Securities Markets - Over the Counter (OTC) Markets


In the over-the-counter (OTC) market, of which the Nasdaq is a large part, the market makers are analogous to the specialists at the exchanges. The market maker creates the bid and ask prices for an OTC security. This person or firm generally maintains inventory and stands ready to buy and sell the security at the quoted price to maintain an orderly market. Just like a specialist on an exchange, the market maker can act as a principal or as an agent.

Quotations on the Nasdaq must be firm: that is, the dealer has to be prepared to trade at least 100 shares at that level.

Exchange Option Markets
The options exchanges have their own cast of characters. These are some of the trading floor participants at the CBOE:

  • Market maker: Increases liquidity by making bids and offers on his or her own account in specific options classes (same role filled by a "registered options trader" on the Amex).

  • Floor broker: Handles public orders, acting solely as an agent.

  • Order book official: Accepts public market or limit orders in specific options classes.

The Amex, where LEAPS and index options are traded, has a participant called a specialist who functions as both a market maker and an order book official.

Secondary markets also exist for the following securities:

  • Corporate bonds (including high-yield)
  • Municipal bonds
  • U.S. Treasury and government agency bonds
  • Repos
  • Commercial paper
  • Negotiable (jumbo) CDs
  • Eurodollar bonds
  • Bankers' acceptances (BAs)
  • Pass-throughs and CMOs
The Currency Market


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RELATED FAQS
  1. How do I buy an over-the-counter stock?

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  2. What's the difference between a Nasdaq market maker and a NYSE specialist?

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  3. What are the steps to get a company listed on the OTCBB?

    The over-the-counter bulletin board (OTCBB) is a regulated quotation service for over-the-counter (OTC) securities. The securities ... Read Answer >>
  4. Can a bond be traded over-the-counter?

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  5. How does a company move from an OTC market to a major exchange?

    The over-the-counter market is not an actual exchange like the NYSE or Nasdaq. Instead, it is a network of companies that ... Read Answer >>
  6. A _______ is a person on the trading floor of certain exchanges who holds an inventory ...

    The correct answer is d. A good example of an exchange using the specialist system is the NYSE. Each stock listed on the ... Read Answer >>
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