A financial firm analyzes two distinct trading executions:
I. An over-the-counter (OTC) trade of a National Exchange-listed equity security between market makers.
II. A direct institutional trade of listed equity securities conducted proprietary-to-proprietary through an automated electronic system without market-maker intermediation.
Which of the following statements regarding these venue classifications are correct?
- Execution I is classified as a Third Market transaction.Answer
- Execution II takes place in the Fourth Market via an Electronic Communications Network (ECN).Answer
- CExecution I is considered a primary market transaction because it occurs off the physical exchange floor.
- DExecution II converts the executing venue into a depository entity performing DTC safekeeping functions.
Answer
Execution I is classified as a Third Market transaction, and Execution II takes place in the Fourth Market via an Electronic Communications Network (ECN).
The Third Market refers specifically to over-the-counter (OTC) trading of securities that are listed on a primary exchange. The Fourth Market consists of direct trading between institutions without broker-dealers as intermediaries, usually conducted through Electronic Communications Networks (ECNs). Both statements correctly describe these venue structures.
Step-by-Step Solution
Key Concept
Classification of Third and Fourth Markets and Trading Venues