29 Questions
What is the purpose of OTC Link ATS?
To facilitate trade negotiations between broker-dealers
What is the primary reason why FINRA ceased operations of the OTCBB?
Because OTC Markets Group's platforms took the lion's share of U.S. OTC stock trading and data
What is the primary difference between OTC Markets Group and exchanges?
The technology used for trade matching
What do broker-dealers post on OTC Link ATS to notify other broker-dealers of their willingness to trade an OTC security?
Quotes
When did FINRA officially cease operations of the OTCBB?
November 8, 2021
What is the primary factor that determines the weight of a stock in a market capitalization-weighted index?
Market capitalization
What is a common use of stock market indices?
Benchmarking the performance of individual stocks
Which type of index gives equal weight to all component stocks regardless of their market capitalization or stock price?
Equal-weighted index
What is the name of the index that pioneered the development of non-capitalization weighted indices in January 2003?
S&P 500 Equal Weighted Index
Which organization constructs indices at the national level using standardized methodology?
MSCI
What is another function of stock market indices besides benchmarking performance?
Acting as economic indicators
What is the primary function of OTC Link ATS?
To offer real-time quotes and trade execution for over-the-counter securities
What is a common risk associated with investing in OTC securities?
Lower liquidity and higher price volatility
What is a stock market index?
A way to measure and report the fluctuations of a pool of securities or a representative segment of a market
How does a company that oversees an index typically review the security selection?
Periodically
What is the weighting scheme used in a price-weighted stock index?
Each company's stock is weighted by its price per share
What is the purpose of an index in a stock market?
To measure and report the fluctuations of a pool of securities or a representative segment of a market
What is the primary reason why the TRI would be higher than the PRI?
Because the TRI includes the return from the reinvestment of dividends
What is the primary method of communication used on a trading floor?
Open outcry
What is the trend that has been observed in the stock exchange industry since the 1980s and 1990s?
A shift towards automated trading systems
What is the primary function of Designated Market Makers (DMMs) on the NYSE trading floor?
To facilitate human interaction and trading
In an auction market, how are buy and sell orders matched and executed?
Based on price and time priority
What is the characteristic of the NYSE trading floor that sets it apart from other stock exchanges?
It is the last major physical trading floor in the world
What is the role of a Designated Market Maker in the NYSE?
To manage the auction process during trading halts
What is the goal of an investor who engages in short selling?
To profit from an anticipated decrease in the stock's price
What happens during the auction process in the NYSE?
Buy and sell orders are matched, and a single price is determined that maximizes the number of shares traded
Why do regulators impose short sale restrictions?
To limit the ability of investors to short sell stocks during volatile market conditions
What is the last step in the short selling process?
Returning the borrowed shares to the brokerage or the original owner
What is the purpose of a DMM in an auction market?
To provide liquidity to the market
Study Notes
OTCBB and OTC Markets Group
- OTCBB is an electronic quotation service provided by FINRA.
- FINRA ceased operations of the OTCBB on November 8, 2021, due to the dominance of OTC Markets Group's platforms.
- OTC Markets Group leverages a network of broker-dealers rather than matching engine technology.
- OTC Link ATS is OTC Markets Group's electronic messaging and trade negotiation system.
Index Construction and Weighting
- Price-weighted indexes give more weight to stocks with higher prices.
- Market capitalization-weighted indexes assign weights based on company market capitalization (stock price * outstanding shares).
- Equal-weighted indexes give all component stocks equal weight regardless of market capitalization or stock price.
- The S&P 500 Equal Weighted Index pioneered the development of non-capitalization weighted indices in 2003.
Uses of Stock Market Indices
- Benchmarks for performance measurement of individual stocks, mutual funds, and portfolio managers.
- Economic indicators of the broader economy.
Trading and Investment
- Investing in OTC securities can offer opportunities but comes with risks of lower liquidity, higher price volatility, and less available information.
- Stock market indices measure and report the fluctuations of a pool of securities or a representative segment of a market.
Trading Platforms and Mechanisms
- Floor trading involves traders or stockbrokers meeting at a specific venue to buy and sell financial instruments using open outcry.
- Automated trading systems have replaced floor trading in many exchanges.
- The New York Stock Exchange Trading Floor is the last major physical trading floor in the world.
- Hybrid trading models combine electronic trading with human interaction.
- Auction markets match and execute trades based on price and time priority.
- Dealer markets involve dealers posting bid and ask quotes and providing liquidity to the market.
Short Selling
- Short selling is an investment strategy that aims to profit from an anticipated decrease in a stock's price.
- The process involves borrowing shares, selling them, repurchasing at a lower price, and returning the borrowed shares to retain the profit.
- Short sale restrictions are imposed to limit the ability of investors to short sell stocks, especially during volatile market conditions.
Test your knowledge of the OTCBB, an electronic quotation service provided by FINRA, and its relation to OTC Markets Group. Learn about the history and recent developments of these financial institutions.
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