Stock Broker Market Structure & Trading Mechanics 1

Question 1

What is the 'bid-ask spread' in securities trading?

Accepted Answer

The difference between the highest price buyers will pay and the lowest price sellers will accept

Answer

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?

Accepted Answer

An order to buy or sell immediately at the best available current market price

Answer

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?

Accepted Answer

Designated Market Maker (DMM)

Answer

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?

Accepted Answer

Selling borrowed shares with the obligation to buy them back later, profiting if the price falls

Answer

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?

Accepted Answer

A regulatory mechanism that halts trading when major indexes fall by specified percentages

Answer

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.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Market Structure & Trading Mechanics 1