Free CISI CMP Sec/Deriv Practice Questions: Securities: Secondary Markets

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Securities: Secondary Markets. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Securities: Secondary Markets

A dealer is checking a proposed client order before sending it to a UK order-driven electronic order book.

Market data immediately before entry:

Order ticket:

• Action: Buy
• Quantity: 8,000 shares
• Order type: Limit
• Limit price: 102.30p
• Time in force: Day
• Special instructions: none

Assume continuous trading, no hidden liquidity, and fees ignored. Which conclusion is best supported?

• A. The order should be cancelled immediately because a day limit order must be fully executable on entry.
• B. 8,000 shares should execute at 102.30p because the limit price fixes the execution price.
• C. 4,000 shares should execute at 102.20p, with the remaining 4,000 shares resting as a bid at 102.30p.
• D. 8,000 shares should execute by taking 4,000 at 102.20p and 4,000 at 102.40p because there is enough displayed sell volume.

Best answer: C

What this tests: Securities: Secondary Markets

Explanation: A buy limit order sets the maximum price the buyer is willing to pay. It can execute immediately against displayed sell offers at or below the limit, starting with the best available offer. Here, only the 4,000 shares offered at 102.20p are within the 102.30p limit. The next sell offer is 102.40p, which is above the buyer’s limit, so it cannot be taken by this order. Because the ticket has day time-in-force and no fill-or-kill or all-or-none instruction, the unfilled balance is not automatically cancelled just because it cannot be fully filled immediately. It may remain on the book as a bid at the limit price until executed, cancelled, or expired at the end of the trading day.

• Treating the limit price as the guaranteed execution price confuses a limit with a fixed transaction price.
• Taking the 102.40p offer ignores the maximum price imposed by the buy limit.
• Immediate cancellation would require a special instruction such as fill-or-kill, which is absent from the ticket.

A buy limit order can trade only at or below its limit, so it takes the 102.20p offer but cannot trade against the 102.40p offer.

Question 2

Topic: Securities: Secondary Markets

A fund manager is placing an order for an order-driven UK equity traded on a secondary market.

Instruction details:

• The manager wants to buy 40,000 shares.
• The current market is 248p bid and 252p offer.
• The manager is prepared to buy only at 250p or lower.
• Immediate execution is not required.
• The instruction should remain available over future trading sessions until it is executed or the manager cancels it.

Which order instruction is the single best fit?

• A. A buy market order for 40,000 shares
• B. A day buy limit order at 250p
• C. A buy limit order at 250p, good-till-cancelled
• D. A buy stop order with a stop price of 250p

Best answer: C

What this tests: Securities: Secondary Markets

Explanation: A market order prioritises immediate execution at the best available price, so it does not protect the buyer from paying more than 250p. A limit order sets a maximum purchase price for a buy order, so a 250p buy limit will execute only at 250p or lower if sufficient liquidity becomes available. A good-till-cancelled instruction addresses the time condition by keeping the order active beyond the current session until it is filled or cancelled, subject to the broker’s or venue’s validity rules. A stop order is not designed to cap the purchase price in this situation; it is normally triggered when a specified price is reached and is often used for momentum entry or loss limitation.

• The market order fails because the manager has set a strict maximum purchase price.
• The buy stop instruction uses a trigger price rather than a simple maximum execution price.
• The day limit order has the correct 250p price cap but fails the need to remain active over future sessions.

A buy limit caps the purchase price at 250p and the good-till-cancelled instruction keeps it live beyond the current trading session.

Question 3

Topic: Securities: Secondary Markets

An asset manager needs to sell £8 million of a liquid UK-listed equity for a fund.

Execution facts:

• The shares are admitted to trading on a regulated exchange.
• The order is not entered into the exchange’s central order book.
• A bank provides a firm bid to the asset manager from its own book.
• The bank regularly executes client orders in this way outside a trading venue.
• No facility is bringing together multiple third-party buying and selling interests.

Which classification is the single best description of the bank’s role in this execution?

• A. Agency broker
• B. Systematic internaliser
• C. Exchange order-book market maker
• D. Multilateral trading facility

Best answer: B

What this tests: Securities: Secondary Markets

Explanation: A systematic internaliser is an investment firm that executes client orders against its own book outside a trading venue on an organised, frequent and systematic basis. The decisive facts are that the trade is bilateral, the bank is using its own capital, and no multilateral system is matching multiple third-party interests. An MTF or exchange order book would involve a trading venue with rules for bringing together buying and selling interests. An agency broker would normally act on behalf of the client without taking the other side as principal.

• A multilateral trading facility requires multiple third-party buying and selling interests to interact under venue rules, which is absent here.
• An agency broker would arrange or execute for the client as agent, not provide a firm principal bid from its own book.
• An exchange order-book market maker may quote on a regulated exchange, but the facts state that execution is outside the exchange order book.

The bank is dealing on own account with clients on an organised, frequent basis outside a regulated market or MTF.

Question 4

Topic: Securities: Secondary Markets

A sales trader is asked why a client’s screen shows sudden weakness in a sterling corporate bond during the afternoon.

Market notes:

• Bond: 5-year investment-grade corporate bond, £150m outstanding, mainly dealt OTC through market makers.
• No issuer announcement, rating action, covenant news, or adverse trading update has been released.
• Comparable gilt yields and sector credit spreads are little changed.
• A fund tried to sell £20m at once after a mandate redemption, while dealers were reluctant to add inventory.
• A matched purchase is delayed because the seller’s custodian has not delivered the bonds for settlement.
• Dealer quotes moved from 101.10/101.40 to 100.00/101.00 and quoted sizes became much smaller.

Which is the single best explanation for the apparent weakness?

• A. Issuer credit deterioration: the bond is repricing because new negative information has emerged about the issuer.
• B. Liquidity and settlement pressure: a large sale in a small OTC issue and a delivery delay reduced executable bids.
• C. Interest-rate risk: the bond is repricing because benchmark gilt yields have moved adversely.
• D. Exchange order-book volatility: the bond is repricing because algorithmic orders are sweeping a central limit order book.

Best answer: B

What this tests: Securities: Secondary Markets

Explanation: A bond price move in the secondary market is not always caused by issuer fundamentals. Small or less actively traded corporate bonds can have wide bid-offer spreads, limited dealer inventory, and poor depth. A large sell order may push executable bids down even when the issuer’s credit position is unchanged. Settlement problems can add pressure because dealers and buyers may be unwilling to commit balance sheet or take on delivery risk until the position can settle. Here, the absence of issuer news, stable comparable yields and spreads, a large forced sale, reduced quote sizes, and a custody delivery delay all support a liquidity and settlement explanation.

• Issuer credit deterioration fails because there is no issuer news, rating action, covenant issue, or adverse trading update.
• Interest-rate risk fails because comparable gilt yields are stated to be little changed.
• Exchange order-book volatility fails because the bond is mainly dealt OTC through market makers, not through a central limit order book.

The facts point to secondary-market frictions, not a change in the issuer’s credit or business fundamentals.

Question 5

Topic: Securities: Secondary Markets

A buy-side trader must buy 250,000 shares of a mid-cap equity during the next hour. The portfolio manager has asked the trader to reduce market impact and signalling risk, while still seeking a meaningful fill.

The trader reviews this market-data snapshot:

Which action is best supported by the snapshot?

• A. Display the full order at the best offer because visible depth confirms adequate liquidity.
• B. Sweep the lit order book immediately because the quoted spread is narrow.
• C. Use a staged execution, seeking midpoint liquidity where available and limiting displayed lit-market participation as conditions change.
• D. Execute the whole order through the market maker because a risk price removes execution cost.

Best answer: C

What this tests: Securities: Secondary Markets

Explanation: Execution quality is not determined by the quoted spread alone. A narrow spread can still produce poor execution if displayed depth is thin relative to the order size, because aggressive buying may walk the book and signal demand. Sharp price moves on small trades indicate higher short-term volatility and greater market-impact risk. A dark venue may reduce spread cost and signalling through midpoint execution, but the fill rate is uncertain, so it should not be the only route. The market maker quote gives certainty for only part of the order and includes a premium above the best offer. A staged, controlled approach best balances price, depth, volatility, order size, and venue selection.

• Sweeping the lit book focuses on speed but ignores thin depth and the likely price impact of a 250,000-share order.
• Displaying the full order would increase signalling risk and is not supported by the limited visible depth.
• A market maker risk price may be useful for part of the trade, but it does not remove cost and is quoted for only 50,000 shares.

The order is large relative to displayed depth, volatility is elevated, and venue choice can reduce spread cost and signalling risk without assuming full hidden liquidity.

Question 6

Topic: Securities: Secondary Markets

A dealer is reviewing why a corporate bond marked lower during the session. Which interpretation is best supported by the market data?

Market-data snapshot:

• A. The price fall is consistent with higher benchmark yields and wider credit spreads, with duration making the bond sensitive to the yield move and poorer liquidity weakening the executable price.
• B. The price fall is inconsistent with the data, because wider credit spreads normally increase the price of an investment-grade bond.
• C. The price fall is best explained by improved liquidity, because a wider bid-offer spread means dealers are more willing to trade tightly around fair value.
• D. The price fall is mainly explained by falling government benchmark yields, because lower benchmarks reduce the relative value of fixed-rate bonds.

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: For a fixed-rate corporate bond, price moves inversely to the yield required by investors. That required yield can be viewed as the relevant government benchmark yield plus the credit spread. Here, the benchmark yield rose by 25 bp and the credit spread widened by 40 bp, so the required yield rose by about 65 bp. With modified duration of 5.8 years, the bond is reasonably sensitive to yield changes, so a price decline is expected. The wider bid-offer spread also points to weaker liquidity, which can make the price at which a dealer can actually transact worse than the theoretical mid-market move alone.

• Treating falling benchmark yields as the cause reverses the data; the benchmark yield increased.
• Saying wider credit spreads raise the bond price reverses the credit-spread relationship for a fixed-rate corporate bond.
• A wider bid-offer spread indicates poorer liquidity, not tighter or more confident dealing conditions.

The benchmark yield rose by 25 bp and the credit spread widened by 40 bp, so the bond’s required yield increased materially and its 5.8-year duration supports a meaningful price decline.

Question 7

Topic: Securities: Secondary Markets

A junior dealer is preparing execution routes for three secondary-market trades. Review the trading note.

Security/order:
1. UK gilt: sell £5m nominal of an existing conventional gilt.
2. Corporate bond: buy £2m nominal of an investment-grade issuer's existing bond.
3. Listed ordinary shares: buy 25,000 shares admitted to trading on the London Stock Exchange.

Desk comment:
For the gilt and corporate bond, obtain dealer quotes and compare clean price/yield and bid-offer spread.
For the ordinary shares, use the exchange order book with an appropriate limit price.

Which interpretation is best supported by the note?

• A. The corporate bond should be executed like the listed shares because corporate bonds normally have the same liquidity and order-book structure as equities.
• B. The gilt and corporate bond are expected to trade by dealer quote, while the ordinary shares are routed through an exchange order book.
• C. All three securities are expected to trade through the same central order book, with dealer quotes used only after execution.
• D. The gilt can only be sold through a new-issue auction, while the corporate bond and shares trade in the secondary market.

Best answer: B

What this tests: Securities: Secondary Markets

Explanation: Government bonds and corporate bonds can trade actively after issue, but their secondary-market dealing is commonly quote-driven and dealer-based, especially in wholesale size. A trader may request prices from market makers or dealers and compare yields, clean prices and bid-offer spreads. Corporate bonds are often less liquid and less standardised than major equities, so dealer inventory and credit spread considerations can be important. Listed ordinary shares are more typically dealt through an exchange order book, where buy and sell orders interact under exchange rules and a limit order can control execution price. The note therefore supports different execution routes for bonds and equities, not the idea that all securities use the same market mechanism.

• Treating all three securities as central order-book trades ignores the separate dealer-quote process specified for the gilt and corporate bond.
• Saying the gilt can only be sold through a new-issue auction confuses primary issuance with secondary trading in existing government bonds.
• Assuming corporate bonds trade like listed shares overlooks the quote-driven, dealer-based nature of much corporate bond secondary trading.

The note distinguishes quote-driven bond dealing from exchange-traded equity execution on an order book.

Question 8

Topic: Securities: Secondary Markets

A client holds 2,000 shares in a listed company and enters a good-till-cancelled sell stop order with a stop price of 98p.

The broker’s handling rule is:

If a trade occurs at or below the stop price, the order becomes a market sell order. There is no limit price.

Ignore fees and taxes.

Market sequence:

• At order entry: 104p bid / 105p offer
• Later trades: 101p, 99p, then 98p
• Immediately after the stop is triggered, available bids are:
  • 1,000 shares at 97p
  • 1,000 shares at 96p

Which outcome is consistent with the order instruction?

• A. The stop is triggered at 98p; as a market sell order it can execute below 98p, producing about £1,930.
• B. The stop is triggered at 98p and all shares sell at exactly 98p, producing £1,960.
• C. The order remains live because a good-till-cancelled instruction prevents same-day execution.
• D. The order executes immediately at the 104p bid, producing £2,080.

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: A sell stop order is not executed when it is entered. It is activated only if the market trades at or below the stop price. In this case, the trade at 98p triggers the stop. Because the broker’s rule says the order then becomes a market sell order, the client does not have a guaranteed sale price of 98p. The order sells into the available bids: 1,000 shares at 97p and 1,000 shares at 96p. The proceeds are £970 plus £960, or about £1,930. The good-till-cancelled instruction only describes how long the order remains valid if it has not yet been triggered or cancelled; it does not prevent same-day execution.

• Immediate execution at 104p treats the instruction as a market order placed at entry, not as a stop order.
• Sale at exactly 98p confuses a stop trigger with a guaranteed limit price.
• Remaining live due to good-till-cancelled confuses order duration with execution conditions.

A sell stop becomes a market sell order once triggered, so execution uses the available bids of 97p and 96p.

Question 9

Topic: Securities: Secondary Markets

A buy-side trader is reviewing a post-trade record for an execution in a UK-listed share.

Execution file:

• Operator: an authorised investment firm; the venue is not a regulated market or stock exchange.
• Participants: multiple banks and investment firms can submit buy and sell orders.
• Matching: orders interact under published, non-discretionary rules.
• Operator position: the operator does not deal on own account for these trades and does not choose counterparties case by case.
• Broker role: the client’s broker routed the order to the venue but did not become principal.

Which classification is best supported by the file?

• A. A systematic internaliser
• B. A market maker in a dealer market
• C. Exchange trading on a regulated market
• D. A multilateral trading facility

Best answer: D

What this tests: Securities: Secondary Markets

Explanation: A multilateral trading facility (MTF) brings together multiple third-party buying and selling interests in financial instruments under non-discretionary rules, resulting in trades. It can look similar to exchange order-book trading, but it is not itself a regulated market or stock exchange. A systematic internaliser is different: it is an investment firm executing client orders against its own book outside a trading venue. A broker may route an order to a venue as agent, but that does not make the broker the execution venue. A market maker or dealer provides liquidity by quoting or trading as principal. The file points to an MTF because multiple participants’ orders interact under set rules, while the operator is neither the principal counterparty nor a regulated exchange.

• Exchange trading is not supported because the file states the venue is not a regulated market or stock exchange.
• A systematic internaliser would involve bilateral own-account execution by the firm, not multilateral matching of third-party orders.
• A market maker in a dealer market would quote or trade as principal, while the operator here does not take principal positions.

The file describes a multilateral system matching third-party buying and selling interests under non-discretionary rules outside a regulated market.

Question 10

Topic: Securities: Secondary Markets

A buy-side dealer at a UK asset manager receives an order with these facts:

• Instrument: £5 million nominal of a sterling corporate bond.
• Liquidity: The bond trades infrequently, and dealer screens show indicative prices rather than firm depth.
• Urgency: The order should be completed today ahead of an index rebalance.
• Client requirement: The portfolio manager wants a firm executable price before committing.

Which execution method is most appropriate?

• A. Request executable quotes from selected bond dealers by RFQ or voice, compare firm prices, and trade with the best available dealer.
• B. Use a multi-day VWAP algorithm based on exchange order-book volume.
• C. Enter an immediate market order for the full nominal amount into a central order-driven equity book.
• D. Post the full order as a visible limit order and wait for natural contra interest.

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: Sterling corporate bonds, especially less liquid issues, are commonly traded through dealer markets rather than through a deep central order book like a liquid equity. When screen prices are only indicative and the dealer needs to complete today, the execution method should obtain firm, executable prices from market makers or bond dealers. An RFQ or voice process lets the dealer compare available liquidity and price for the required size while keeping the process consistent with the instrument’s market structure. The urgency rules out a slow passive approach, and the lack of exchange order-book depth makes equity-style market orders or VWAP algorithms unsuitable.

• A full market order in an equity-style central book assumes a venue and liquidity profile that do not match an infrequently traded corporate bond.
• A VWAP algorithm is more suitable for liquid exchange-traded shares with observable order-book volume, not urgent bond execution with indicative dealer prices.
• A visible passive limit order may fail to complete today and can reveal trading interest in a thin market.

An infrequently traded corporate bond is normally executed through quote-driven dealer liquidity, and RFQ or voice dealing gives a firm price for same-day execution.

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