Stock Trading Professional Standards & Competencies 4 — Questions and Answers
Question 1: What is 'spoofing' in securities markets?
- Creating fake trading accounts to circumvent position limits
- Placing orders with the intent to cancel them before execution to manipulate prices (Correct answer)
- Impersonating another trader to gain market access
- Using false identity to open brokerage accounts
Correct answer: Placing orders with the intent to cancel them before execution to manipulate prices
Spoofing involves placing bids or offers with the intent to cancel them before execution, creating a false impression of supply or demand to manipulate prices.
Question 2: The Volcker Rule primarily restricts financial institutions from:
- Lending to retail customers
- Engaging in proprietary trading and owning hedge funds or private equity funds (Correct answer)
- Trading foreign currency
- Offering margin accounts to institutional clients
Correct answer: Engaging in proprietary trading and owning hedge funds or private equity funds
The Volcker Rule, part of the Dodd-Frank Act, prohibits banks from engaging in short-term proprietary trading and limits their ownership stakes in hedge funds and private equity funds.
Question 3: When a broker-dealer executes a trade as a 'principal,' this means:
- The broker acted as an agent charging only a commission
- The broker bought or sold securities from its own inventory account (Correct answer)
- The trade was approved by the firm's principal officer
- The broker matched buyers and sellers without taking a position
Correct answer: The broker bought or sold securities from its own inventory account
When acting as a principal, a broker-dealer trades from its own account, taking the opposite side of the client's trade and earning a markup or markdown rather than a commission.
Question 4: Which document must investors receive before purchasing a mutual fund, outlining fees, risks, and investment objectives?
- Form ADV
- Prospectus (Correct answer)
- Annual Report (10-K)
- Statement of Additional Information only
Correct answer: Prospectus
Investors must receive a prospectus before or at the time of purchase, which discloses the fund's investment objectives, fees, risks, and management information.
Question 5: A customer files a complaint against their broker for unauthorized trading. Under FINRA rules, the firm must:
- Investigate and respond only if the complaint is in writing
- Report all written complaints to FINRA immediately upon receipt
- Retain records of all written complaints for at least four years (Correct answer)
- Resolve the complaint within 30 days or face automatic arbitration
Correct answer: Retain records of all written complaints for at least four years
FINRA Rule 4513 requires firms to retain records of all written customer complaints for at least four years in an easily accessible location.
Question 6: What does 'best execution' require of broker-dealers when executing client orders?
- Always routing orders to the exchange with the lowest listing fees
- Seeking the most favorable terms reasonably available for the customer's transaction (Correct answer)
- Executing all orders at the national best bid and offer (NBBO) without exception
- Completing all orders within 30 seconds of receipt
Correct answer: Seeking the most favorable terms reasonably available for the customer's transaction
Best execution requires broker-dealers to use reasonable diligence to seek the most favorable execution terms for customers, considering price, speed, likelihood of execution, and other relevant factors.
Question 7: Under SEC Rule 10b-5, which of the following constitutes a violation?
- Selling a stock at a loss to offset capital gains
- Making a materially false statement in connection with the purchase or sale of a security (Correct answer)
- Purchasing a stock without conducting fundamental analysis
- Recommending a stock without disclosing past performance
Correct answer: Making a materially false statement in connection with the purchase or sale of a security
SEC Rule 10b-5 prohibits making any materially false or misleading statement, or omitting material facts, in connection with the purchase or sale of any security.
Stock Trading Professional Standards & Competencies 4
What is 'spoofing' in securities markets?