Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

What best defines the characteristics of third markets?

1. Direct trades between companies

2. Exchange-listed securities traded over the counter

3. Initial offerings by companies

4. Securities that are only traded in auctions

The correct answer is: Exchange-listed securities traded over the counter

The correct definition of third markets relates to exchange-listed securities traded over the counter. In this context, third markets involve a platform where institutional investors can trade shares that are already listed on major exchanges, but do so off the exchange itself. This mechanism allows for greater flexibility and often, more favorable pricing for large block trades, which can help avoid price disruption that might occur if such trades were executed on the exchange. The nature of third markets primarily aims to facilitate trading while minimizing the impact on the overall supply and demand dynamics of the stock, making it an attractive option for large transactions. The term effectively captures this off-exchange trading of securities that are still actively traded on a formal exchange, distinguishing them from other market segments. Other options present different trading concepts but do not accurately encapsulate third markets. Direct trades between companies typically do not involve publicly listed securities in the way that third markets do. Initial offerings by companies refer specifically to the issuance of new shares, known as initial public offerings (IPOs), which is outside the realm of what third markets represent. Lastly, securities traded exclusively in auctions would not encompass the broad range of exchange-listed securities typically associated with third market activity. Thus, the most fitting definition focuses on the over-the-counter trading of securities