What Is the Third Market? Definition, Explanation, 7 Facts

Securities that are listed on a stock exchange can also be traded on what are called “third markets.” Third markets are financial markets that are not part of a stock exchange. The article below will tell you everything you need to know about the subject.

What Is the Third Market?

A third market is made up of broker-dealers and institutional investors who are not members of the exchange but trade in exchange-listed stocks. In other words, the third market is made up of over-the-counter (OTC) trades of securities listed on an exchange between broker-dealers and large institutional investors.

Often, securities that aren’t traded on major centralized markets like the New York Stock Exchange are part of over-the-counter transactions (NYSE).

What Is the Third Market?

But since these securities don’t meet the requirements to be listed on a consolidated exchange, they are traded through a broker-dealer system. Securities from the third market are listed on an exchange, but they are not traded on that exchange.

Understanding Third Market

Maximizing Profits

In the past, a third market was the best place to buy and sell assets. This allowed companies to raise money for their pension plans and investment banks and brokerages to buy big blocks of stock.

Smaller investors would find it easy to track the trades of these assets because they didn’t happen on major stock exchanges like the New York Stock Exchange or the American Stock Exchange.

And because these deals could be made quickly and easily through a third-party market, both parties would be able to make the most money possible.

Influx of Individual Investors

Even though large financial institutions used to be the only ones who could invest in the third market, the number of individual investors has grown. This is because of how many people have access to the Internet.

What Is the Third Market?

Individual investors who are not trading on behalf of a bigger institution have had access to the financial markets like never before since the 1990s and into the 21st century. These traders like the third market better than the exchange market because it is faster and less regulated.

One more advantage of trading on a third market is that the costs of having a broker are lower. When an investor trades on their own in a third market, they don’t have to pay for a broker.

Even though many online trading platforms have transaction fees, they are usually much cheaper than what you would pay a traditional broker. Because of this, the cost for an investor to execute an order will go down, which may be something that a lot of them like.

Experience Often Necessary

On the other hand, beginners shouldn’t start at the third market. For people who are new to investing, the best way to trade is through a brokerage. Once a new investor has gotten better at making predictions and analyzing investments, a third market will look good.

How the Third Market Works

When they hear about the financial markets in the news, most people know about the primary and secondary markets. However, there is also a third market. The primary market is when a company gives out shares of stock to the public for the first time.

Most investors are most comfortable and good at trading on the secondary market, which is where stocks and other assets are bought and sold.

What Is the Third Market?

On the third market, brokers and institutional investors like fund managers can buy and sell securities that are listed on an exchange. Most of the time, these securities are traded on a regulated exchange, such as the New York Stock Exchange (NYSE).

Investors can trade exchange-listed assets and shares without using the secondary market or exchanges at all by using the third market.

To trade exchange-listed shares with a non-member on the third market, a member company must first fill all limit orders on the specialist’s book at the same price or a higher one. Institutional investors who are active in the third market are often investment banks and pension funds.

The third market is made up of institutional investors who want to buy and sell their own assets quickly and get paid in cash. Because brokers don’t charge fees in the third market, investors might save money when they buy securities there.

Third-party trading platforms “cross” block orders from large companies that might be in competition with each other. This gets rid of the need for middlemen. The rules about anonymity keep both sides from knowing who the other is.

The extra rules and logic built into flow management interfaces make the transaction anonymous enough, but there are some things that can’t be shared with the public.

Even though Jefferies & Company was the first to trade on the third market in the 1960s, there are now a lot of brokerage firms that focus on this niche.

What Is the Third Market?

Third Market Makers

When there isn’t a buyer or seller for one side of a deal, third-market makers fill that gap. This makes the financial market as a whole more efficient.

As middlemen, third-market manufacturers can buy things cheaply and sell them for more money. They also make trades on exchanges where the broker does not have a membership on the broker’s behalf.

When an investor wants to sell but only makes a small, quick profit by buying a security at a good price and selling it to another investor at a better price, the investor may go to a third-market maker to act as a buyer.

Third-market makers may sometimes pay brokers a small fee (a penny or two per share) to send orders to them. In some situations, brokers and third-market makers are the same person or group.

Why Does a Third Market Matter?

There is a third market where big investors can meet to buy and sell their own securities quickly for cash. Because there are no broker’s fees, securities in the third market can be bought at lower prices.

Who Participates In The Third Market?

Institutional investors like hedge funds, pension funds, and investment banks that invest a lot of money often trade on the third market. Large transactions, sometimes called “bulk deals” or “block deals,” are common on the third market, where these actors can be found.

What Is the Third Market?

But, to be fair, they aren’t the only ones doing business in this area. Institutional investors and wealthy people have started to try out the third market in the past few years.

Why Do Institutional Investors Prefer The Third Market?

It’s no secret that the low costs of trading on the third market are a big draw for institutional investors who want to make big deals. It’s likely that the tens of thousands of dollars in brokerage, tax, and turnover fees that these traders paid because they traded millions of dollars are fair.

Such big extra costs would not only raise the price of the stock, but they would also cut into the profits that institutional investors would normally get.

Here’s an example of a made-up third market that can help us understand why people like it so much.

Let’s say you run an investment business and want to buy 1,000,000 shares of Ashok Leyland Limited, a company that trades on the stock exchange, for Rs. 100 per share. One choice is to do this on the secondary market. But when you tried to make a deal, you would have to pay fees and other costs to the exchange.

Let’s say that all the fees and commissions in an exchange-backed trade add up to about 4% of the total turnover of the trade.

  • You would have to give up about Rs. 4,000,000 (1,000,000 shares x Rs. 100 per share x 4%).
  • Taking this into account, your cost of ownership goes up from Rs. 100 per share to around Rs. 104 per share (Rs. 1,000,000 + Rs. 400,000) for 1 lakh shares.
  • Just trade through the parallel market, and none of these problems will happen.

The fact that people can stay anonymous is another great thing about the third market. In some situations, it may be better for institutional investors’ stakes in a company to stay private than to be made public.

What Is the Third Market?

The third market gives them privacy so they can make big investments or sell their stock without anyone knowing. On the third market, everyone is so anonymous that neither the buyer nor the seller knows who the other person is.


It is common to trade and invest in third-party marketplaces. Without a third market, it would have been much harder to buy and sell large amounts of a company’s shares.

Also, when large trades and large blocks of shares are put up for sale on the secondary market, it could cause an unwelcome rise in the counter’s volatility and cause stock prices to soar and hit the upper circuit in a short amount of time.

That would make a hiccup in the smooth flow of transactions on the stock market. Large transactions put some pressure on the secondary markets, but having a third market takes some of that pressure off.

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Pat Moriarty
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