Chapter: 3 How Securities are Traded?

Section: 4 Over-the-Counter Market (OTC)

An Over-the-counter market (OTC) is an informal network of brokers and dealers who negotiate the sales of securities among them. There are minimal membership requirements for trading or listing requirements for securities. In most countries, thousands of brokers are registered with the Securities & Exchange Commission as dealers in OTC securities. These dealers quote prices at which they are willing to buy or sell securities. A broker then executes a trade by contacting the dealer listing an attractive quote. The best example of an OTC market is the National Association of Securities Dealers Automatic Quotation system (NASDAQ) in US. The computer-linked system offers immediate information on bid and asks prices for stocks offered by various dealers. The bid price is the price at which a dealer is willing to purchase a security; the ask price is the one at which the dealer is willing to sell a security. Hence, the ask price is always higher than the bid price, and the difference, the bid-ask spread, makes up the dealer's profit. The system allows a broker who receives a buy or sell order from an investor to examine all current quotes, call the dealer with the best quote, and execute a trade.