Market Organization

Section: Market Organization and Structure Estimated study time: 45 minutes Content: Financial markets are organized systems that allow buyers and sellers to exchange securities, commodities, currencies, and other financial instruments. Understanding market structure is essential for evaluating execution quality, transaction costs, and the information content of prices. Markets can be classified in multiple dimensions: by trading phase (primary vs. secondary), by execution mechanism (quote-driven vs. order-driven), by physical organization (exchange vs. OTC), and by asset class. Primary markets are where new securities are issued directly by the issuing entity to investors — initial public offerings (IPOs), seasoned equity offerings (SEOs), and bond issuances occur in primary markets. Secondary markets provide liquidity for existing securities, enabling investors to buy and sell among themselves without involving the issuer. Securities are traded through two main mechanisms. In a quote-driven (dealer) market, designated dealers or market makers post bid and ask quotes and stand ready to trade at those prices. The bid-ask spread is their compensation for providing liquidity and bearing inventory risk. NASDAQ traditionally operated as a dealer market. In an order-driven market, buyers and sellers submit orders that are matched through rules (typically price-time priority). The New York Stock Exchange's electronic matching system is order-driven. Dark pools are private order-driven venues where large institutional orders can be executed without revealing intentions to the broader market, minimizing market impact costs. Most modern exchanges are hybrid systems combining elements of both mechanisms. Order types are critical knowledge for the CFA exam. A market order executes immediately at the best available price — it prioritizes execution certainty over price. A limit order specifies the maximum price a buyer will pay or minimum price a…