On the Two Kinds of “Secondary Markets”: Auction Markets and Dealer or Over-the-Counter (OTC) Markets

Financial markets function as both primary and secondary markets for debt and equity securities. The term primary markets refers to the original sale of securities by governments and corporations. The secondary markets are where these securities are bought and sold after the original sale. Equities are, of course, issued solely by corporations. Debt securities are issued by both governments and corporations. . . .

A secondary market transaction involves one owner or creditor selling to another. Therefore, the secondary markets provide the means for transferring ownership of corporate securities. There are two kinds of secondary markets: auction markets and dealer markets. 

Dealer markets in stocks and long-term debt are called over-the-counter (OTC) markets. Trading in debt securities takes place over the counter. The expression over the counter refers to days of old when securities were literally bought and sold at counters in offices around the country. Today, like the money market, a significant fraction of the market for stocks and all of the market for long-term debt have no central location; the many dealers are connected electronically. . . .

Auction markets differ from dealer markets in two ways: First, an auction market or exchange, unlike a dealer market, has a physical location (like Bay Street in Toronto or Wall Street). Second, in a dealer market, most of the buying and selling is done by the dealer. The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those who wish to buy. Dealers play a limited role.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17-19.