Examkin

Question

Difficulty: MediumTypes of Markets and Trading Venues

Two major pension funds arrange the direct transfer of a large block of listed equity securities between their respective portfolios without using the services of a broker-dealer intermediary or traditional exchange floor. Which secondary trading market tier is utilized for this direct institution-to-institution trade?

  1. Fourth marketAnswer
  2. B
    Primary market
  3. C
    Third market
  4. D
    National Securities Clearing Corporation (NSCC) market

Answer

The Fourth market is the secondary trading venue tier consisting of direct trading between institutional investors without broker-dealer intermediaries.
The correct answer identifies the Fourth market. The Fourth Market consists of direct institution-to-institution trading of securities without using a broker-dealer intermediary. Institutions utilize proprietary networks and Electronic Communication Networks (ECNs) in the Fourth Market to reduce transaction costs and commissions when trading large block positions.

Step-by-Step Solution

1
Analyze the trading participants and execution mechanism in the scenario.
The transaction involves two institutional entities (pension funds) executing a trade directly with each other without a broker-dealer.
Identifying the presence of intermediaries and the nature of the participating buyers/sellers determines the market venue classification.
2
Differentiate between the four market tiers of secondary trading.
First Market = Listed securities traded on an exchange floor/electronic order book. Second Market = Unlisted OTC securities. Third Market = Exchange-listed securities traded OTC via broker-dealers. Fourth Market = Direct institution-to-institution trading, usually via ECNs.
Applying definitions of trading venues narrows down the correct classification for institution-to-institution trades.
3
Match the scenario to the correct market tier.
Direct institutional trading without broker-dealers is defined as the Fourth Market.
The Fourth Market eliminates broker commissions by allowing large institutions to trade block positions directly.

Key Concept

Secondary Market Tiers and Trading Venues
Rate this question

Topics

Types of Markets and Trading Venues

More questions from this topic