What Is an Interdealer Quotation System (IQS)?

An interdealer quotation system (IQS) is an electronic system for organizing and disseminating price quotes by brokers and dealer firms. IQSs are intended to provide investors with timely and relevant market information on which to base their investment decisions.

In the United States, the National Association of Securities Dealers Automatic Quotation (Nasdaq), Nasdaq SmallCap Market, and the Over-The-Counter Bulletin Board (OTCBB) exchange platforms are integrated into one IQS. By using this integrated system, investors have access to a wide range of securities, ranging from large blue-chip companies to smaller micro-caps.

Key Takeaways

  • Interdealer quotation systems (IQS) prove price information and facilitate electronic trading in securities.
  • An IQS works by connecting price quotations from several exchanges into one platform, so as to improve functionality for market participants.
  • There are a number of different types of interdealer quotation systems and each has its own specializations.
  • In the United States, popular examples include Nasdaq, Nasdaq's SmallCap Market, and OTCBB platforms.

Understanding an Interdealer Quotation System

An IQS functions by tying together the price quotations of various exchanges into one platform. This allows investors to more easily access security price quotations that would otherwise need to be monitored on several separate exchanges. As such, the creation of an IQS promotes the liquidity and accessibility of financial markets.

The exact specifications of an IQS will depend on the specific focus of its constituent exchanges. For example, the OTCBB displays quotes, last sale price, and volume information for many over-the-counter (OTC) securities. These securities are not otherwise listed on national securities exchanges like the New York Stock Exchange (NYSE). The securities listed on the OTCBB include domestic and foreign companies, as well as American depository receipts (ADRs). The OTCBB, and other OTC exchanges, are sometimes referred to as "pink sheets."

Another way that an IQS can benefit investors is by enabling a higher level of regulatory oversight. For instance, the OTCBB requires broker-dealers to qualify as market makers under the rules of the Financial Industry Regulatory Authority (FINRA) before being able to quote securities on the OTCBB. Similarly, companies who have to have their securities quoted on the OTCBB must obtain sponsorship from a market maker and file regular financial reports with regulators, such as the Securities and Exchange Commission (SEC).

Real-World Example of an Interdealer Quotation System

Another example of an IQS is OTC Link, which provides quotations focused on small and thinly traded securities. The securities traded through OTC Link do not have any eligibility requirements and often do not provide timely financial disclosures to regulators.

At the other end of the spectrum is the Nasdaq, which is home to over 3,000 technology companies. The companies which trade on the Nasdaq exchange are generally large and established businesses, which in some cases are among the largest companies in the world. Examples of prominent Nasdaq-listed companies include Amazon, Google, and Microsoft. Unlike their OTC counterparts, these securities are highly liquid and regularly file financial statements and other information with the SEC.