A pension fund completes an off-exchange transaction directly with a mutual fund to trade a position of exchange-listed shares using an automated matching network without the involvement of a broker-dealer intermediary. How is this transaction venue classified?
- The fourth market, because institutional investors are trading directly with each other through electronic communication networks.Answer
- BThe primary market, because direct transactions between institutional entities bypass traditional secondary exchanges to transfer capital.
- CThe third market, because the electronic network acts as a principal dealer buying shares into inventory to resell to the recipient fund.
- DThe second market, because clearance and settlement entities like the Depository Trust Company (DTC) serve as the primary execution venue.
Answer
The fourth market consists of direct institutional-to-institutional trading of financial securities through electronic communication networks (ECNs) without using broker-dealers as intermediaries.
The correct answer accurately identifies the fourth market, which comprises institutional investors trading large blocks of stock directly with one another through proprietary computer networks and ECNs, completely bypassing broker-dealer intermediaries and traditional exchange floors.
Step-by-Step Solution
Key Concept
Fourth Market and ECN Execution Mechanics