Market Structure & Trading Mechanics Flashcards

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

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.

What is a 'market order' in securities trading?

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.

On the NYSE, which participant is responsible for maintaining a fair and orderly market by standing ready to buy or sell a specific stock?

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.

What does 'short selling' involve?

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.

What is a 'circuit breaker' in US equity markets?

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.

What is the 'T+1' settlement standard for US equity trades?

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.