FIA Equity Markets & Trading 2 — Questions and Answers
Question 1: What does the term 'short selling' mean in equity markets?
- Buying shares and holding them for less than one day
- Borrowing shares to sell them, hoping to repurchase at a lower price (Correct answer)
- Selling shares at a discount to their market value
- Placing a sell order with a time limit shorter than normal
Correct answer: Borrowing shares to sell them, hoping to repurchase at a lower price
Short selling involves borrowing shares and selling them with the intent to repurchase at a lower price, profiting from price declines.
Question 2: Which order type guarantees execution but not price?
- Limit order
- Stop-limit order
- Market order (Correct answer)
- Fill-or-kill order
Correct answer: Market order
A market order is executed immediately at the best available price, guaranteeing execution but not the price received.
Question 3: What is a 'circuit breaker' in the context of US equity markets?
- A regulatory cap on daily trading volume
- A mechanism that temporarily halts trading when prices fall by a defined percentage (Correct answer)
- A device used by exchanges to manage server load
- A rule limiting the number of short sale transactions per day
Correct answer: A mechanism that temporarily halts trading when prices fall by a defined percentage
Circuit breakers are market-wide trading halts triggered when a major index, such as the S&P 500, declines by a specified percentage threshold.
Question 4: What is the primary function of a market maker?
- To act as an arbitrator in trade disputes
- To continuously quote buy and sell prices, providing liquidity (Correct answer)
- To execute large block trades on behalf of institutions
- To set official benchmark prices at the close of trading
Correct answer: To continuously quote buy and sell prices, providing liquidity
Market makers quote continuous bid and ask prices and stand ready to buy or sell, ensuring there is always liquidity available for investors.
Question 5: What does 'T+2 settlement' mean for equity trades in the US?
- Trades must be confirmed within 2 minutes of execution
- The buyer must pay within 2 hours of the trade
- Final exchange of securities and cash occurs 2 business days after the trade date (Correct answer)
- Brokers have 2 days to report the trade to FINRA
Correct answer: Final exchange of securities and cash occurs 2 business days after the trade date
T+2 settlement means the legal transfer of securities and payment is completed two business days after the trade is executed.
Question 6: Which of the following best describes an Electronic Communications Network (ECN)?
- A government-run system for reporting insider trading
- An automated system that matches buy and sell orders electronically outside traditional exchanges (Correct answer)
- A network of brokers who trade directly with each other by phone
- A software platform used exclusively by retail investors
Correct answer: An automated system that matches buy and sell orders electronically outside traditional exchanges
ECNs are automated platforms that electronically match buy and sell orders, often providing after-hours trading and direct access to markets.
Question 7: What is 'price improvement' in equity trading?
- When a stock's price rises after a buy order is placed
- When a trade is executed at a price better than the quoted bid or ask (Correct answer)
- When a broker negotiates a lower commission for a client
- When market conditions improve after a position is opened
Correct answer: When a trade is executed at a price better than the quoted bid or ask
Price improvement occurs when a buy order is filled below the ask price or a sell order is filled above the bid price, benefiting the investor.
FIA Equity Markets & Trading 2
What does the term 'short selling' mean in equity markets?