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The Over-the-Counter Exchange

The over-the-counter (OTC) market is not an organization but an intangible market for the purchase and sale of securities not listed by the organized exchanges. The market price of OTC securities results from a matching of the forces of supply and demand for securities by traders known as dealers. OTC dealers are linked with the purchasers and sellers of securities through the National Association of Securities Dealers Automated Quotation (Nasdaq) System, which is a sophisticated telecommunications network. In 1999 the Nasdaq exchange merged with the American Stock Exchange to become Nasdaq-AMEX. This new entity continued to facilitate floor trading of stocks listed on the American Stock Exchange and computerized trading for stocks listed on Nasdaq.

Nasdaq provides current bid and ask prices on thousands of actively traded OTC securities. The bid price is the highest price offered by a dealer to purchase a given security, and the ask price is the lowest price at which the dealer is willing to sell the security. The dealer in effect adds securities to his or her inventory by purchasing them at the bid price and sells securities from his or her inventory at the ask price, hoping to profit from the spread between the bid and ask prices. Unlike the auction process on the organized securities exchanges, the prices at which securities are traded in the OTC market result from both competitive bids and negotiation.

In addition to creating a secondary (resale) market for outstanding securities, the OTC market, is also a primary market in which all new public issues are sold.

over-the-counter (OTC) market

An intangible market (not an organization) for the purchase and sale of securities not listed by the organized exchanges.

IREVIEW QUESTIONS

RQ-9 How does the New York Stock Exchange facilitate the exchange of stocks?

RQ-10 How does the Nasdaq market differ from the New York Stock Exchange?

 
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