Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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What describes the Fourth market?

Trading of securities directly between private institutions
Initial Public Offerings
Exchange trading of public securities
Transaction between retail investors

The correct answer is: Trading of securities directly between private institutions

The Fourth market refers to the trading of securities directly between private institutions, which typically occurs through a decentralized platform. This market enables institutional investors, such as banks, mutual funds, and large corporations, to trade securities without the involvement of brokers or exchanges. This direct trading helps to minimize costs and maintain confidentiality, allowing these institutions to negotiate terms that suit their specific needs. In contrast, the other options describe different aspects of the financial markets. Initial Public Offerings pertain to the process by which a private corporation first sells its shares to the public, thus facilitating a public market for those securities, and is not characteristic of the Fourth market. Exchange trading involves transactions conducted on formal exchanges, where public securities are listed and traded. Lastly, transactions between retail investors generally take place in the First market, where individual investors buy and sell stocks through brokers, not in the Fourth market. Understanding these distinctions highlights the unique nature of the Fourth market as a platform exclusively for institutional trading.