7 Ocak 2013 Pazartesi

The Fourth Market Transactions

The fourth market transactions can be defined as the direct trading of large blocks of securities between institutional investors through a computer network, rather than on an exchange.[1] As it is understood from the definition the transactions are done in OTC market. This is due to the absence of a regulated market between the buyer and the seller.

After giving the main definition of the fourth market we can also give the main specialities of fourth market as follows:[2]
·       Investors are trading directly with other investors (without using a broker)
·       The advent of ECNs (electronic communication network) fuels the growth of the fourth market. ECNs have reduced the trading costs, they have introduced an ability of trading after hours, and they offer ask and bid transactions which are matched anonymously.
·       Institutional investors linked to each other by computer terminals. The system permits subscribers to display bids and offers (which are exposed system wide for whatever length of time the initiating party specifies) and to consummate trades electronically
·       ECNs captured about 40% of Nasdaq trading volume. 
·       In this market, as discussed above, there should be a computerized service that allows subscribers to display tentative bid and ask quotes. One of these service providers is INSTINET (an acronym for Institutional Networks Corporation) which is registered as a stock exchange with the Securities and Exchange Commission.

INSTINET, as discussed above have the following characteristics:
·         It is a kind of agency broker focused on helping investors improve execution quality through the innovative use of trading technology.
·         It was founded in 1969 to launch the first electronic block-crossing capability for institutions.
·         Innovator of trading technology for over 35 years.
·         Provides a global trading platform that connects portfolio managers and traders directly to equity markets around the world.
·         Offers enhanced trading services including algorithms, global portfolio trading, agency sales trading, commission management and third-party research.

If the company is trading through ECNs, the company will have the following advantages:[3]
·         Anonymity
·         Lower transaction fees
·         Instant order execution and confirmation
·         Longer trading hours

The same company has the following disadvantages:
·         Low volume means poor liquidity for less popular stocks.

After introducing the fourth market with its actors, we need to give an example from the recent business life. The following event can be a good scenario for this market. When a mutual fund and a pension fund enter into a large block trade with each other, this would generally occur in the fourth market and usually over an electronic communication network. By executing the transaction this way, both parties avoid brokerage and exchange transaction fees. They also avoid the possibility of distorting the market price or the volume traded on an exchange.

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