Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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Prepare for the Chartered Alternative Investment Analyst Exam with our comprehensive quiz platform. Dive into a series of questions that challenge your understanding of alternative investments, enhancing your readiness for certification.

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Which of the following correctly describes the third market?

Direct trading between private parties
OTC trading of exchange-listed securities
Trading of new issuances
Buying and selling of government securities

The correct answer is: OTC trading of exchange-listed securities

The third market refers to the over-the-counter (OTC) trading of securities that are listed on an exchange. This refers to transactions that occur outside of the traditional stock exchanges but involve stocks that are already publicly traded. In this market, broker-dealers can facilitate trading of these listed securities, often providing more liquidity and flexibility for traders, particularly large institutional investors. This trading is distinct from the primary market, where new issues of securities are sold for the first time, and the secondary market, where existing securities are traded among investors on exchanges. The third market allows for trading in a less regulated environment, which can sometimes lead to more favorable pricing and execution for large blocks of shares. The other options do not accurately define the third market: direct trading between private parties typically refers to private placements or private offerings; trading of new issuances pertains to the primary market; and buying and selling of government securities is usually associated with the money market rather than a description of the third market.