The Third Market

Now that you understand how the secondary market works on exchanges and over-the-counter (OTC), the third market combines elements of both: exchange-listed securities that trade off the exchange.

What Is the Third Market?

• The third market is where exchange-listed securities are traded in the OTC market (off the exchange)
• This allows non-exchange member firms to trade listed securities without going through the exchange
• Primarily used by institutional investors and dealers

Think of it this way: The stock is still "listed" on an exchange like the NYSE, but the actual trade happens somewhere else, in the OTC market. The listing does not change; just the venue where the trade takes place.

Why Use the Third Market?

Institutional investors choose the third market for three key reasons:

• Lower transaction costs: avoids exchange fees and floor broker commissions
• Reduced market impact: trading large blocks off-exchange avoids moving the market price. A large sell order on the exchange would push prices down before the full order could execute.
• Extended trading hours: can trade beyond the exchange's regular session hours

How It Works

• A broker-dealer (BD) or dealer acts as an intermediary, making a market in the listed security off-exchange
• The trade is negotiated OTC rather than matched through the exchange's auction system
• The security itself is still listed on the exchange; it is simply being traded in a different venue

Exam Tip: Gotchas

• Third market = listed securities traded OTC. It is NOT the same as the regular OTC market for unlisted securities. A common mix-up is treating any OTC trade as a "third market" transaction, but only trades in exchange-listed securities qualify.
• A dealer is still involved as an intermediary. This is different from the fourth market, where institutions trade directly with each other and no intermediary is involved.
• The third market exists because of cost and market-impact benefits, not because the securities cannot trade on the exchange.