Unit and 8 and 9 K

Which of the following statements regarding the third market is true?

• It is composed of listed securities traded OTC.

• It is composed only of unlisted securities.

• The services of a brokerage firm are not used.

• It refers to the block trading of unlisted securities.

Answer explanation

The third market is composed of OTC market makers (dealers) that deal in and provide liquidity for exchange-listed stock.

A large volume transaction for an institutional investor has occurred on an alternative trading system or network. Entered anonymously, the general public will see no info regarding the volume, price, or who the institutional investor was. This transaction scenario is generally referred to as having occurred:

• on a U.S. exchange

• in a dark pool

• in the over-the-counter (OTC) market

• in the third market

Answer explanation

Dark pools are designed to help institutional traders operate in a less transparent setting than the exchanges (lit markets). This allows the institutions to trade with less disruption of the secondary markets. It also helps these institutional money managers make it more difficult to determine the strategies they are using.

The SEC regulates the trading of all of the following except:

• the New York Stock Exchange

• The Chicago Board of Options Exchange

• The London Stock Exchange

• the U.S. over the counter market

Answer explanation

The SEC is a U.S. government regulator of securities. The London Stock Exchange is located in London, England and is not under US authority.

When a broker-dealer maintains an inventory in a particular stock and trades that stock in the OTC market, it is acting as

• an agent

• a market maker

• a broker

• an underwriter

Answer explanation

A market maker is a dealer in the OTC market that maintains an inventory in a stock and provides liquidity for customers seeking to buy and sell the security.

To fill a customer buy order OTC, your broker requests a quote from a market maker. That dealer responds, "15 bid, ask 15 1/4". If the trade order is entered, the market maker must

• sell the shares for $15.

• buy the shares for $15.

• sell the shares for $15.25.

• buy the shares for $15.25.

Answer explanation

This is an order to buy, so the market maker is selling. The customer sells at the bid price. With this quote, the market maker is committing to selling at the ask price of $15.25.

All of the following are true for a designated market maker except:

• is a member of an exchange

• is charged with maintaining a fair and orderly market.

• maintains an inventory of the assigned stock

• guarantees the customer will get a profitable trade.

Answer explanation

Nobody can guarantee a profit in securities trading. A DM is an exchange member that maintains an inventory in a stock, provides liquidity, and is responsible for maintaining a fair and orderly market in its assigned securities.

The SEC has the power to do all of the following except:

• revoke a registration

• arrest those in violation of the reguations

• impose fines

• limit a firm's activity

Answer explanation

The SEC may investigate suspected violations, impose fines, limit a firm's activities, and revoke or suspend registrations. It does not have the authority to arrest.

The SEC is the primary federal securities industry regulator in the United States. It was created by:

• the Securities Act of 1933.

• The Securities Exchange Act of 1934.

• The Investment Advisers Act of 1940.

• The Uniform Securities Act.

Answer explanation

The SEC was created by the Securities Exchange Act of 1034. The 1933 act does give oversight of the primary markets to the SEC, but the commission itself was not formed until the 1934 act passed.

Financial activities and large cash transactions are reported to which of the following federal agencies?

• SEC

• OCC

• Federal Reserve

• FinCEN

Answer explanation

FinCEN is the intelligence agency within the Federal government that tracks suspicious financial activities. It both collects from and provides info to the other federal agencies, such as the FRB and the SEC. The OCC is the Options Clearing Corporation.

The Federal Reserve Board was established by:

• the Securities Act of 1933

• the Uniform Securities Act

• the Federal Reserve Act of 1913.

• the Trust Indenture Act

Answer explanation

The Federal Reserve Board was established by the Federal Reserve Act in 1913.