SIE Exam: Market Structure
Section 1 — Knowledge of Capital Markets (16% of exam)
Understanding market structure is a foundational component of the SIE exam, covering how securities are bought and sold across different venues and the roles of various market participants. You need to distinguish between primary markets (where new securities are issued) and secondary markets (where existing securities trade), as well as the third market (exchange-listed securities traded OTC) and fourth market (direct institution-to-institution trading). The exam tests your knowledge of auction markets like the NYSE versus dealer markets like Nasdaq, and the function of electronic communication networks (ECNs) and alternative trading systems. A critical distinction is between a broker-dealer acting as agent (earning commissions) versus principal (trading from inventory and earning markups). You should also understand market makers and their role in providing liquidity by continuously quoting bid and ask prices. Knowledge of OTC markets, dark pools, and how different market structures serve the needs of retail and institutional investors is essential for this section of the exam.
Key Concepts
Primary Market
Where newly issued securities are sold for the first time, with proceeds going to the issuing company. IPOs and new bond offerings are primary market transactions.
Secondary Market
Where previously issued securities trade between investors. The issuer does not receive proceeds from secondary market transactions.
Market Maker
A dealer firm that stands ready to buy and sell a security at publicly quoted bid and ask prices from its own inventory, providing liquidity to the market.
Agent vs. Principal
When acting as agent, a firm executes trades on behalf of customers for a commission. As principal, a firm trades from its own account and charges a markup or markdown.
Auction Market vs. Dealer Market
An auction market (like NYSE) matches buyers and sellers at competitive prices. A dealer market (like Nasdaq) uses market makers quoting prices from their own inventory.
Dark Pool
A private alternative trading system where orders are not displayed publicly before execution, primarily used by institutional investors for large block trades.
Practice Questions
Question 1 of 4
When an investor purchases shares of a newly issued stock directly from the issuing company through an underwriter, this transaction occurs in which market?
Correct answer: B.
The primary market is where newly issued securities are sold for the first time, with proceeds going to the issuing company. IPOs and new bond offerings are primary market transactions.
Question 2 of 4
A broker-dealer sells shares of stock to a customer from its own inventory and charges a markup. In this transaction, the firm is acting as which of the following?
Correct answer: B.
When a broker-dealer trades from its own inventory (proprietary account), it acts as a principal or dealer. In a principal transaction, the firm sells securities it owns to the customer and charges a markup.
Question 3 of 4
Which market involves the trading of exchange-listed securities in the over-the-counter market?
Correct answer: C.
The third market refers to exchange-listed securities that are traded in the over-the-counter (OTC) market rather than on the exchange itself. This allows institutional investors to execute large trades with potentially less market impact.
Question 4 of 4
Which of the following correctly distinguishes between a broker and a dealer?
Correct answer: B.
A broker acts as an intermediary (agent) between a buyer and seller, executing trades on behalf of customers and earning commissions. A dealer buys and sells securities for its own account (principal) and earns the spread between bid and ask prices.
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Start Practicing FreeFrequently Asked Questions
What is market structure on the SIE exam?
Market structure on the SIE covers how securities markets are organized, including primary vs. secondary markets, auction vs. dealer markets, the roles of brokers and dealers, market makers, ECNs, and alternative trading systems.
What is the difference between a broker and a dealer?
A broker acts as an agent, executing trades on behalf of customers and earning commissions. A dealer acts as a principal, trading from its own inventory and earning markups or markdowns. Most firms are registered as broker-dealers and perform both functions.
Sources
- Regulation NMS - National Market System. U.S. Securities and Exchange Commission (accessed 2026-05-14)
- OTC Equity Trading - Regulatory Notices. FINRA (accessed 2026-05-14)
- Equity Market Structure Overview. U.S. Securities and Exchange Commission (accessed 2026-05-14)