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Question

Difficulty: EasyTypes of Markets and Trading Venues

When institutional investors trade large blocks of exchange-listed securities directly with one another through electronic communication networks (ECNs) without using a broker-dealer intermediary, this transaction takes place in which of the following trading venues?

  1. Fourth MarketAnswer
  2. B
    Primary Market
  3. C
    Depository Trust Company (DTC)
  4. D
    Dealer Inventory Market

Answer

The correct trading venue is the Fourth Market.
The Fourth Market refers specifically to direct secondary market trading of securities between institutional investors (such as mutual funds, pension funds, and insurance companies) using proprietary electronic networks (ECNs) without the assistance or commissions of broker-dealer intermediaries.

Step-by-Step Solution

1
Identify the trading participants and execution mechanism in the scenario.
The trade occurs directly between institutional investors using an Electronic Communication Network (ECN).
Understanding who is trading and how the trade is executed identifies the specific market tier.
2
Match the trade characteristics to the market venue definitions.
Direct institution-to-institution trading without broker-dealer intermediaries defines the Fourth Market.
The Fourth Market is designed for institutions to execute block trades efficiently while bypassing traditional market maker commissions.

Key Concept

Fourth Market Operations and Institutional Trading Venues
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Topics

Types of Markets and Trading Venues

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