taker

Question 10

Without a secondary market, issuers would be unable to ________, or they would have to pay a higher rate of return, as investors would ________ in compensation for expected illiquidity in the securities.

A) sell new securities; increase the discount rate
B) sell new securities; decrease the discount rate
C) buy new securities; decrease the price
D) sell new securities; increase the price

Question 11

Which of the below statements is FALSE?

A) In a call market, a market maker holds an auction for a stock at certain times in the trading day (or possibly more than once in a day).
B) Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders.
C) In a call market, a market maker holds an auction for a stock at the same time each day.
D) An auction in a call market may be oral or written.

Question 12

Perfect market results when ________.

A) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price.
B) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price.
C) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price.
D) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price.

Question 13

Which of the following statements is FALSE?

A) A real market might also differ from the perfect market because of the possibly frequent event of a temporary imbalance in the number of buy and sell orders that investors may place for any security at any one time.
B) An unmatched or unbalanced flow of buy and sell orders causes a problem in that the security's price may change abruptly, even if there has been no shift in either supply or demand for the security.
C) The fact of imbalances in buy and sell orders cannot explain the need for the dealer or market maker, who stands ready and willing to buy a financial asset for its own account (to add to an inventory of the financial asset) or sell from its own account (to reduce the inventory of the financial asset).
D) An unmatched or unbalanced flow of buy and sell orders causes a problem in that buyers may have to pay higher than market-clearing prices (or sellers accept lower ones) if they want to make their trade immediately.

Question 14

By taking the opposite side of a trade when there are no other orders, the dealer prevents the price from ________ from the price at which a recent trade was consummated.

A) materially converging
B) materially diverging
C) immaterially concurring
D) immaterially diverging

Question 15

In a continuous market, prices may vary ________.

A) because of the basic situation of supply and demand.
B) are determined discontinuously throughout the trading day.
C) are determined continuously throughout the trading day even if buyers and sellers are not submitting orders.
D) with the pattern of orders reaching the market.

Question 16

The ________ can be viewed as the price charged by dealers for supplying immediacy together with short-run price stability (continuity or smoothness) in the presence of short-term order imbalances.

A) bid-ask fee
B) bid-ask price
C) bid-ask spread
D) bid-ask imbalance

Question 17

Which of the below statements is TRUE?

A) In the United States, secondary shares are traded on major national stock exchanges (the largest of which is the American Stock Exchange) and regional stock exchanges.
B) In the United States, significant trading in stock takes place on the so-called over-the-counter or OTC market, which involves specific geographical locations.
C) In the United States, the dominant OTC market for stocks in the United States is the New York Stock Exchange.
D) In the United States, some bonds are traded on exchanges, but most trading in bonds in the United States and throughout the world occurs in the OTC market.

Question 18

This practice of selling securities that are not owned at the time of sale is referred to as ________.

A) buying short.
B) selling short.
C) selling long.
D) buying and selling simultaneously.

Question 19

One indication of the usefulness of secondary markets is that they exist throughout ________.

A) the United States.
B) Europe and Asia.
C) each state.
D) the world.

Question 20

The key distinction between a primary market and a secondary market is that, in the secondary market, ________.

A) funds flow from the seller of the asset to the buyer.
B) the issuer of the asset receives funds from the buyer.
C) funds flow from the buyer of the asset to the seller.
D) the existing issue changes hands in the primary market.

Question 21

In its "Big Bang" of 1986, the London Stock Exchange ________.

A) abolished fixed brokerage commissions.
B) abolished competitive brokerage commissions.
C) adopted fixed brokerage commissions.
D) shot down all types of brokerage commissions.

Question 22

Among the overall advantages of electronic trading are ________.

A) providing liquidity to the government.
B) price discovery (particularly for less liquid markets).
C) utilization of old technologies.
D) trading and portfolio management inefficiencies.

Question 23

Which of the below statements is TRUE?

A) In a passive strategy, investors seek to capitalize on what they perceive to be the mispricing of a security or securities.
B) In a market that is price efficient, active strategies will not consistently generate a return after ignoring transactions costs and the risks associated with a strategy of frequent trading.
C) In a market which seems to be price efficient, one investment strategy is simply to buy and hold a broad cross section of securities in the market
D) Matching in an investment strategy that has the goal of matching the performance of some financial index from the market.

Question 24

Primary markets help the issuer of securities to track their values and required returns.

Question 25

Dealers also have to be compensated for bearing risk. A dealer's position may involve carrying inventory of a security (a long position) or selling a security that is not in inventory (a short position). There are three types of risks associated with maintaining a long or short position in a given security. Two of these include ________.

A) the risk of trading with someone who has inferior information and the expected time it will take the dealer to unwind a position and its uncertainty.
B) the uncertainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty.
C) the risk of trading with someone who has inferior information and the uncertainty about the future price of the security.
D) the certainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty.

Question 26

Secondary markets hurt investors by providing liquidity.

Question 27

Effective August 24, 2000, the minimum spread was reduced to ________ ("decimals"), with trades on all stocks in decimals beginning on August 9, 2001.

A) one-eighth
B) one-sixteenth
C) one cent
D) two cents

Question 28

In ________, investors can obtain transaction services as cheaply as possible, given the costs associated with furnishing those services.

A) an internally inefficient market
B) an externally efficient market
C) a pricing efficient market
D) an operationally efficient market

Question 29

Which of the below statement is FALSE?

A) The multi-customer system simply computerizes the traditional customer-dealer market making mechanism.
B) Single-dealer systems are based on a customer dealing with a single, identified dealer over the computer.
C) Dealer-to-customer systems can be a single-dealer system or multiple-dealer system.
D) Multi-dealer systems provide some advancement over the single- dealer method since a customer can select from any of several identified dealers whose bids and offers are provided on a computer screen.

Question 30

There are a variety of types of electronic trading systems for bonds. The two major types of electronic trading systems are ________.

A) the customer-to-dealer systems and the exchange systems.
B) the dealer-to-customer systems and the leverage systems.
C) the broker-to-dealer systems and the exchange systems.
D) the dealer-to-customer systems and the exchange systems.

Question 31

In the United States, secondary trading of common shares are traded on major national stock exchanges and regional stock exchanges, which are organized and somewhat regulated markets in specific geographical locations.

Question 32

In a call market, the auction may be oral but not written.

Question 33

Some markets conduct the day's initial trades with a call method and most other trades in a continuous way.

Question 34

Because the bond business has been ________ rather than ________ business, the capital of the market makers is critical.

A) a financial; an accounting
B) an accounting; a financial
C) an agency; a principal
D) a principal; an agency

Question 35

Which of the below statement is FALSE?

A) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process.
B) Although there is a common clearinghouse for bonds, there is none for common stocks.
C) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process.
D) The exchange system is quite different rom the dealer-to-customer systems and has potentially significantly greater value added.

Question 36

There are several related reasons for the transition to the electronic trading of bonds. Which of the below reasons is NOT one of these?

A) The profitability of bond market making has declined since many of the products have become less commodity-like.
B) The increase in the volatility of bond markets has increased the capital required of bond broker-dealers.
C) Making markets in bonds has become more risky for the market makers because the size of the orders has increased tremendously.
D) The profitability of bond market making has declined and their bid-offer spreads have decreased.

Question 37

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

A) Internal inefficiency
B) External efficiency
C) Operational efficiency
D) Pricing efficiency

Question 38

The same Wall Street firms that have been the major market makers in bonds have also been the ________ of electronic trading in bonds.

A) cynics
B) attackers
C) supporters
D) detractors

Question 39

Suppose that an investor expects that the price her security will decline. She can still benefit should the price actually decline if she can arrange to sell the security without owning it.

Question 40

The dominant OTC market for stocks in the United States is AMEX.

Question 41

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.

Question 42

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

Question 43

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.

Question 44

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

Question 45

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

Question 46

Commissions are all of the brokerage costs of transacting.

Question 47

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

Question 48

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

Question 49

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

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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

Question 54

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

Question 55

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.