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over-the-counter market

trading
Also known as: off-board market, unlisted market
Written and fact-checked byThe Editors of Encyclopaedia Britannica
The Editors of Encyclopaedia Britannica
Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors.
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over-the-counter market, trading in stocks and bonds that does not take place on stock exchanges. It is most significant in the United States, where requirements for listing stocks on the exchanges are quite strict. It is often called the “off-board market” and sometimes the “unlisted market,” though the latter term is misleading because some securities so traded are listed on an exchange.

In the over-the-counter market, dealers frequently buy and sell for their own accounts and usually specialize in certain issues. Schedules of fees for buying and selling securities are not fixed, and dealers derive their profits from the markup of their selling price over the price they had paid. The investor may buy directly from dealers who are willing to sell stocks or bonds that they own or with a broker who will search the market for the best price.

Bonds of the U.S. government (“treasuries”), as well as many other bond issues and preferred-stock issues, are listed on the New York Stock Exchange but have their chief market over-the-counter. Other U.S. government obligations, as well as state and municipal bonds, are traded over-the-counter exclusively.

A third market has developed because of the increased importance of institutional investors, such as the mutual funds, who deal in large blocks of stock. Trading is done in shares listed on the exchanges but takes place over-the-counter; that permits large-quantity discounts not possible on the exchanges, where brokerage fees are fixed.

Historically, much of the regulation of the over-the-counter market has been effected through the National Association of Securities Dealers, Inc. (NASD), created in 1939 by an act of Congress to establish rules of conduct and protect members and investors from abuses. In 2007 NASD merged with a sector of the New York Stock Exchange to form the Financial Industry Regulatory Authority (FINRA), which became the main regulatory body of that market in the United States. Although retail prices of over-the-counter transactions are not publicly reported, interdealer prices for the issues have been published since February 1965 by NASD and later FINRA.

This article was most recently revised and updated by Peter Bondarenko.