Securities Trader Representative (Series 57) Practice Exam

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The SEC created rules for Limit Up/Limit Down to address which primary concern?

Preventing downward pressure on individual securities due to an increase in short selling
Preventing trades in individual securities from occurring outside a specified trading band
Preventing trading in all securities from occurring outside a specified trading band
Allowing trading in individual securities in other market centers if the primary market center halts trading

The correct answer is: Preventing trades in individual securities from occurring outside a specified trading band

The focus of the Limit Up/Limit Down (LULD) rules established by the SEC is to prevent trades in individual securities from occurring outside a defined price range, or trading band. This mechanism is designed to enhance market stability during periods of significant volatility by ensuring that trades cannot occur outside of predetermined price thresholds. The primary concern that led to the creation of these rules was the erratic price fluctuations that could lead to market disruptions or flash crashes. By enforcing a trading band, the LULD mechanism helps to prevent extreme price movements in individual securities that may not reflect the underlying fundamentals, ensuring a smoother trading experience and reducing the likelihood of panic selling or buying. The other choices relate to broader concepts or different dimensions of securities trading, but the specific aim of the LULD framework is centered on the prevention of individual securities trading outside specified price limits.