FIA Equity Markets & Trading 4 — Questions and Answers
Question 1: What is the role of a 'transfer agent' in equity markets?
- To match buy and sell orders on an exchange
- To maintain records of security ownership and process transfers between buyer and seller (Correct answer)
- To set the price at which new shares are issued in an IPO
- To monitor trading activity for regulatory compliance
Correct answer: To maintain records of security ownership and process transfers between buyer and seller
Transfer agents maintain shareholder records, process ownership transfers, and handle dividend payments on behalf of public companies.
Question 2: What is the significance of the ex-dividend date?
- The date on which a company announces its dividend payment
- The first date on which a buyer is not entitled to the declared dividend (Correct answer)
- The date on which dividend payments are mailed to shareholders
- The final date shareholders can sell shares before dividends are calculated
Correct answer: The first date on which a buyer is not entitled to the declared dividend
An investor must own shares before the ex-dividend date to receive the declared dividend; buyers on or after this date are not entitled to the upcoming payment.
Question 3: What is 'high-frequency trading' (HFT)?
- A strategy where trades are executed multiple times per day by human traders
- An automated trading strategy using powerful computers to execute a large number of orders at very high speeds (Correct answer)
- A technique used by retail investors to trade during peak market hours
- A form of arbitrage that exploits differences in closing auction prices
Correct answer: An automated trading strategy using powerful computers to execute a large number of orders at very high speeds
HFT uses sophisticated algorithms and co-located servers to execute a massive volume of orders in fractions of a second, capturing small price discrepancies.
Question 4: What distinguishes a 'block trade' from a typical equity transaction?
- Block trades are executed only after market hours
- Block trades involve very large quantities of securities, often negotiated privately to minimize market impact (Correct answer)
- Block trades are executed only between two exchanges
- Block trades are limited to government securities
Correct answer: Block trades involve very large quantities of securities, often negotiated privately to minimize market impact
Block trades involve large share quantities (typically 10,000+ shares or $200,000+ in value) and are often arranged privately or via dark pools to avoid moving the market.
Question 5: What is 'decimalization' in US equity markets?
- Converting trade volumes to decimals for reporting purposes
- The shift from fractional pricing (e.g., 1/8) to decimal pricing (e.g., $0.01) for stock quotes (Correct answer)
- A method of calculating portfolio returns to multiple decimal places
- The practice of rounding share prices to the nearest dollar
Correct answer: The shift from fractional pricing (e.g., 1/8) to decimal pricing (e.g., $0.01) for stock quotes
Decimalization, implemented in the US in 2001, changed stock pricing from fractions to decimals, reducing the minimum tick size and narrowing bid-ask spreads.
Question 6: What is a 'crossing network' in equity trading?
- A system that links multiple exchanges to provide unified pricing
- A mechanism that matches buy and sell orders internally at a midpoint price, avoiding exchange fees (Correct answer)
- A network that allows trades to cross national borders without currency conversion
- A clearing system that crosses offsetting positions to reduce settlement risk
Correct answer: A mechanism that matches buy and sell orders internally at a midpoint price, avoiding exchange fees
Crossing networks match institutional buy and sell orders at the midpoint of the bid-ask spread, minimizing market impact and transaction costs.
Question 7: Which regulatory body oversees equity market trading in the United States?
- Federal Reserve Board (FRB)
- Commodity Futures Trading Commission (CFTC)
- Securities and Exchange Commission (SEC) (Correct answer)
- Office of the Comptroller of the Currency (OCC)
Correct answer: Securities and Exchange Commission (SEC)
The SEC is the primary federal regulator overseeing US securities markets, including equity trading, disclosure requirements, and investor protection.
FIA Equity Markets & Trading 4
What is the role of a 'transfer agent' in equity markets?