Securities Markets - Over-The-Counter (OTC) / Negotiated Markets

Other trading takes place over a nationwide network of broker-dealers known as the over-the-counter (OTC) market. Securities sold on the OTC market are said to be unlisted securities, meaning they are not listed on a centralized exchange. The SEC granted NASDAQ exchange status and the securities that trade on the higher levels are considered to be listed securities. The securities  that trade on the OTC BB or in the Pink Sheets would be considered to be unlisted.  In addition to stocks and bonds, all municipal bonds and U.S. government securities trade on the OTC market.

The market in which securities are bought and sold is also known as the secondary market. We will discuss the primary market, which is where new issues are sold, later in this section. For now, we are concerned with trading of existing securities.

  • Market Maker
    • The OTC market focus is around market makers instead of specialists. Market makers are OTC dealers who buy and sell a minimum number of shares of a specific security at a quoted price.
    • An OTC security may have several market makers representing it, unlike the securities assigned to specialists on the exchanges. In fact, an actively traded OTC security may be represented by up to 40 market makers or more. Large liquid securities like Microsoft may have over 100 market makers dealing in the shares. .
    • The market maker acts more like a depository and distribution source for securities, absorbing excess stock when demand is low and providing the stock when demand is high. As a result, he or she bears the burden of risk, but also buys and sells for his or her own profit.
    • The primary source of the market maker's profits are the spread, which is the difference between the bid price at which the market maker is willing to buy a security and the ask price at which he or she will sell the security.
Exam Tips and Tricks
You should be able to distinguish between the duties and responsibilities of specialists, floor brokers and market makers for the exam.


The National Association of Securities Dealers Automated Quotation System (Nasdaq)
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