Fourth Market

A mutual fund and a pension fund negotiate and execute a large block trade of exchange-listed stock directly with each other over an ECN, with no broker-dealer involved. This trade occurred in the...

1. A.Primary marketNo issuer and no new securities are involved — the shares already exist.
2. B.Fourth marketCorrect — institutions trading directly with each other through an ECN, with no intermediary, is the fourth market.
3. C.Second marketThere is no separate second market; ordinary investor-to-investor trading is the secondary market, and this is its fourth-market corner.
4. D.Third marketThe third market involves a broker-dealer trading listed stock OTC — here there is no intermediary.

Why: Direct institution-to-institution trading with no broker-dealer intermediary — typically large blocks routed through ECNs or dark pools — is the fourth market.

A pension fund trades a listed stock directly with another pension fund over an electronic network with no broker-dealer involved. Separately it buys a newly issued bond directly from the issuer in a private placement. Classify the two transactions.

1. A.Both are secondary market transactions, one on an exchange and one over the counter.Wrong. Buying a newly issued bond from the issuer is not secondary, and neither trade touched an exchange.
2. B.Both are primary market transactions, because an institution is a party to each of them.Wrong. The identity of the participants does not classify a trade; whether the security is newly created does.
3. C.The stock trade is a fourth market trade and the bond purchase is a primary market transaction.Correct. Institution-to-institution trading without a broker-dealer is the fourth market, and a new issue bought from the issuer is primary.
4. D.The stock trade is a third market trade and the bond purchase is a secondary market transaction.Wrong. The third market is institutions trading listed stock through a broker-dealer, and the bond was newly issued.

Why: Classification always runs through two questions: is the security newly created, and if not, where did the trade take place. Buying a newly issued bond directly from the issuer is a primary transaction whatever the buyer's size and however private the placement. The stock trade involves an existing security with no broker-dealer intermediary, which places it in the fourth market rather than the third, where institutions trade listed stock through a broker-dealer away from the exchange. Had a broker-dealer taken the other side of that stock trade off-exchange, the answer for that leg would have been the third market.