Secondary Markets and Exchanges
Key terms and exam facts about exchanges, OTC markets, ECNs, dark pools, and the players who make markets.
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Questions Covered in This Set
12 cards to master
Primary vs. secondary market — who gets the money?
Primary market: the issuer receives the proceeds. Secondary market: investors trade with each other and the issuer gets nothing.
What are the two main functions of the secondary market?
Liquidity (easy conversion of securities to cash) and price discovery (a fair, publicly visible price).
Define the first, second, third, and fourth markets.
First: listed securities traded on an exchange. Second: OTC trading of unlisted securities (dealer-to-dealer). Third: listed securities traded OTC. Fourth: institution-to-institution trading, typically via ECNs.
How does an exchange operate as a market?
It is a centralized, order-driven auction market where many buyers and sellers compete simultaneously; the highest bid meets the lowest offer.
What was the NYSE specialist, and what is the role called today?
One firm responsible for maintaining a fair and orderly market in an assigned stock — buying when there are no buyers and selling when there are no sellers. Today it's the Designated Market Maker (DMM).
How is the OTC market structured?
Negotiated and quote-driven — no floor or single location; an interdealer network where market makers post two-sided quotes and trade their own inventory.
How does a market maker get paid, and how is it disclosed?
By the spread between bid and ask, disclosed as a markup (on purchases by the customer) or markdown (on sales) built into the price — not a separate commission.
Broker (agency) vs. dealer (principal) capacity
As broker/agent the firm matches you with a third party and charges a stated commission; as dealer/principal it trades from its own inventory for a markup/markdown. A firm can be one or the other on a trade, never both.
Which securities trade almost entirely OTC?
Corporate bonds, municipal bonds, U.S. government securities, and most asset-backed products — the bond market is a dealer market.
What is an ECN?
An Electronic Communications Network — an alternative trading system (ATS) that electronically and anonymously matches buy and sell orders, often after hours, with no dealer in the middle; it powers the fourth market.
What is a dark pool and why is it used?
An ATS that does not display quotes publicly before execution, giving pre-trade anonymity so large institutional orders don't move the market; trades are still reported after execution.
Name the OTC Markets Group quotation tiers.
OTCQX, OTCQB, and Pink.
