Lesson 5 of 8 · All lessons in this module
- Primary markets, secondary markets and how trades are arranged
- Routes to public equity: IPOs, SPACs, direct listings and follow-ons
- Why IPOs are underpriced, and what secondary markets do
- Exchange trading: the order book, the bid-ask spread and VWAP
- Off-exchange and over-the-counter equity trading
- Measuring liquidity: float, average daily volume and turnover
- Types of equity indexes
- Composite, theme, ESG and factor equity indexes
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 5 of 8 · 11 min
Off-exchange and over-the-counter equity trading
Very large, very small or illiquid trades often execute off-exchange to limit implicit costs such as market impact, while OTC equity trading runs through a network of dealer market makers that offers reliable execution but less transparency.
In short
- Off-exchange trades are typically block trades (usually 10,000 shares or more), tiny retail trades in low-priced shares, or trades in illiquid shares.
- Brokers split blocks into smaller orders over time or across several parties to reduce price impact; fund managers may also swap shares bilaterally at the closing price.
- Implicit costs beyond the spread: market impact (your own trading moves the price), delay costs / slippage (filled late after the price moved), opportunity costs (never filled while the price moved).
- OTC markets are quote-driven: several broker-dealer market makers quote bids and asks and fill orders from inventory or by finding an offsetting order.
- OTC: highest likelihood of execution, but less transparency, no assurance of the best price, and dealers may pull back in stress; mostly smaller firms that skip or fail exchange listing.
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