Stock Broker Market Structure & Trading Mechanics 1 — Questions and Answers
Question 1: What is the 'bid-ask spread' in securities trading?
- The difference between a stock's 52-week high and low
- The difference between the highest price buyers will pay and the lowest price sellers will accept (Correct answer)
- The fee charged by the exchange per trade
- The gap between pre-market and regular session prices
Correct answer: The difference between the highest price buyers will pay and the lowest price sellers will accept
The bid-ask spread is the difference between the bid price (highest price a buyer will pay) and the ask price (lowest price a seller will accept), representing the market maker's compensation for providing liquidity.
Question 2: What is a 'market order' in securities trading?
- An order to buy or sell at a specific price or better
- An order to buy or sell immediately at the best available current market price (Correct answer)
- An order that expires at the end of the trading day
- An order that executes only in after-hours trading
Correct answer: An order to buy or sell immediately at the best available current market price
A market order instructs the broker to buy or sell a security immediately at the best available current price, prioritizing execution speed over price certainty.
Question 3: On the NYSE, which participant is responsible for maintaining a fair and orderly market by standing ready to buy or sell a specific stock?
- Retail investor
- Floor broker
- Designated Market Maker (DMM) (Correct answer)
- Compliance officer
Correct answer: Designated Market Maker (DMM)
NYSE Designated Market Makers (formerly specialists) are assigned to specific stocks and are obligated to maintain fair and orderly markets by posting competitive quotes and providing liquidity.
Question 4: What does 'short selling' involve?
- Buying shares with borrowed money
- Selling borrowed shares with the obligation to buy them back later, profiting if the price falls (Correct answer)
- Selling shares you own at a loss for tax purposes
- Trading securities in less than one minute
Correct answer: Selling borrowed shares with the obligation to buy them back later, profiting if the price falls
Short selling involves borrowing shares and selling them, hoping to repurchase them at a lower price later to return to the lender, profiting from the price decline.
Question 5: What is a 'circuit breaker' in US equity markets?
- A tool that disconnects computers during power surges
- A regulatory mechanism that halts trading when major indexes fall by specified percentages (Correct answer)
- A rule limiting the number of trades per second
- A device used to limit short selling
Correct answer: A regulatory mechanism that halts trading when major indexes fall by specified percentages
Circuit breakers are market-wide trading halts triggered when the S&P 500 falls 7%, 13%, or 20% in a single day, designed to give investors time to assess extreme volatility.
Question 6: What is the 'T+1' settlement standard for US equity trades?
- Trades must be executed within 1 hour
- Trades settle (transfer of securities and cash) one business day after the trade date (Correct answer)
- Trades must be reported to FINRA within 1 day
- Investors must hold shares for at least 1 day
Correct answer: Trades settle (transfer of securities and cash) one business day after the trade date
T+1 settlement means that the actual exchange of securities and cash occurs one business day after the trade date, following the SEC's 2024 move from T+2.
Stock Broker Market Structure & Trading Mechanics 1
What is the 'bid-ask spread' in securities trading?