Financial markets are the markets where individuals and organisations lend funds to other individuals and organisations.
Required:
Explain the following under financial markets: (6 marks)
i) Over the counter market (OTC)
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A decentralized market, without a central physical location, where market participants trade with one another through various communication modes such as the telephone, email, and proprietary electronic trading systems. An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets. In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed. In general, OTC markets are typically less transparent than exchanges and are also subject to fewer regulations.
ii) Dealers market
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A financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security of instrument. In a dealer market, a dealer – who is designated as a “market maker” – provides liquidity and transparency by electronically displaying the prices at which it is willing to make a market in a security, indicating both the price at which it will buy the security (the “bid” price) and the price at which it will sell the security (the “offer” price). Bonds and foreign exchange trade primarily in dealer markets.
iii) Auction market
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In an auction market, buyers enter competitive bids and sellers enter competitive offers at the same time. The price at which a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept. Matching bids and offers are then paired together, and the orders are executed. The New York Stock Exchange (NYSE) is an example of an auction market.