CFA Level 1: Understanding the Third and Fourth Market

Understanding the Third and Fourth Market

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Question

Sal Nunn, CFA, is a portfolio manager at Walker Investments. Nunn sold 300,000 shares of a NASDAQ listed stock on an electronic crossing network in after hours trading because the company announced a significant negative earnings surprise. Indicate whether the third or fourth market best describes the Nunn trade and state whether the NASDAQ market is a call or continuous market.

Answers

Explanations

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A. B. C.

C

Based on the information provided, we can determine whether the trade made by Sal Nunn, CFA, falls into the third or fourth market and whether the NASDAQ market is a call market or a continuous market.

The third market refers to trading that occurs off the exchange, typically involving large institutional investors. This includes trades that take place in electronic crossing networks, where buyers and sellers are matched internally within a brokerage firm or other intermediary.

The fourth market refers to direct trading between institutional investors, bypassing both the traditional exchanges (such as the New York Stock Exchange) and electronic crossing networks. It involves large block trades and is often facilitated by broker-dealers or alternative trading systems.

In the given scenario, Sal Nunn sold 300,000 shares of a NASDAQ listed stock on an electronic crossing network in after-hours trading. This indicates that the trade is not taking place on a traditional exchange but rather in an electronic crossing network, which aligns with the definition of the third market. Therefore, the trade made by Sal Nunn falls into the third market.

Now let's determine whether the NASDAQ market is a call market or a continuous market.

A call market is a type of market where trading occurs at specific times or during specific call sessions. During these sessions, participants submit their buy or sell orders, and the trades are executed at a single calculated price. In a call market, trading is not continuous throughout the trading day.

On the other hand, a continuous market refers to a market where trading occurs continuously throughout the trading day. Participants can submit their buy or sell orders at any time during market hours, and trades are executed based on prevailing market prices.

Based on the given information, it does not specify whether the NASDAQ market operates as a call market or a continuous market. Therefore, we cannot definitively determine whether NASDAQ is a call market or a continuous market based on the provided details.

To summarize, the correct answer would be:

A. Nunn's trade is in the third market, and the information provided does not specify whether NASDAQ is a call market or a continuous market.

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