Examkin

Question

Difficulty: MediumTypes of Markets and Trading Venues

A compliance officer is reviewing execution venues used for off-exchange trading of equity securities. Which of the following statements correctly describe the structural characteristics of the Third and Fourth Markets? (Select TWO correct options)

  1. Third Market transactions involve exchange-listed equity securities traded in the over-the-counter (OTC) market between broker-dealers.Answer
  2. Fourth Market transactions consist of direct trading between institutional investors executed through Electronic Communication Networks (ECNs).Answer
  3. C
    Fourth Market transactions are primary market offerings in which issuing corporations sell newly issued shares directly to institutional buyers to raise capital.
  4. D
    Broker-dealers executing Third Market orders while acting in a principal capacity charge an agency commission on the transaction.

Answer

The correct statements are that Third Market transactions involve exchange-listed equity securities traded OTC between broker-dealers, and Fourth Market transactions consist of direct trading between institutional investors executed through Electronic Communication Networks (ECNs).
The Third Market is defined as off-exchange over-the-counter (OTC) trading of securities listed on a national exchange. The Fourth Market is comprised of direct trades between institutional investors bypassing broker-dealers by trading on Electronic Communication Networks (ECNs). Both represent key secondary market execution venues.

Step-by-Step Solution

1
Analyze the operational structure of the Third Market.
Identify that the Third Market encompasses over-the-counter (OTC) trading of stocks that are listed on a formal exchange such as the NYSE.
Trading listed stocks off the physical exchange floor between broker-dealers defines Third Market activity.
2
Analyze the operational structure of the Fourth Market.
Identify that the Fourth Market consists of direct institution-to-institution block trading using proprietary ECN systems without broker-dealers.
Eliminating intermediaries allows major institutions like pension funds and mutual funds to lower transaction costs.
3
Evaluate and eliminate incorrect distractor statements.
Reject statements attributing primary issuer capital raising to the Fourth Market or claiming principal trades incur agency commissions.
Both markets operate exclusively in the secondary market, and principal trading earns markups/markdowns rather than agency commissions.

Key Concept

Structural differences between Third Market OTC trading of listed stocks and Fourth Market direct ECN institutional trading.
Estimated Time:1m 15s
Rate this question

Topics

Types of Markets and Trading Venues

More questions from this topic