Examkin

Question

Difficulty: MediumTypes of Markets and Trading Venues

Securities transactions take place across various market tiers and execution capacities. Which of the following statements regarding trading venues and execution roles are correct?

  1. The Third Market refers to over-the-counter (OTC) trading of securities that are listed on a primary stock exchange.Answer
  2. When a broker-dealer fills a customer buy order directly from its own firm inventory, it acts in a principal capacity and charges a mark-up.Answer
  3. C
    When an issuing corporation sells a new offering of securities to the public to raise growth capital, the transaction takes place in the secondary market.
  4. D
    A broker-dealer acting as an agent in a transaction buys securities from inventory and receives a mark-up rather than a commission.

Answer

The correct statements are that the Third Market involves over-the-counter trading of exchange-listed securities, and that a broker-dealer executing customer orders from its own inventory acts as a principal charging a mark-up or mark-down.
The Third Market refers specifically to off-floor over-the-counter trading of exchange-listed securities. Furthermore, when a firm acts as a dealer (principal capacity), it buys and sells securities for its own inventory account and charges a mark-up when selling to a customer or a mark-down when buying from a customer.

Step-by-Step Solution

1
Analyze the venue definition for the Third Market.
The Third Market is defined as over-the-counter (OTC) trading of listed securities, which makes this statement accurate.
Exchange-listed stocks traded off the physical exchange floor in the OTC market constitute the Third Market.
2
Evaluate broker-dealer execution capacities (Broker vs. Dealer).
Trading from inventory denotes a principal (dealer) role where the firm charges a mark-up or mark-down, making the statement accurate.
Broker-dealers operate in two capacities: Agent (broker/commission/no inventory) or Principal (dealer/mark-up or mark-down/inventory).
3
Identify misclassifications in primary vs. secondary market transactions.
An issuer selling new shares to raise capital is a primary market transaction, rendering the secondary market claim incorrect.
Secondary market trading takes place strictly between investors, with no proceeds going to the issuing company.

Key Concept

Third Market OTC trading of listed securities and Broker-Dealer principal versus agent execution roles.
Rate this question

Topics

Types of Markets and Trading Venues

More questions from this topic