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Question

Difficulty: MediumTypes of Markets and Trading Venues

An investor is reviewing how equity securities are traded across different secondary market venues. Which of the following statements correctly describe trading in over-the-counter (OTC) equity markets? (Select ALL that apply.)

  1. Trades are executed through a decentralized network of broker-dealers acting as market makers in a negotiated market.Answer
  2. B
    Transactions take place on a centralized physical trading floor managed by an assigned exchange specialist.
  3. Securities traded OTC frequently include unlisted equities that do not satisfy national exchange listing standards.Answer
  4. D
    The issuing corporation receives the proceeds generated from every trade conducted between market participants.

Answer

Over-the-counter (OTC) equity trading occurs across a decentralized network of market makers in a negotiated market environment, and incorporates unlisted stocks that fail to meet national stock exchange listing requirements.
The correct statements recognize that over-the-counter (OTC) markets operate via a decentralized network of market makers negotiating prices, and that OTC venues accommodate unlisted equity securities that do not fulfill national exchange listing standards.

Step-by-Step Solution

1
Analyze OTC market trading structure
Identify that OTC markets operate without a physical floor, relying instead on a decentralized, electronic inter-dealer network where dealers compete through negotiated bids and asks.
Contrasting OTC negotiated markets with centralized double-auction stock exchanges is fundamental to market venue structure.
2
Evaluate listing requirements for OTC securities
Confirm that unlisted corporate equities—those unable or choosing not to meet exchange listing standards—trade in the OTC market.
Exchange listing rules establish financial thresholds, so non-qualifying securities reside in OTC quotation systems.
3
Differentiate secondary market trading from primary issuance
Recognize that secondary market trades (OTC or exchange) involve investor-to-investor transactions where the issuing entity receives no capital proceeds.
Capital flows to the issuer exclusively during primary market transactions.

Key Concept

OTC Negotiated Markets vs. Exchange Auction Markets and Secondary Market Dynamics
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Topics

Types of Markets and Trading Venues

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