SIE cheat sheetSection 1: Knowledge of Capital Markets (16%)
Markets & Trading Venues
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NYSE (New York Stock Exchange)
- Auction market — buyers and sellers compete directly
- Uses Designated Market Makers (DMMs) to maintain orderly markets
- Physical trading floor + electronic trading
- Listed securities must meet strict listing standards
NASDAQ
- Dealer/quote-driven market — trades through market makers
- Multiple market makers compete for each stock (competitive quotes)
- Fully electronic — no physical trading floor
- Three tiers: Global Select, Global Market, Capital Market
OTC (Over-the-Counter)
- Decentralized, negotiated market
- OTC Bulletin Board (OTCBB) and OTC Markets Group (Pink Sheets)
- Less regulation, less liquidity, higher risk
- Includes most bonds, all government securities
ECNs (Electronic Communication Networks)
- Match buy/sell orders automatically
- Allow after-hours trading
- Examples: Arca, INET
Dark Pools
- Private exchanges for trading large blocks
- No pre-trade transparency (hence "dark")
- Used by institutional investors to avoid market impact
- Also called Alternative Trading Systems (ATS)
Primary vs Secondary Markets
- Primary: NEW securities sold to investors (IPOs, new issues) — issuer receives proceeds
- Secondary: EXISTING securities traded between investors — issuer gets nothing
Key facts to memorize
- NYSE = auction market with DMMs
- NASDAQ = dealer market with competing market makers
- Primary market: issuer receives proceeds
- Secondary market: investors trade with each other
- Dark pools = ATS, no pre-trade transparency
Mnemonics that stick
- NYSE = "Auction" (think: bidding like an auction house)
- NASDAQ = "Dealer" (think: car dealer — you buy from the dealer, not another customer)
- "Primary = PROCEEDS to issuer, Secondary = SALES between investors"
Exam traps
- In a secondary market trade, the issuer receives NO money — only the seller does
- NASDAQ is NOT an exchange technically — it's a dealer market (though often called an exchange colloquially)
- Dark pools/ATS must still register with SEC and report trades
- OTC Markets include most bonds — not just penny stocks
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