Third Market Maker

A third market maker is any third-party securities dealer who is ready and willing to buy or sell stocks listed on exchanges at publicly quoted prices. 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 broker also facilitates the buying and selling of securities, but he or she accomplishes this task by directly matching up buy and sell orders. 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.

More recently, the "third market" describes the exchange of securities on electronic mediums such as exchange-listed securities in the over-the-counter (OTC) market. Third market trading was pioneered in the 1960s by firms such as Jefferies & Company although today there are a number of brokerage firms focused on third market trading, and more recently dark pools of liquidity, which are popular with high-frequency trading strategies.

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.