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Question

Difficulty: MediumTypes of Markets and Trading Venues

An investor places an order through a registered broker-dealer to buy shares of a corporation whose stock is listed on a national exchange. The broker-dealer executes the transaction over-the-counter (OTC) rather than on the exchange floor. Which market venue segment does this trade represent?

  1. The Third MarketAnswer
  2. B
    The Primary Market
  3. C
    The Fourth Market
  4. D
    The Depository Trust Company (DTC) facility

Answer

The Third Market represents secondary trading of exchange-listed securities off-exchange in the over-the-counter (OTC) market.
The Third Market refers to secondary market trading of exchange-listed securities that takes place over-the-counter (OTC) off the floor of a physical or electronic exchange, facilitated by broker-dealers.

Step-by-Step Solution

1
Identify the type of security being traded
The security is listed on a national stock exchange.
Market segment definitions depend on whether securities are listed or unlisted.
2
Determine the execution venue and role of intermediaries
The trade is executed off-exchange in the OTC market with broker-dealer participation.
Trading listed stock OTC via broker-dealers distinguishes the Third Market from exchange trading or direct Fourth Market institutional trades.
3
Match the trade characteristics to the market venue classification
Trading exchange-listed stocks off the exchange in the OTC market defines the Third Market.
The Third Market provides liquidity and competitive pricing off traditional exchange floors.

Key Concept

Secondary market venue classifications (First, Second, Third, and Fourth Markets)
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Topics

Types of Markets and Trading Venues

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