11.2 Secondary Market Trading (1934 Act)
The secondary market provides liquidity for outstanding securities. You must know the mechanics of NYSE auction specialists (DMMs) versus NASDAQ multi-dealer quote markets.
Key FINRA Exam Takeaways
- Securities Exchange Act of 1934 ('People Act'): Regulates secondary trading, exchanges, broker-dealers, and insider trading.
- Auction Market (NYSE): Order-driven; Designated Market Maker (DMM) maintains a fair and orderly market.
- Negotiated Dealer Market (NASDAQ): Quote-driven; multiple competing Market Makers publish two-sided Bid/Ask quotes.
- Bid price: Highest price a buyer/dealer will PAY. Ask/Offer price: Lowest price a seller/dealer will ACCEPT.
- Spread = Ask Price - Bid Price. The dealer profits by buying at the Bid and selling at the Ask.
Bid vs. Ask Perspective
From customer perspective: If you enter a market SELL order, you sell at the BID. If you enter a market BUY order, you buy at the ASK. From dealer perspective: Dealer buys at Bid, sells at Ask. Spread is dealer compensation.
Knowledge Checkpoint • Section 11.2
A market maker publishes a quote for TechCorp common stock of 48.20 - 48.35. A retail customer enters a market order to BUY 200 shares. At what price will the customer's order be executed (excluding commission)?