Examkin

Question

Difficulty: MediumTypes of Markets and Trading Venues

A registered representative is explaining trading structures to a client by contrasting exchange-listed venues with over-the-counter (OTC) secondary market venues. Which of the following statements correctly describe the operating characteristics of OTC secondary market trading?

  1. The OTC market is an unlisted, decentralized, negotiated market where market makers compete by publishing bid and ask quotes.Answer
  2. Secondary market trading on OTC venues involves transactions between investors, meaning the issuing corporation receives no proceeds from these trades.Answer
  3. C
    Primary market offerings take place in the OTC secondary market whenever an issuing company receives the proceeds directly from public investors purchasing existing equity shares.
  4. D
    When a firm acts in a principal capacity in an OTC trade, it executes customer orders purely as an agent and charges a commission without using its own inventory.

Answer

The correct statements are that the OTC market is a decentralized, negotiated market where market makers compete via quotes, and secondary market trading involves trades between investors where the issuing corporation receives no proceeds.
The statements describing the OTC market as an unlisted, decentralized, negotiated venue with competing market makers, and describing secondary trades as investor-to-investor transactions without issuer proceeds, are accurate statements regarding market structure.

Step-by-Step Solution

1
Analyze the core structure of Over-the-Counter (OTC) markets.
Identify that OTC trading is decentralized and operates on a negotiated quote model rather than an auction floor.
Exchanges use auction mechanisms, whereas OTC relies on market maker negotiations across electronic networks.
2
Differentiate between primary and secondary market cash flows.
Confirm that secondary market trading transfers capital between investors, not to the issuing corporation.
The issuer only receives money during primary market issuance.
3
Distinguish between broker (agency) and dealer (principal) roles.
Eliminate statements asserting that principal trading involves agency commissions without inventory.
Principal trading involves buying/selling from proprietary inventory with mark-ups/mark-downs.

Key Concept

OTC Negotiated Market Characteristics vs. Primary/Secondary Market Roles
Rate this question

Topics

Types of Markets and Trading Venues

More questions from this topic