An institutional asset manager executes a large transaction of exchange-listed equity securities directly with another institutional investor through an Electronic Communication Network (ECN) without utilizing a broker-dealer as an intermediary. Simultaneously, a retail investor purchases previously issued unlisted corporate shares directly from a market maker's proprietary inventory. Which of the following correctly categorizes the venues and capacities involved in these two secondary market transactions?
- The direct institutional transaction occurs in the Fourth Market, while the retail transaction takes place in the Over-the-Counter (OTC) secondary market with the market maker acting in a principal capacity.Answer
- BThe direct institutional transaction takes place in the Primary Market because no broker-dealer participated, while the retail trade takes place in the Third Market.
- CThe direct institutional transaction occurs in the Fourth Market, and the market maker in the retail trade acted in an agency capacity by charging a commission.
- DThe direct institutional transaction relies on the NSCC to perform safekeeping and custody of securities, while the retail trade takes place in the First Market.
Answer
The direct institutional transaction occurs in the Fourth Market, while the retail transaction takes place in the Over-the-Counter (OTC) secondary market with the market maker acting in a principal capacity.
The correct option accurately identifies that direct trading between institutional investors without intermediaries takes place in the Fourth Market (often via ECNs). Additionally, buying unlisted stock from a market maker's inventory is an Over-the-Counter (Second Market) transaction where the firm operates as a principal.
Step-by-Step Solution
Key Concept
Secondary Market Tiers and Broker-Dealer Capacities
Estimated Time:1m 30s