Third & Fourth Market

Third Market
Securities listed on the New York Stock Exchange trade on the exchange and on various other facilities. OTC market makers have been able to make markets in NYSE-listed securities for quite some time now, and we call this the third market. So we would find shares of GE or IBM trading "over-the-counter," in "the third market." However, if shares of GE or IBM are purchased/sold via the NYSE, that's still the first market.

To facilitate third market trading the industry developed a quotation system called the Consolidated Quotation System (CQS). Although this quotation system operates between 9 AM and 6:30 PM Eastern time, the major action on the system is still during normal market hours.

The rules we looked at for excused withdrawals from the NASDAQ system also apply to market makers in the third market. If a market maker wants to withdraw indefinitely/permanently, as with NASDAQ, the firm just withdraws its quotes from the CQS. FINRA rules would require the firm to wait at least two business days before it can re-register as a market maker in that security. Remember that the wait time is 20 days for the NASDAQ system
 
Fourth Market
The fourth market, also known as the "ECN market," is an electronic trading system for institutional investors. Rather than using the services of a traditional broker-dealer, participants from insurance companies, pension funds, mutual funds, and other institutions trade electronically and directly with each other for both listed and unlisted securities.

The electronic communications networks used here are named, not surprisingly, Electronic Communications Networks (ECNs). INSTINET is an example of an ECN used within the fourth market. ECNs are a form of Alternative Trading System (ATS) discussed and regulated by the SEC's Regulation ATS. An alternative trading system matches buyers and sellers electronically, usually those who trade in large quantities (institutional investors). SEC Regulation ATS imposes strict record keeping requirements on these trading systems and requires them to file a Form ATS. However, these systems do not have to go so far as to register as securities exchanges. As the SEC states, Regulation ATS allows "alternative trading systems to choose whether to register as national securities exchanges, or to register as broker-dealers and comply with additional requirements under Regulation ATS, depending on their activities and trading volume."
ECNs execute orders on an agency basis. They, therefore, are not obligated to main¬tain two-sided quotes, since they are not buying and selling for their own account.