What Does It Mean By Third Market?

Investors might know about two types of capital markets: primary and secondary. The primary market is made up of the IPO and stock exchange markets. Did you know there were two other types of capital markets available? Investors and traders often refer to these two types as the fourth and third markets, respectively. This article will discuss this market in more detail, including an example of a third market.

What is the third market?

The third market is basically a place where shares of companies listed on stock exchanges can be traded over-the counter (OTC), and not directly through the exchanges.

Third market investors can trade shares of companies through the secondary market. They bypass the whole secondary market and all its participants, such as the broker house and stock exchange. Investors can save significant amounts on brokerage fees, turnover fees and taxes by trading through the third market. This allows purchasing entities to enjoy lower prices that what is being quoted on stock exchanges.

Who is eligible to participate in the third market

Large institutional investors such as pension funds, hedge funds and investment banks use the third market most often. This market is used by large institutional investors like pension funds, hedge funds, investment banks, and others to execute large-scale trades. These are also called bulk deals or blocks deals. They are not the only ones who use this market. Retail investors and people with sufficient net worth have been participating in this market for a while.

Why are institutional investors more inclined to invest in the third market?

The fact that bulk trades on the third market are much cheaper for institutional investors is one of the main reasons. These trades are so large that they reach into the millions. This means that ancillary expenses such as brokerage, taxes and turnover fees would also add up to tens of thousands. These additional costs would not only increase ownership costs but also reduce the profit margins of institutional investors.

Let's look at one example of a hypothetical third market to understand why the third market is preferred.

Let's say you are an investment company looking to purchase 1 lakh shares Ashok Leyland Limited at Rs. 100 per share. This could be done via the secondary market. However, this would mean that you would need to pay the various fees and costs associated with trading on the exchange.

Let's say that the cost of an exchange-backed trade is 4% of its total turnover.

- This would mean that you would have to part with approximately Rs. {4,00,000 4,00,000. (1 lakh shares x Rs. 100 per share) x 4%.|100 shares x Rs.}

- This will increase your ownership cost from Rs. 100 per share to Rs. 104 per share {(Rs. 1,00,00,000. + Rs. 4,00,000) / 1 lakh shares.|4,000,00,000. + Rs.}

All this can be avoided by trading via the third market.

The third market also offers anonymity for both buyers and sellers. Many institutional investors don't want the public to see information about their investments in companies. They can choose to remain anonymous as they make large investments and liquidate their stakes in third market. The anonymity factor in third market is so high that neither the buyer nor seller can know each other's identities.

Conclusion

Third markets are essential for investment and trading. Without a third market, it would have been difficult to buy and sell large blocks of shares of a company with relative ease. It is possible to sell large blocks of shares and make huge trades on the secondary market. This could cause volatility to spike and lead to stock prices soaring and reaching the upper circuit in a very short time. This could disrupt the normal flow of stock market trades. The presence of a third market can help alleviate stress from secondary markets that are subject to bulk transactions.