Investments, tenth edition

  Dealer Markets   

Roughly 35,000 securities trade on the    over-the-counter   or   OTC 

market.    Thousands of brokers register with the SEC as security dealers. Dealers quote 

prices at which they are willing to buy or sell securities. A broker then executes a trade by 

contacting a dealer listing an attractive quote. 

 Before 1971, all OTC quotations were recorded manually and published daily on so-

called pink sheets. In 1971, the National Association of Securities Dealers introduced its 

Automatic Quotations System, or NASDAQ, to link brokers and dealers in a computer 

network where price quotes could be displayed and revised. Dealers could use the network 

to display the bid price at which they were willing to purchase a security and the ask price 

at which they were willing to sell. The difference in these prices, the bid–ask spread, was 

the source of the dealer’s profit. Brokers representing clients could examine quotes over 

the computer network, contact the dealer with the best quote, and execute a trade. 

 As originally organized, NASDAQ was more of a price-quotation system than a trading 

system. While brokers could survey bid and ask prices across the network of dealers in the 

search for the best trading opportunity, actual trades required direct negotiation (often over 

the phone) between the investor’s broker and the dealer in the security. However, as we will 

see, NASDAQ is no longer a mere price quotation system. While dealers still post bid and 

ask prices over the network, what is now called the  NASDAQ Stock Market  allows for 

electronic execution of trades, and the vast majority of trades are executed electronically.