Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A client is interested in purchasing shares of a company directly from other institutional investors without using a public exchange. This type of transaction would occur in which of the following markets?
- APrimary Market
- BThird Market
- CSecondary Market
- DFourth Market
Show answer & explanationAnswer & explanation
Correct answer: D. Fourth Market
The Fourth Market involves direct trades between institutional investors, often through electronic communication networks (ECNs), bypassing broker-dealers and public exchanges.
Why the other options are wrong
- A. The primary market deals with the issuance of new securities, not direct trading between institutions.
- B. The Third Market involves over-the-counter (OTC) trading of exchange-listed securities, typically through broker-dealers.
- C. The secondary market is where previously issued securities are traded between investors, but usually through public exchanges or broker-dealers.
Fourth Market
The Fourth Market is a market where institutional investors trade securities directly with each other, without the use of broker-dealers or public exchanges.
- Direct transactions between institutions.
- Bypasses broker-dealers and public exchanges.
- Often facilitated by Electronic Communication Networks (ECNs).
- Aims to reduce transaction costs.
Memory trick: Primary is 'P' for 'Public' new issues, Secondary is 'S' for 'Sold' previously, Third is 'T' for 'Through' broker-dealers OTC, Fourth is 'F' for 'Firm-to-firm' direct.