Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 12
c.
the conversion of many European countries to a single currency.
d.
the Eurolist system.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
38. A market order is an order to buy or sell a stock at the best possible price.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
39. A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the
current market price of the stock.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
40. When investors place a limit order, they can place it for the day only.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
41. The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock’s value
Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 13
without receiving a margin call.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
42. A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the
stock.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
43. When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that
stock back from the investor to whom they lent it.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
44. When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3
percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large
number of investors expect the stock’s price to decline.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
Copyright Cengage Learning. Powered by Cognero.
Page 14
45. Trading halts are intended to prevent insider trading.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
46. A trading halt prevents a stock from experiencing a loss in response to news.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
47. The SEC’s Division of Market Regulation assesses possible violations of the SEC’s regulations and can take action
against individuals or firms.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
48. Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
Copyright Cengage Learning. Powered by Cognero.
Page 15
49. ____ offer advice to customers on stocks to buy or sell.
a.
b.
c.
d.
e.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
50. Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?
a.
It requires firms to disclose relevant information broadly to investors at the same time.
b.
It restricts firms from providing analysts with information that they could use before the market is aware of the
information.
c.
It requires firms to announce a change in expected earnings to all investors and other interested parties at the
same time.
d.
It prohibits firms from communicating with analysts after a news announcement is made to all investors.
e.
All of the above are correct with respect to Regulation FD.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
51. A(n) ____ from a broker requires the investor to put up additional collateral.
a.
maintenance margin
b.
initial margin
c.
margin call
d.
trading halt
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
Copyright Cengage Learning. Powered by Cognero.
Page 16
52. Which of the following is incorrect in regard to short selling?
a.
Naked short selling involves selling a stock short without first borrowing the stock.
b.
During the credit crisis, the SEC temporarily protected more than 800 firms from short selling.
c.
The SEC’s uptick rule prevents speculators from taking a short position in stocks that have declined at least 15
percent for the day, except when the most trade resulted in an increase in the stock price.
d.
During the credit crisis, some short sellers focused particularly on the stocks of financial institutions.
e.
none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
53. The bid-ask spread is negatively related to
a.
order costs
b.
inventory costs.
c.
Risk
d.
trading volume
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
54. Which of the following statements is incorrect with respect to the structure of the SEC?
a.
It is composed of seven commissioners appointed by the president of the United States.
b.
The president selects one commissioner to chair the commission.
c.
Each commissioner serves a five-year term.
d.
Commissioners’ terms are staggered.
e.
Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise
the regulations as needed.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
KEYWORDS:
Knowledge
Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 17
55. Which of the following is incorrect with regard to taxes imposed on stock transactions?
a.
Stock transactions are subject to dividend and capital gains tax at the federal level and may be subject to state
income tax as well.
b.
Stocks have to be held for at least one year to qualify for the long-term capital gains tax.
c.
The maximum federal tax on dividends and long-term capital gains is 14 percent.
d.
Higher tax rates are imposed on the dividends and capital gains of individuals in high tax brackets.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
56. The SEC’s ____ reviews the registration statement filedwhen a firm goes public, corporate filings for annual and
quarterly reports, and proxy statements that involve voting for board members or other corporate issues.
a.
Division of Corporate Finance
b.
Division of Market Regulation
c.
Division of Enforcement
d.
none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
57. 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
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
58. In naked short selling, short-sellers sell a stock short that they currently own.
a.
True
b.
False
ANSWER:
b
POINTS:
1
Copyright Cengage Learning. Powered by Cognero.
Page 18
59. Dark pools:
a.
are private stock markets used by institutional investors.
b.
are stocks issued by firms that have disclosed very limited financial information.
c.
are stock option contracts that cover positions in stocks.
d.
are contracts used to bet against the default of a debt instrument.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
60. 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.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
61. 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.
a.
bid rigging
b.
default inversion
c.
insider trading
d.
an increase in margin requirements
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 19
62. A criticism of dark pools is that they:
a.
reduce transparency.
b.
are more expensive than the public stock exchanges.
c.
are not accessible to institutional investors.
d.
cannot be used to trade large blocks of stock.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
63. 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:
a.
are illegal under Regulation FD.
b.
are legitimate if the consultants divulge only information that is already public.
c.
have raised concerns that the consultants provide inside information
d.
B and C
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
64. To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap
evidence.
a.
dark pool trading
b.
naked short selling
c.
insider trading
d.
accounting fraud
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
65. ______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed
instructions.
a.
High frequency trading
b.
Mechanical analysis
Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 20
c.
Liquidity trading
d.
Technical analysis
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
66. Traders that engage in high frequency trading commonly close out their positions in:
a.
one day.
b.
one month
c.
three months
d.
one year
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
67. High frequency traders set up their own _________ that specify the conditions under which a specific stock should be
purchased or sold, the size of the transaction, and the price that should be paid.
a.
algorithms
b.
inverse programs
c.
circuit breakers
d.
nextron networks
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
68. On May 6, 2010, the “__________” occurred, when stocks on the New York Stock Exchange (NYSE) declined by
more than 9 percent on average before reversing and recovering most of those losses on that same day. Much of the
trading occurred within a half hour, which is thought to be the most volatile half hour in the history of the NYSE.
a.
credit cefault crisis
b.
swap crisis
c.
specialist crash
d.
flash crash
ANSWER:
d
Copyright Cengage Learning. Powered by Cognero.
Page 21
69. While an investor’s ability to simultaneously consider multiple markets to accommodate its orders was perceived to
allow for more competitive pricing (lower transactions costs), it also led to a form of “_______________” whereby
traders with relatively faster access to specific markets can use another trader’s planned orders and move ahead of that
order.
a.
randomized algo
b.
front running
c.
circuit breaking
d.
specialist surfing
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
70. Many high frequency traders are willing to serve as intermediaries (similar to market makers) by
accommodating orders that they believe will ultimately result in profits.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge