SIE Market Structure and Trading 2 — Questions and Answers
Question 1: Dark pools are best described as:
- Exchanges that specialize in penny stocks
- Private trading venues that do not display quotes publicly (Correct answer)
- After-hours trading systems
- Derivatives trading platforms
Correct answer: Private trading venues that do not display quotes publicly
Dark pools are private trading venues where large orders can be executed without showing quotes to the public market.
Question 2: A stop order (stop-loss order) becomes a market order when:
- The security's price reaches the limit price
- The security's price reaches or passes the stop price (Correct answer)
- The order is not filled within one trading day
- Volume exceeds the order size
Correct answer: The security's price reaches or passes the stop price
A stop order is triggered and becomes a market order when the security's price reaches the designated stop price.
Question 3: Short selling requires investors to borrow securities because:
- They must hold the securities for 30 days before selling
- They are selling securities they do not currently own (Correct answer)
- SEC rules require collateral for all trades
- Short selling is only permitted on margin
Correct answer: They are selling securities they do not currently own
Short sellers borrow securities to sell them first, expecting to buy them back cheaper later and return the borrowed shares.
Question 4: What is the 'spread' in a securities quote?
- The difference between the stock's 52-week high and low
- The difference between the bid and ask prices (Correct answer)
- The commission charged by the broker
- The difference between par value and market price
Correct answer: The difference between the bid and ask prices
The spread is the difference between the ask price (what dealers sell at) and the bid price (what dealers buy at), representing the dealer's compensation.
Question 5: An all-or-none (AON) order instructs the broker to:
- Fill the order immediately or cancel it
- Execute the entire order at once or not at all (Correct answer)
- Accept any price for the entire order
- Execute the order only at the opening price
Correct answer: Execute the entire order at once or not at all
An AON order must be filled in its entirety at the specified price; partial fills are not accepted.
Question 6: What is payment for order flow (PFOF)?
- Commissions paid by customers for trade execution
- Compensation paid to broker-dealers by market makers for routing customer orders to them (Correct answer)
- Fees paid by exchanges to attract listing companies
- Charges for late settlement of securities
Correct answer: Compensation paid to broker-dealers by market makers for routing customer orders to them
PFOF is a practice where market makers compensate broker-dealers for routing customer orders to them for execution.
SIE Market Structure and Trading 2
Dark pools are best described as: