Financial Markets Infographic

SIE Exam: Breakdown of Financial Markets

Understanding where securities trade is fundamental to the SIE exam. This visual guide breaks down the five market types using multiple learning approaches. Pick the visualization that clicks for you, or study them all for complete mastery.

Key Takeaway
Primary raises cash for issuers (IPOs, new bonds). Secondary (First & Second Markets) is everyday trading on exchanges and OTC. Third & Fourth are for institutions bypassing exchanges for better execution or privacy.

Market Hierarchy Flowchart

See how markets relate to each other. Securities are born in the Primary Market, then live their trading life in various Secondary Markets.

← Scroll horizontally to view full diagram →
PRIMARY MARKET New Securities Issued $ → Issuer SECONDARY MARKET Existing Securities Trade Here ($ flows between investors) FIRST MARKET Exchange-Listed NYSE, Nasdaq Retail & Institutions AAPL, MSFT SECOND MARKET OTC / Unlisted Dealer Networks Brokers, Dealers NSRGY, TCEHY, Bonds THIRD MARKET Listed Off-Exchange OTC for Listed Stocks Institutions, Block Trades AMZN via Dealer FOURTH MARKET Dark Pools / ECNs Institution-to-Institution Private, Large Blocks Liquidnet, GOOGL PUBLIC TRADING VENUES INSTITUTIONAL / PRIVATE Quick Reference Primary: IPOs, new bonds — money goes to issuer First: NYSE/Nasdaq — normal exchange trading Second: OTC dealer networks — unlisted securities Third: Listed stocks traded off-exchange Fourth: Dark pools — private institutional trades

How OTC Trading Actually Works

Put faces and places to the OTC market. Unlike exchanges, OTC is a network of dealers—here's who they are and how trades happen.

The Key Players

OTC Markets Group

Platform Operator

A private company (headquarters: NYC) that operates the electronic quotation platform where dealers post bid/ask prices. Think of it as a bulletin board—not where trades execute, but where quotes are displayed.

otcmarkets.com Est. 1913

Dealers / Market Makers

Trade Counterparties

Broker-dealer firms that hold inventory and quote prices. They buy from sellers and sell to buyers, profiting on the spread. These are the actual trading counterparties.

Citadel Securities Virtu Financial GTS

FINRA

Regulator

Financial Industry Regulatory Authority—the self-regulatory organization that oversees broker-dealers. Operates TRACE for bond trade reporting. All OTC trades must be reported here.

Trade Reporting Dealer Oversight

Investors & Brokers

Order Originators

Retail investors use brokers (Schwab, Fidelity) who route orders to dealers. Institutional investors may trade directly with dealers for large blocks.

Retail via Broker Institutional Direct

Exchange vs OTC: How Trades Flow

Exchange (First Market)
1
You Place Order
Buy 100 shares AAPL at market
2
Broker Routes to Exchange
Order goes to Nasdaq's central order book
3
Matched Automatically
Exchange matches you with a seller at best price
4
Trade Executes
Instant, transparent, public price
OTC (Second Market)
1
You Place Order
Buy 100 shares NSRGY (Nestlé) at market
2
Broker Contacts Dealer
Checks OTC Markets for dealer quotes, calls for price
3
Dealer Quotes Price
"I'll sell at $98.50" — negotiated, not matched
4
Trade Executes
Reported to FINRA, wider spread, less transparency
The Core Difference
Exchange = Centralized order book (like an auction house)
OTC = Decentralized dealer network (like calling car dealerships for quotes)

On an exchange, you're matched with another investor. In OTC, you're trading with a dealer who holds inventory.

OTC Markets Group Platform Tiers

OTCQX
Best Market — Highest quality, SEC reporting required
OTCQB
Venture Market — Early-stage companies, some requirements
Pink
Open Market — Minimal requirements, higher risk
Expert
Expert Market — No public quotes, limited to professional investors

Complete Market Comparison Matrix

Side-by-side comparison of all five markets. Perfect for drilling the details before exam day.

Market What It Trades Where Who / Main Use Examples
Primary New securities (stocks, bonds) issued for the first time Directly from the issuer through underwriters/investment banks Issuers (companies/governments) raising capital; investors buying new issues Tesla's 2010 IPO US Treasury bonds
First
(Secondary)
 Exchange-listed stocks and securities On exchanges (NYSE floor, Nasdaq electronic system) Retail & institutional investors; everyday trading for liquidity and price discovery AAPL on Nasdaq MSFT on NYSE
Second
(Secondary)
 Unlisted securities (OTC stocks, bonds) Over-the-counter (OTC) via dealer networks—no central exchange Dealers, brokers, investors in smaller or non-listed assets; trading less liquid securities NSRGY (Nestlé ADR) TCEHY (Tencent ADR) Corporate bonds
Third Exchange-listed stocks traded off-exchange OTC, bypassing the exchange Large institutions avoiding fees, negotiating big blocks AMZN via OTC dealer Goldman Sachs trades
Fourth Any securities (often listed stocks) in large blocks Direct between institutions via ECNs or dark pools Hedge funds, pensions for private, low-fee trades without public visibility Liquidnet dark pool GOOGL block trades

Market Detail Cards

Deep-dive into each market with complete details. Great for thorough review.

Primary Market

Where Securities Are Born
What It Trades
New securities (stocks, bonds) issued for the first time. This is the only market where money goes directly to the issuer.
Where
Directly from the issuer through underwriters and investment banks. Think IPO roadshows and bond auctions.
Who / Main Use
Companies and governments raising capital. Investors buying new issues to get in at offering price.
Real Examples
Tesla 2010 IPO ($17/share) US Treasury Bond Auction Airbnb 2020 IPO

First Market

Exchange Trading
What It Trades
Exchange-listed stocks and securities. The blue chips and tech giants you see on CNBC.
Where
On actual exchanges—NYSE trading floor (auction) or Nasdaq electronic system (negotiated/dealer).
Who / Main Use
Retail and institutional investors. Primary purpose: liquidity and price discovery. This is "normal" stock trading.
Real Examples
AAPL on Nasdaq MSFT on NYSE TSLA daily trading

Second Market

OTC / Over-the-Counter
What It Trades
Unlisted securities—OTC stocks (foreign ADRs, penny stocks), corporate bonds, government bonds. Almost ALL bonds trade here.
Where
Over-the-counter via dealer networks (OTC Markets Group tiers: OTCQX, OTCQB, Pink). No central exchange—dealers negotiate directly.
Who / Main Use
Dealers, brokers, and investors seeking smaller or non-exchange-listed assets. Less liquid, wider spreads.
Real Examples
NSRGY (Nestlé ADR) TCEHY (Tencent ADR) NTDOY (Nintendo ADR) Corporate bonds
Don't Confuse With...
Private secondary markets (Forge Global, EquityZen, Carta) are where shares of private companies like SpaceX and OpenAI trade among accredited investors. This is different from the SIE "Second Market"—those platforms deal with truly private company equity, not unlisted public securities.

Third Market

Listed Stocks, Off-Exchange
What It Trades
Exchange-listed stocks (like AAPL, AMZN) but traded OFF the exchange. Same securities, different venue.
Where
OTC, bypassing the exchange. ECNs (Electronic Communication Networks) compete with exchanges here.
Who / Main Use
Large institutions avoiding exchange fees and negotiating big block trades. Sometimes offers better price improvement.
Real Examples
AMZN via OTC dealer Goldman Sachs block trades Hedge fund executions

Fourth Market

Dark Pools & Direct Trading
What It Trades
Any securities (often listed stocks) in large blocks. Massive institutional trades that would move markets if public.
Where
Direct between institutions via ECNs or dark pools (private networks). No public quotes until after execution.
Who / Main Use
Hedge funds, pension funds, mutual funds. Private, low-fee trades without showing their hand to the market.
Real Examples
Liquidnet dark pool BlackRock/Vanguard blocks GOOGL pension trades

Exam Day Memory Trick:

Primary = Proceeds go to issuer
1st = On the exchange (#1 place for trading)
2nd = Secondary venue (OTC, less regulated)
3rd = Third-party route (skip the exchange)
4th = "For" institutions only (dark/private)

Critical Concept

The Key Distinction:

Market Money Flows To... Securities Are...
Primary The issuer (company/government) New (first-time issuance)
Secondary (1st-4th) The selling investor Existing (already issued)