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Question

Difficulty: MediumTypes of Markets and Trading Venues

An investor places an order to trade shares of a stock listed on the New York Stock Exchange (NYSE). The order is executed off-floor in the over-the-counter (OTC) market by institutional market makers. Which market segment does this transaction represent?

  1. Third marketAnswer
  2. B
    Primary market
  3. C
    Fourth market
  4. D
    Depository clearance market

Answer

The transaction represents the Third Market, which consists of over-the-counter (OTC) trading of exchange-listed equities.
The third market is defined as over-the-counter (OTC) trading of exchange-listed securities. Broker-dealers and institutional market makers execute these trades off the floor of the primary exchange where the security is listed.

Step-by-Step Solution

1
Identify the trading venue characteristics
The security is exchange-listed (NYSE), but the execution takes place off the exchange floor in the over-the-counter (OTC) market.
Trading venues are categorized by where trades are executed relative to where the securities are listed.
2
Match venue characteristics to market definitions
OTC trading of exchange-listed securities is explicitly defined as the Third Market.
The first market is physical exchange trading; the second market is OTC trading of unlisted securities; the third market is OTC trading of listed securities; and the fourth market is direct institution-to-institution trading.

Key Concept

Third Market Trading Venues
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Topics

Types of Markets and Trading Venues

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