Negotiated Market

A negotiated market is a type of secondary market exchange in which the prices of each security are bargained out between buyers and sellers. In a negotiated market there are no market-makers or order matching, instead buyers and sellers actively negotiate on the price at which a transaction is finalized either directly or through the use of brokers. These markets are considered very inefficient as the time, effort and lack of transparency in pricing are large issues that can't be resolved for this type of trading.

Negotiated markets exist and function via the basic principle of supply and demand. Buyers produce demand for a given security or asset by entering bid orders to buy the security at a specified amount and price, while sellers create the supply for the security by entering ask orders, again for set amounts and prices. The over-the-counter securities market is one major example of a negotiated market.

Consider a buyer, who wants to buy 1000 shares of the (fictional) Small Time Insurance Company. This company is traded exclusively in the over-the-counter market. The buyer calls his broker and asks for a price quote. The broker checks the market by referring to the pink sheets issued by the National Quotation Bureau. The pink sheets indicated that a brokerage in Chicago is currently making a market in Small Time Insurance Company, quoting it at 20 bid and 20.75 asked. The broker tells the buyer that Small Time Insurance Company can probably be purchased for 20.75. If the buyer likes the price, he may give the broker an order to buy Small Time Insurance.

At this point, the buyer's broker would call or wire the broker in Chicago. Such a conversation might go like this:

Buyer broker: What is your market for Small Time Insurance?

Chicago broker: 20 bid and 20.75 asked

Buyer broker: What is the size of your market?

Chicago broker: 300 shared either way (buy or sell)

Buyer broker: I will pay 20.25 for 100

Chicago broker: I will sell 100 at 20.50

Buyer broker: I will take 100 at 20.5

Chicago broker: I have sold you 100 shares of Small Time Insurance common stock at 20.50

In practice, the buyer broker probably checked the quotations of several dealers before making an offer, since various brokers may be willing to sell a security at various prices. A broker that wants to by a security for a customer will check the market by telephoning several brokers he things are making a market in the security.