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Question

Difficulty: MediumTypes of Markets and Trading Venues

A university endowment fund executes a direct trade of 50,000 listed equity shares with a corporate pension fund using an Electronic Communication Network (ECN), without using a broker-dealer to act as an intermediary. In which secondary trading market venue classification did this transaction occur?

  1. Fourth MarketAnswer
  2. B
    Third Market
  3. C
    Primary Market
  4. D
    First Market

Answer

The transaction occurred in the Fourth Market, which represents direct trading between institutional investors without broker-dealer intervention.
The Fourth Market consists exclusively of direct institutional-to-institutional trading in listed or unlisted securities, typically facilitated by Electronic Communication Networks (ECNs), bypassing traditional broker-dealer market makers and commissions.

Step-by-Step Solution

1
Identify the transaction participants and venue characteristics
Two institutional entities (university endowment and corporate pension fund) are trading existing listed equity shares directly via an ECN without broker-dealer participation.
Market tier classifications are determined by the security type, trading platform, and role of intermediaries.
2
Evaluate the market tier definitions
Direct trades between institutional investors bypassing intermediaries occur specifically in the Fourth Market.
Third market involves broker-dealers, first market involves exchange trading, and primary market involves new security issuance.

Key Concept

Secondary Market Structure and Fourth Market Definition
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Topics

Types of Markets and Trading Venues

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