Friday, September 25, 2009

Open versus negotiated markets

Another distinction within the financial system which is sometimes useful is that between open markets and negotiated markets. For example, some corporate bonds are sold in the open market to the highest bidder and bought and sold any number of times before they mature. In contrast, in the negotiated market for corporate bonds, securities generally are sold to one or a few buyers under private contract and held maturity.
An individual who goes to his or her local banker to secure a loan for a new car enters the negotiated market for auto loan. However, a broker instructed to buy a few shares of GM stock will attempt to fill the order by contacting a seller in the open market. Most state and local government securities are sold in the open market. But a growing number are sold under a privately negotiated "treaty" with one or a few buyers. In the market for corporate stocks there are over-the-counter (OTC) sales and the major stock exchanges, which represent the open market. Operating at the same time, however, is the negotiated market for stock, in which a corporation may sell its entire equity issue to a large insurance company or pension funds.

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