SIE Market Structure: Primary vs Secondary Markets and Trading Venues

Market structure is one of the clearest topic categories on the SIE — the concepts are well-defined, the distinctions are testable, and candidates who understand how capital markets are organized can answer these questions quickly and confidently. Here is the framework you need.

Primary Markets: Where Securities Are Born

The primary market is where new securities are sold for the first time. When a corporation sells shares to the public for the first time, it conducts an Initial Public Offering (IPO). When an already-public company issues additional shares, it conducts a follow-on or secondary offering (not to be confused with the secondary market).

In a primary market transaction, the proceeds go to the issuer — the company raising capital. This is the defining feature that distinguishes primary from secondary market transactions.

The Underwriting Process

Investment banks acting as underwriters facilitate IPOs. The syndicate structure typically includes:

• Managing underwriter (lead) — Coordinates the offering, conducts due diligence, negotiates with the issuer
• Syndicate members — Other broker-dealers that share the underwriting obligation and distribution
• Selling group members — Dealers who help sell shares but do not take on underwriting liability

The red herring (preliminary prospectus) is distributed during the registration period while the SEC reviews the registration statement. It cannot include the final offering price or proceeds. Once the SEC declares the registration effective, the final prospectus is issued with pricing information.

Secondary Markets: Where Securities Trade

The secondary market is where previously issued securities trade between investors. The issuer receives no proceeds from secondary market transactions — the seller receives the proceeds.

Secondary markets are organized in two broad structures:

Exchange Markets

Exchanges are centralized auction markets where buyers and sellers are matched through a competitive bidding process. The New York Stock Exchange (NYSE) is the paradigmatic exchange — historically operating on a physical trading floor with specialists (now called Designated Market Makers) responsible for maintaining orderly markets in assigned securities.

Exchange-listed stocks must meet listing standards related to market capitalization, earnings, and float. The highest-quality large-cap companies typically list on the NYSE.

Over-the-Counter Markets

OTC markets are dealer markets where securities are traded through a network of broker-dealers rather than on a centralized exchange. Nasdaq is the primary OTC market for equities in the U.S. — though it describes itself as an exchange, its structure is a dealer market where multiple market makers compete to buy and sell securities.

Market makers are broker-dealers that commit to continuously quoting two-sided markets (bid and ask prices) for specific securities. Their profit comes from the bid-ask spread — the difference between the price at which they buy (bid) and the price at which they sell (ask).

NYSE vs. Nasdaq: Structural Differences

Feature	NYSE	Nasdaq
Structure	Auction market	Dealer market
Market participants	Designated Market Makers	Multiple competing market makers
Trading location	Physical exchange with electronic systems	Fully electronic
Typical listings	Large-cap traditional companies	Technology and growth companies

Settlement and T+1

When a securities trade is executed, the actual exchange of securities and cash does not happen instantly. Settlement is the process of transferring ownership and payment. Since May 2024, U.S. equities settle on a T+1 basis — one business day after the trade date. This replaced the previous T+2 standard.

If a trade is executed on Monday, it settles Tuesday. Holidays and weekends do not count. Failure to deliver securities or payment by the settlement date constitutes a settlement failure and can result in regulatory consequences.

Order Types

Understanding order types is tested directly and in the context of trading mechanics and customer instructions.

Market order — Executed immediately at the best available price. Guarantees execution but not price. Appropriate when speed of execution is the priority.

Limit order — Executed only at the specified price or better. A buy limit order fills only at or below the limit price; a sell limit order fills only at or above the limit price. Guarantees price but not execution.

Stop order (stop-loss) — Becomes a market order when the security trades at or through the stop price. Used to limit losses or protect profits. Does not guarantee the execution price, particularly in fast-moving markets.

Stop-limit order — Becomes a limit order (not a market order) when the stop price is triggered. Provides price protection but risks non-execution if the price moves through the limit before the order fills.

Short Selling

A short sale involves selling shares the seller does not own (shares borrowed from a broker). The short seller profits if the price falls — they buy back the shares at a lower price to close the position. The risk of a short sale is theoretically unlimited because the stock price can rise indefinitely.

Regulation SHO governs short selling. The locate requirement prohibits short sales unless the broker has located shares available to borrow. The uptick rule equivalent (Rule 10a-1 alternative) applies circuit breaker triggers to restrict short selling in severely declining stocks.

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Test your market structure knowledge with SIE practice questions at advisorexams.com/exams/sie.