Fourth Market
What Is the Fourth Market?
The fourth market alludes to a market where securities trade directly between institutions on a private, over-the-counter (OTC) computer network, rather than over a recognized exchange, for example, the New York Stock Exchange (NYSE) or Nasdaq. It is like the third market, which includes exchange-recorded securities that are being traded over-the-counter between broker-sellers and large institutional investors. Fourth market trading contrasts from third market trading in that there is no intermediary or broker facilitating the trade. Institutions directly trade with one another without brokers or dark pools.
Institutions can trade different types of securities and derivatives contracts on the fourth market, frequently to increase obscurity or to effect large trades without moving the market.
Figuring out the Fourth Market
The fourth market is used exclusively by institutions just, and can be diverged from the primary market, secondary market, third market and dark pools. While primary, secondary, and third markets have comparative trading components and use comparable advances as the fourth market, these markets are exchanges of publicly offered shares for all investors including retail and institutional.
Frequently the fourth market is utilized for trading securities that imply an organization's risk management strategy. For instance, swap options are one type of derivative that can be traded through the fourth market directly with a willing counterparty to oversee interest rate risk. With a put swaption, an institution can enter a contract to pay a fixed rate of interest and receive a floating rate of interest relating to credit debt on its balance sheet.
In other cases, companies might decide to exchange securities privately to forestall moving markets. This could happen in the event that a mutual fund and a pension fund go into a large block trade with one another. The two companies could execute over a electronic communication network (ECN). By executing the transaction along these lines, they stay away from the possibility of contorting the market price or the volume traded on an exchange. The two players may likewise stay away from brokerage and exchange transaction fees.
Primary, Secondary, Third, and Fourth
Market exchanges are a huge part of the financial business' infrastructure universally. In the U.S., primary, secondary and third markets are feasible parts of the financial system. Primary markets incorporate the main issuance of a security and its initial public offering (IPO). Secondary markets are markets, for example, the New York Stock Exchange and Nasdaq which trade actively over the course of the day, five days every week. Third markets likewise trade actively with a five-day week and are known as the over-the-counter markets. These markets give access to a wide range of investors to publicly traded securities that must be registered with the Securities and Exchange Commission (SEC) for public sale.
The Fourth Market and Dark Pools
Fourth markets are generally more closely comparable to dark pools, with the two expressions frequently utilized conversely. These markets are private exchanges that trade solely between institutional investors. A large number of securities and structured products can trade on the fourth market with little transparency to the broad public market.
Fourth market trades are executed between institutions. These trades are commonly positioned directly from every institution with low transaction costs. The fourth market can incorporate a broad cluster of securities including publicly offered securities traded privately as well as derivatives and structured products tailored to the necessities of corporate institutions.
These trading platforms can be set up by independent companies or they might be framed by institutions themselves. Liquidity and trading volume can change widely with this type of trading.
Features
- Institutions use the fourth market to keep trading activities private, reduce transaction costs, and to execute large volumes without moving markets.
- The fourth market is an over-the-counter marketplace for the direct exchange of securities between private institutions.
- The fourth market comes up short on broker or exchange intermediary, thus gives little transparency to the public or regulators.
