SIE Market Structure and Trading 1 — Questions and Answers
Question 1: What is the role of a market maker?
- To regulate trading activity on exchanges
- To provide liquidity by continuously quoting bid and ask prices (Correct answer)
- To execute trades only for institutional investors
- To set the official closing price of securities
Correct answer: To provide liquidity by continuously quoting bid and ask prices
Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.
Question 2: The bid price in a security quote represents:
- The price at which a dealer will sell the security
- The price at which a dealer will buy the security (Correct answer)
- The last traded price of the security
- The average of buy and sell prices
Correct answer: The price at which a dealer will buy the security
The bid price is the highest price a buyer (dealer) is willing to pay to purchase the security from an investor.
Question 3: The National Best Bid and Offer (NBBO) rule requires broker-dealers to:
- Execute all trades through the NYSE
- Execute customer orders at the best available prices across all exchanges (Correct answer)
- Charge a minimum commission on all trades
- Route orders to the largest market maker
Correct answer: Execute customer orders at the best available prices across all exchanges
The NBBO rule requires broker-dealers to execute customer orders at the best available bid or offer price across all trading venues.
Question 4: A limit order is an instruction to buy or sell a security:
- Immediately at the best available market price
- At a specific price or better (Correct answer)
- Only at the closing price
- Only if trading volume exceeds a threshold
Correct answer: At a specific price or better
A limit order specifies the maximum price a buyer will pay (or minimum price a seller will accept) and will only execute at that price or better.
Question 5: What is the difference between a broker and a dealer?
- Brokers trade for their own account; dealers trade for customers
- Brokers act as agents for customers; dealers trade for their own account as principals (Correct answer)
- Dealers are regulated by FINRA; brokers are not
- Brokers only handle government securities
Correct answer: Brokers act as agents for customers; dealers trade for their own account as principals
A broker acts as an agent executing trades on behalf of customers, while a dealer trades as a principal from its own inventory.
Question 6: Regular-way settlement for most equity securities occurs:
- Same day as the trade
- 1 business day after the trade (T+1) (Correct answer)
- 2 business days after the trade (T+2)
- 3 business days after the trade (T+3)
Correct answer: 1 business day after the trade (T+1)
Following the SEC's 2024 transition to T+1 settlement, most equity securities must settle one business day after the trade date.
SIE Market Structure and Trading 1
What is the role of a market maker?