Deck 18: Markets for Common Stock: Structure and Organization

Question 1

Which of the following statements is FALSE?

A) Limit orders are executed by the specialist when the market price moves to the limit.
B) The NYSE lists stocks throughout the United States and, thus, is not a "national exchange."
C) Overall, the NYSE trading mechanism is an auction-based, order-driven market.
D) The need for "space" for trading floors for the NYSE derives from its trading mechanism, the floor-based specialist system.

Answer 1

B

Question 2

In carrying out their duties, specialists ________.

A) simply fill customer market orders or limit or stop orders by similar orders.
B) are allowed to engage in transactions in securities in which they are registered unless such transactions are necessary to maintain a fair and orderly market.
C) profit only from those trades in which they are involved; that is, they realize revenue for trades in which they are an agent.
D) None of these

Answer 2

D

Question 3

The SuperDot system ________.

A) is used for small market orders, limit orders, and basket (or portfolio) trades and program trades.
B) can be used for under 100,000 shares with priority given to orders of 2,100 shares or less.
C) routes NYSE-listed stock orders electronically directly to a specialist on the exchange trading floor, rather than through a broker.
D) All of these

Answer 3

D

Question 4

Exchanges have usually been mutual organizations with memberships or "seats". Adopting a new technology ________.

A) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.
B) may benefit the customers of an exchange by increasing the transaction costs but also increase the value of access privileges and seats of a membership organization.
C) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.
D) may benefit the members of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.

Question 5

Which of the following statements is TRUE?

A) Each specialist is located at a "booth" or "post" with all orders for a stock received at this post and the specialist conducts an auction based on these orders to determine the execution price.
B) Each specialist "specializes" in many stocks with each stock is assigned to more than one specialist.
C) Market orders, as opposed to limit orders, are kept by the specialist in their "book," originally a physical paper book but now an electronic book.
D) The OTC trading mechanism has been based on the specialist system.

Question 6

The U.S. stock market is composed of ________.

A) OTC markets and off-exchange markets.
B) stock exchanges and off-exchange markets.
C) stock exchanges, OTC markets and off-exchange markets.
D) stock exchanges, OTC markets, off-exchange markets, and government markets.

Question 7

________ is often defined as a market where intermediaries meet to deliver and execute customer orders.

A) An exchange
B) A market structure
C) An order driven market
D) A quote driven market

Question 8

In contrast to ________ that is a nonprofit organization, a publicly owned equity-based organization is ________ and operated for a profit.

A) a corporation; an exchange
B) an exchange; a corporation
C) a corporation; a government entity
D) a government entity; an exchange

Question 9

Which of the below statements is TRUE?

A) Overall, non-intermediated, quote-driven markets may be less costly due to the absence of profit-seeking dealers.
B) The Nasdaq is primarily a continuous auction order-driven system based on customer orders but the specialists enhance the liquidity by their market-making to maintain a fair and orderly market.
C) The NYSE is a continuous market during the trading day and a call auction market to open and close the market and to reopen after a stop in trading. Thus, the NYSE is not a hybrid market.
D) Nasdaq (an acronym for the National Association of Securities Dealers Automated Quotations System) began as a descendant of the OTC dealer network, and is a dealer quote-driven market.

Question 10

Exchanges ________.

A) have traditionally been organizations built around an electronic trading floor.
B) have usually been mutual organizations that are owned and operated on a profit basis for the benefit of their members, those who operate on the trading floor.
C) have memberships or "seats" that provide floor access or trading privileges but not ownership rights.
D) None of these

Question 11

The types of changes in the U.S. stock exchanges include ________.

A) the market structures of the exchanges and decline of the off-exchange markets.
B) the trading mechanisms of the exchanges and consolidation domestically.
C) consolidation internationally and the trading mechanisms of the broker-dealers.
D) consolidation among different types of assets, for example, securities options and futures .

Question 12

Amex ________.

A) lists stocks from throughout the United States but not international stocks.
B) is a national exchange.
C) is not an auction-type market based on orders.
D) has a specialist system that is dissimilar to that of the NYSE.

Question 13

________ is an electronic order routing and reporting system that links member firms worldwide electronically directly to the specialist's post on the trading floor of the NYSE.

A) The SuperDOT system
B) The SuperElectronic reporting system
C) The SuperSPOT system
D) None of these

Question 14

A fundamental difference between U.S. and international exchanges involves ________.

A) their method of trading.
B) their market structure.
C) the nature of the exchanges' business organizations.
D) All of these

Question 15

A major role of a NYSE-assigned specialists is ________. 2. As catalysts, they help to bring buyers and sellers together.
3) As dealers, they trade for their own accounts when there is a temporary absence of public buyers or sellers, and only after the public orders in their possession have been satisfied at a specified price.
4) As auctioneers, they quote current bid-ask prices that reflect total supply and demand for each of the stocks assigned to them.

A) As principles, they execute market orders entrusted to them by brokers, as well as orders awaiting an indeterminate market price.
B) As catalysts, they trade for a customer's accounts when there is a temporary absence of public buyers or sellers.
C) As auctioneers, they quote current bid-ask prices that reflect total supply and demand for each of the stocks assigned to them.
D) All of these

Question 16

Which of the below statements is FALSE?

A) Dealers provide value to the transaction process by providing capital for trading and facilitating order handling.
B) With respect to order handling, dealers provide value by assisting in the price improvement of customer orders; that is, the order is executed within the bid-offer spread.
C) The over-the-counter markets (OTC markets) are order-driven markets.
D) Dealers provide value by facilitating the market timing of customer orders to achieve price discovery.

Question 17

Dealers ________.

A) operate as agents, not principals.
B) continually provide bids and offer quotes to buy for or sell from borrowed inventories and profit from the spread between their bid and offer quotes.
C) compete with each other in their bids and offers.
D) have a perspective that views the "best" market as the highest bid and lowest offer.

Question 18

Trading in stocks listed on the NYSE is conducted as a ________ at a designated physical location on the trading floor, called a ________, with brokers representing their customers' buy and sell orders.

A) decentralized discontinuous auction market; post
B) centralized continuous auction market; post
C) decentralized discontinuous auction market; seat
D) centralized continuous auction market; seat

Question 19

________ is a market in which buy and sell orders of public participants (who are the holders of the securities) establish the prices at which other public participants can trade.

A) A limit-driven market
B) An order-driven market or auction market
C) A market-driven auction market
D) A quote-driven market

Question 20

________ permit intermediaries to provide liquidity. Intermediaries may be brokers (who are agents for the naturals); dealers or market-makers (who are principals in the trade); and specialists, as on the New York Stock Exchange (who act as both agents and principals). Dealers are independent, profit-making participants in the process.

A) A limit-driven market
B) An auction market
C) A dealer-driven market
D) A quote-driven market

Question 21

Demutualization occurs by giving the members shares or equity in the demutualized organization in exchange for their seats in the mutual organization.

Question 22

Specialists are also responsible for balancing buy and sell orders at the opening of the trading day in order to arrange an equitable opening price for the stock.

Question 23

________ began trading in 1969 and was essentially the first electronic communications network.

A) Instinet
B) CBOE
C) ISE
D) Nasdaq

Question 24

The term fair and orderly market means a market in which there is price continuity and reasonable depth.

Question 25

________ is an entity independent of a registered securities exchange that collects and disseminates securities quotes and trades.

A) Trade Reporting Facility (TRF)
B) Automated Confirmation Transaction System (ACT)
C) An alternative display facility (ADF)
D) The National Exchange (NSX)

Question 26

During the 1990s, the SEC continued its emphasis on greater quote and price transparency. In this regard, the SEC instituted new order handling rules in 1997. These rules include: ________.

A) any market-maker who held a customer order had to display that order in their quote.
B) a market-maker could place a more aggressive quote in an ECN, if the ECN displayed the top of its book in the Nasdaq quote montage.
C) if the ECN's own best quote was not shown in the quote montage, then the market-maker had to update its own quote in Nasdaq to match the ECN quote.
D) All of these

Question 27

One outcome of ________ (also called consolidators) is that customer order flow is "less sticky"; that is, the order flow will switch from one execution service to another quickly based on short-term, quantitative information.

A) sticky order routers
B) consolidator orders
C) consolidator routers
D) smart order routers

Question 28

Some of the regional stock exchanges, including Philadelphia and Boston, as well as the Amex have been driven by trading in stock options and index options rather than stocks in recent years.

Question 29

Dark pools ________.

A) fulfill the need for a neutral gathering place but do not fulfill the traditional role of an exchange in the new paradigm.
B) are private crossing networks in which participants submit orders to cross trades at externally specified prices and, thus, provide anonymous sources of liquidity (hence, the name "dark").
C) are electronic execution systems that do displaying quotes and providing transactions at externally provided prices.
D) are not designed to prevent information leakage and offer access to undisclosed liquidity and leave "footprints."

Question 30

Which of the below statements is FALSE?

A) ITS refers to the International Transaction System.
B) The Order Protection Rule (Trade-Through Rule) requires that trades be executed at the best displayed prices provided by an electronic trading system and accessible under one second.
C) The Trade-Through Rule provides price protection to top-of-book orders (best bids or best offers) placed on exchanges that are electronically accessible.
D) Internalization refers to off-exchange ("upstairs") trades, mainly of retail trades.

Question 31

Electronic communication networks (ECNs) ________.

A) are not off-exchange exchanges.
B) are direct descendants of (and part of) the NYSE, not Nasdaq.
C) display bids and offers; that is, they provide an open display.
D) provide institutions and market-makers with an known way to enter orders.

Question 32

Overall, after demutualization, the market participants and market owners were the same via memberships, seats, or access privileges.

Question 33

Price discovery is a dynamic process that involves customer orders being translated into trades and transaction prices; however because price discovery is not instantaneous, individual participants have an incentive to "market-time" the placement of their orders.

Question 34

The Pacific Exchange (PHLX) is the oldest stock exchange in the United States, founded in 1790.

Question 35

________ matches buy and sell orders in a multinational trade at a price that is set elsewhere.

A) Investment Technologies Groups (ITG)
B) A debit network
C) A crossing network
D) WorthNET

Question 36

In a ________, sometimes called a period call, orders from customers are batched together for a simultaneous trade at a specific point in time.

A) call auction
B) regulated auction
C) put auction
D) buyer's auction

Question 37

Electronic communication networks (ECNs) ________.

A) are not a limit order book.
B) offer transparency, anonymity, automated service, and reduced costs, and are therefore effective for handling small orders.
C) may not be linked into the Nasdaq marketplace via a quotation representing the ECN's best buy and sell quote.
D) do not use the Internet to link buyers and sellers, thus employing brokers and trading floors.

Question 38

Which of the below statements is FALSE?

A) All central markets have incentives to impose order consolidation rules on its members.
B) In addition to ECNs, other alternative trading systems (ATS) were developed as alternatives to exchanges.
C) Broadly, there are two types of ATS: (1) crossing networks, which have functioned since the 1980s; and (2) dark pools, which are much more recent.
D) Crossing networks are electronic venues that display quotes but anonymously match large orders.

Question 39

The construct of the Nasdaq as a dealer system has made it ________ for ECNs and others to conduct the trades directly and report them to the exchange.

A) difficult
B) easy
C) impossible
D) possible

Question 40

A structural change that has occurred in exchanges is their evolution from publicly owned electronically traded (that is, no trading floor) organizations to membership-owned, floor-traded organizations.

Question 41

Dark pools, as well as crossing networks, are creating very fragmented markets for large trades and block trades.

Question 42

The OTCBB is a regulated electronic quotation service that displays real-time quotes, last sale prices, and volume information in the OTC equity securities.

Question 43

Direct market access (DMA) refers to the use of electronic systems to access various liquidity pools and execution venues directly, without the intervention of a sell-side firm trading desk or broker.

Question 44

Since options exchanges are registered with the SEC, they too can initiate and operate stock exchanges. During 2007, two options exchanges, the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), began stock exchanges, called the ISE Stock Exchange and the Chicago Board Options Stock Exchange, respectively. Describe the two components of the ISE stock market.

Question 45

What does direct market access (DMA) refer to? Name two advantages of DMA to a buy-side firm?

Question 46

The OTC market is often called a market for "listed" stock.

Question 47

The Pink Sheets is an electronic quotation system that displays quotes from broker dealers for many OTC securities.

Question 48

Contrast the differences between exchanges and publicly owned equity-based organization.

Question 49

Contrast the NYSE exchange with Nasdaq

Question 50

Over the years, the Nasdaq became more of a stock market by adding trade and volume reporting and automated trading systems. In October 2002, the Nasdaq started a system, called SuperMontage. Describe how SuperMontage has changed Nasdaq.

Question 51

There are two overall market models for trading stocks. Name and describe these two market models.

Question 52

The Nasdaq, as an electronic exchange, has no physical trading floor, but makes all its trades through a computer and telecommunications system.

Question 53

Describe the tasks of a NYSE specialist.

Question 54

Direct market trading is a relatively recent type of trading technique whereby an overall trade (either buy or sell) is conducted electronically in a series of small transactions instead of one large transaction.

Question 55

What is a dark pool? Describe two of the sponsors of dark pools.

Question 56

Among the advantages of dark pools are less or no visibility and no price discovery.

Question 57

In general, options trading is composed of one component: options on individual stocks.