Third Market Maker
What Is a Third Market Maker?
A third market maker is a type of market maker that deals in the third market, which is a segment of the financial markets wherein exchange-traded securities are exchanged over-the-counter (OTC) by institutional investors.
The term can likewise be utilized in a more broad sense to allude to any third-party securities dealer who is ready and able to trade stocks listed on exchanges at publicly traded prices.
Grasping a Third Market Maker
As their name proposes, third market makers operate in the alleged third market. In this segment of the financial markets, [broker-dealers](/merchant dealer) and institutional investors trade large block orders of stock with each other, frequently bypassing the requirement for brokerage commission fees. Trading in this market is commonly limited to large investors, for example, pension funds, hedge funds, and other financial institutions.
The third market upholds the primary and secondary markets. While the primary market connects with the issuance of new securities through [initial public offerings](/initial public offering) (IPOs), the secondary market is where more settled or "seasoned" securities are traded. The third market should be visible as an ancillary to the secondary market, in that it includes OTC transactions of seasoned securities by institutional investors.
At the point when third-market trading started, it was a way for investors to accomplish namelessness, safeguarding their purchases from public view, which they couldn't get from straightforwardly trading on the exchanges. Third-market trading additionally allowed financial institutions to arrange fixed commissions; lower than the fixed commission charges on exchanges, making investing more expense well disposed, assisting with further developing trading profits.
Third Market Trading
Third market trading was spearheaded during the 1960s by firms like Jefferies and Company. Today, notwithstanding, there are a number of brokerage firms zeroed in on third market trading. All the more as of late, supposed dark pools of liquidity have additionally become well known, especially among high-frequency trading (HTF) firms.
Similarly as with all market makers, the market makers that operate in the third market give liquidity to the marketplace by facilitating the purchase and sale of securities. They do as such by purchasing an inventory of securities for their own account, which they hold and afterward exchange to other market participants.
Market makers produce profit by buying low and selling high, and they will purchase inventory in the event that there is certainly not an extra buyer or seller quickly accessible for that security a while later. Thus, market makers expect a portion of the inventory risk of the marketplace; assuming demand for their inventory decreases before it tends to be exchanged, market makers might understand a loss upon the sale of that inventory.
Illustration of a Third Market Maker
Sean is a market operator operating in the third market. Accordingly, he deals fundamentally with large institutional counterparties who wish to make OTC transactions in securities that ordinarily trade in the secondary market. Since these large creators trade straightforwardly with each other, they can frequently try not to pay any commission fees.
To profit from these transactions, Sean acts as a market maker, buying his own inventory of securities and afterward reselling them to institutional counterparties at a higher price. These transactions generally include large blocks of shares that exchange hands.
Since Sean holds inventory in these shares, it is feasible for him to lose money in the event that he neglects to track down a buyer inside a reasonable time period. Therefore, having a sharp information on the institutional marketplace is essential for Sean's long-term accomplishment as a third market maker.
Highlights
- Since third-market makers typically trade in large blocks of securities, trading is essentially limited to large investors, for example, pension funds and hedge funds.
- Third market makers are market makers operating in the third market of the financial world.
- Market makers will purchase inventory in the event that there is definitely not an extra buyer or seller quickly accessible for that security, thereby expecting a portion of the inventory risk of the marketplace.
- The third market comprises of large investors who trade seasoned securities on an OTC basis instead of straightforwardly with an exchange.
- Third market makers hold their own inventory of securities, and they aim to profit by reselling that inventory at a higher price. In doing as such, they add to the overall liquidity of the marketplace.
