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?
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?
Question 3 of 4
Which market involves the trading of exchange-listed securities in the over-the-counter market?
Question 4 of 4
Which of the following correctly distinguishes between a broker and a dealer?
8+ more practice questions
Get full access to AI-graded practice, timed mock exams, and progress tracking.
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.