Quick Answer
Securities trade across four markets. In the primary market, issuers create new securities and receive the proceeds; the secondary market is where existing securities trade between investors and the selling investor gets the money. The third and fourth markets are both secondary activity: listed securities traded off-exchange (dealer involved) versus institutions trading directly through electronic networks (no intermediary).
The whole unit on one sheet: the four markets, who gets paid, and where trading happens.
The Four Markets
| Market | What Happens | Key Fact |
|---|---|---|
| Primary | New securities issued and sold for the first time | Issuer receives the proceeds |
| Secondary | Existing securities trade between investors | Selling investor receives the money |
| Third | Exchange-listed securities traded over-the-counter (OTC), off the exchange | Dealer acts as intermediary |
| Fourth | Institutions trade directly with each other via electronic communication networks (ECNs) | No broker-dealer intermediary |
- Primary market transactions: initial public offering (IPO) = a company's first public stock sale; follow-on offering = new shares from an already-public company; municipal bond new issue.
- Third and fourth markets are both subsets of secondary market activity (previously issued securities changing hands).
The One-Liners That Win Points
- Primary = issuer gets the money. Secondary = selling investor gets the money. The issuer gets nothing from secondary trades. (Most tested distinction on the SIE.)
- Follow-on offering = company issues new shares, receives proceeds (primary). Secondary offering = existing shareholders sell their shares, they receive proceeds (company gets nothing).
- Disclosure document: prospectus for corporate offerings; official statement for municipal bonds.
- Third market = listed securities traded OTC, dealer involved. Fourth market = institutions trading directly, no intermediary.
- Auction market = competitive bidding (NYSE). Negotiated market = dealer quotes (OTC / Nasdaq).
- The bid-ask spread is how dealers (market makers) are compensated.
Memory Aid
Exchange = Listed = Auction; OTC = Unlisted = Negotiated
Liquidity, Price Discovery, and Market Makers
- Liquidity = how easily a security is bought or sold without moving its price; it comes from the secondary market, not the primary.
- Price discovery = market trading determines a security's fair value; more transparent markets (exchanges) discover price more efficiently than OTC.
- Market makers quote a continuous two-sided market (bid and ask); on the NYSE the primary market maker is the Designated Market Maker (DMM); on Nasdaq and OTC, multiple market makers compete, which can narrow the spread.
- Market makers are the "buyer for every seller and seller for every buyer."
Top Gotchas
- The fourth market bypasses broker-dealers entirely; a dealer in the middle makes it the third market instead.
- Third market = listed securities traded OTC, not the regular OTC market for unlisted securities.
- ECNs are not limited to listed securities; they handle OTC securities too. The third market is the one defined by listed securities trading off-exchange.
- Nasdaq is now a registered national securities exchange, but know its OTC / dealer-market roots.
- OTC securities are not unregulated; they have less oversight but still follow securities laws.
- Securities prices are set by market trading, not by any regulator or issuer.
One-Breath Recap
New securities are born in the primary market, where the issuer collects the proceeds, then live and trade in the secondary market, where the selling investor gets paid. The third and fourth markets are just secondary trading with the venue and intermediary changed: listed securities off-exchange through a dealer, or institution-to-institution through an ECN with no middleman.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Market Structure unit for the complete lesson.