Section 8.3 – Participants in the Secondary Market

  • In the secondary market, securities are traded between investors — not between investors and issuers.

    • Trades involve two main groups:

      • Investors – who buy and sell securities

      • Facilitators – who help investors complete those trades

🧍‍♂️ Investors:

  • There are several types of investors in the secondary market:

    1. Retail Investors

    • Individuals investing for their own personal accounts (not professionals).

    • Can range from small investors to very wealthy individuals.

    • Usually invest to build wealth over time.

    2. Day Traders

    • A type of retail investor who trades rapidly in and out of positions.

    • Usually close all positions by the end of the trading day.

    3. Accredited Investors

    • Used mainly in the primary market (Regulation A and Regulation D offerings).

    • These are individuals or entities who meet certain income or net worth requirements.

    • Considered financially sophisticated and able to handle high-risk investments.

    4. Institutional Investors

    • Large organizations that invest on behalf of others, such as:

      • Mutual funds

      • Pension funds

      • Banks

      • Insurance companies

    • Investment decisions are often made by financial professionals or advisers.

    5. Fiduciaries

    • Individuals who manage assets for someone else (the beneficiary) and must act in that person’s best interest.

    • Examples:

      • Custodians – Manage accounts for minors under the Uniform Transfers to Minors Act (UTMA); can also be firms that hold assets in IRAs or retirement accounts.

      • Trustees – Oversee trusts such as living trusts, pension trusts, or others.

      • Guardians – Court-appointed managers for minors or incapacitated individuals.

      • Executors – Manage the estate of a deceased person.

    6. Investment Advisers (IA)

    • Provide investment advice to others for compensation.

    • Must register under the Investment Advisers Act of 1940 (federal) or Uniform Securities Act (state).

    • Three-Prong Test for IA Registration:

      1. Gives investment advice,

      2. As a regular part of business,

      3. For compensation.

    • Agents of IAs must register and pass the Series 65 exam.

    • When acting as an IA, the adviser is a fiduciary for the client.

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🏦 Facilitators

  • Facilitators help investors complete transactions in the secondary market.
    The main facilitators are broker-dealers, clearing firms, transfer agents, registrars, and clearing agencies.

Broker-Dealers (BDs):

  • Members of FINRA and other SROs (Self-Regulatory Organizations).

  • Execute securities transactions for customers or their own accounts.

  • Earn revenue mainly through commissions, spreads, and transaction fees.

  • Some serve retail clients, others focus on institutional clients.

  • May also engage in proprietary trading (trading the firm’s own capital).

Types of Broker-Dealers:

  • Carrying (Clearing) Firm

    • Holds customer funds and securities.

    • Executes, clears, and settles trades.

    • Sends confirmations and statements.

    • Must segregate customer assets (cannot mix with firm’s assets).

    • Typically large firms with full operational capacity.

  • Fully Disclosed (Introducing) Firm

    • Introduces customer accounts to a clearing firm.

    • The clearing firm holds funds, executes and settles trades, and sends confirmations.

    • The introducing firm may take orders but relies on the clearing firm for back-office functions.

  • Prime Broker

    • Used mainly by institutional clients.

    • One firm (the prime broker) provides custody and administrative services, while executing brokers handle trades.

    • Allows clients to trade with multiple broker-dealers but maintain one centralized account.

    • Requires written agreements between the customer, prime broker, and executing brokers.

    • Advantages: centralized records, flexibility, and efficient multi-broker trading.

🧾 Transfer and Registration Functions:

Transfer Agent

  • Maintains records of a company’s shareholders and outstanding shares.

  • Responsible for:

    • Issuing and canceling stock certificates.

    • Maintaining ownership records.

    • Handling lost or stolen certificates.

    • Ensuring shares are properly registered and issued.

Registrar

  • Always independent from the issuer and transfer agent.

  • Licensed by the state.

  • Provides audit and oversight to ensure the transfer agent’s records are accurate.

💳 Clearing Agencies

  • Act as intermediaries between the buy and sell sides of a trade — ensuring trades are settled correctly.

  • Function similarly to how banks clear checks.

  • Examples:

    • DTCC (Depository Trust and Clearing Corporation) – The world’s largest securities depository.

    • OCC (Options Clearing Corporation) – Handles the clearing and settlement of options trades.

  • Commercial banks and broker-dealers may also act as clearing agencies.

Next Section

✺ Review questions ✺

  • Another investor, not the issuer.

  • Custodians, Trustees, Guardians, or Executors.

  • Gives investment advice, does so as a regular part of business, and for compensation.

  • The Series 65 exam.

  • Carrying (Clearing) Firm, Fully Disclosed (Introducing) Firm, and Prime Broker.

  • Segregate them — keep separate from firm assets.

  • Allows trading through multiple brokers while maintaining a centralized master account.

  • Maintains ownership records, issues/cancels certificates, and handles lost/stolen shares.

  • Provides audit and oversight of the transfer agent’s records.

  • DTCC and OCC.