Lesson #15 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

The difference between dealers and brokers is:

❌ Dealers do not serve as a principal in transactions and brokers do.
❌ Brokers are market makers and dealers are not.
❌ Dealers make, on average, more profits than brokers.
✅ Brokers do not serve as a principal in transactions and dealers do.

Explanation:
Dealers trade on their own account (they are principals), while brokers only arrange trades for clients and do not own the securities involved.

Question 2

Stock exchanges did not flourish until the 19th century in the U.S. because:

❌ The cost of creating such an exchange was perceived to be too high.
❌ There was no demand for such a stock exchange.
✅ The number of potentially listed companies was too small.
❌ Basic information technology was not yet available.

Explanation:
Before the 19th century, there were very few large corporations, so there weren’t enough companies to justify active stock exchanges.

Question 3

NASDAQ Level II screen scenario — what happens if a dealer places a limit order to buy 50 shares at $20.02?

❌ There will be a transaction of 100 shares at $20.05.
❌ There will be a transaction of 50 shares at $20.
❌ There will be a transaction of 50 shares at $20.05.
✅ No transaction will occur.

Explanation:
The best ask price is $20.05. A buy order at $20.02 does not match the ask price, so no trade is executed.

Question 4

Why do high-frequency trading firms locate servers close to exchanges?

❌ Take advantage of exchange maintenance services.
❌ Benefit from the highest possible demand for trades.
❌ Receive price discounts from exchanges.
✅ Minimize the time to transmit orders to the exchange.

Explanation:
High-frequency trading depends on ultra-low latency. Being physically closer reduces transmission time and gives a speed advantage.

Question 5

A payment for order flow is:

❌ Equal to the bid-ask spread.
✅ The compensation and benefit a brokerage receives by directing orders to different parties to be executed.
❌ A transaction cost only associated with stop-loss orders.
❌ A transaction cost only associated with limit orders.

Explanation:
Payment for order flow is money or benefits brokers receive for sending client orders to specific market makers or firms.

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