Third Market

A third market consists of trading by non-exchange member brokers/dealers and institutional investors of exchange-listed stocks. In other words, the third market involves exchange-listed securities that are being traded over-the-counter between brokers/dealers and large institutional investors.

Before selling an exchange-listed security to a non-member in a third market transaction, a member firm must fill all limit orders on the specialist's book at the same price or higher. Typical institutional investors who take part in the third market include investment firms and pension plans. The third market brings together large investors willing and able to purchase and sell their own securities holdings for cash and immediate delivery. Securities can be purchased at lower prices in the third market because of the absence of broker's commissions.  

Third party trading systems bypass traditional brokers and allows large and possibly rival institutions' block orders to "cross" with each other. Anonymity rules prevent either side from knowing the identity of the counter-party. There are additional rules and logics built into flow management interfaces, but there is some information that cannot be shared with the public, which gives the transaction sufficient anonymity.

The third market supports the primary and secondary markets. The primary market describes the issuance of new securities. The secondary market is traditionally where seasoned securities are exchanged among market participants. And now, the third market is ancillary to the secondary market, with an emphasis on OTC markets and institutional investors.

Third market trading began in the 1960s with firms such as Jefferies & Company, although, today, there are a number of brokerage firms focused on third market trading. 

Third market makers add liquidity to financial markets by facilitating buy and sell orders even if there isn't a buyer or seller immediately available for the other side of the transaction. Third market makers make a profit from their roles as intermediaries by buying low and selling high. They also place trades for brokers on exchanges of which that broker is not a member.

A third market maker might act as a buyer when an investor wants to sell, but he or she just wants to make a small, short-term profit from buying a security at a favorable price and selling it to another investor at a higher price. Third market makers sometimes pay brokers a small fee of a cent or two per share to direct orders their way. Sometimes brokers and third market makers are one in the same.