SIE Ready🔁 Market Structure · Lesson 2 of 4 · 5 min
Exchanges, OTC and the Bid-Ask Spread
💱 Every quote has two prices. Customers buy at the higher one and sell at the lower one, and that gap pays the people who keep the market open.
💡 Key idea
Bid = what the dealer pays you; ask = what you pay the dealer. Spread = ask − bid. Exchanges match orders; OTC is a negotiated dealer network.
🧠 Why it matters
An exchange (NYSE, Nasdaq, Cboe) is a registered marketplace with listing standards where buy and sell orders meet. Nasdaq began as a dealer quotation system and has been a registered national securities exchange since 2006. The over-the-counter (OTC) market is a dealer network: firms trade directly with each other and with customers, by phone or electronically, often in stocks not listed on any exchange and in most bonds. OTC equity quotes are displayed on interdealer quotation systems such as those run by OTC Markets Group. A quote has a bid (the highest price a buyer will pay) and an ask or offer (the lowest price a seller will accept). Customers buy at the ask and sell at the bid. Spread = ask − bid. Example: bid 20.10, ask 20.25 → spread $0.15.
📈 In the real world
📱 Tomás wants 100 shares of a small company quoted OTC at 4.80 bid, 4.95 ask. He buys at 4.95. If he changed his mind a second later and sold, he would get 4.80: the 15-cent spread costs him $15 on 100 shares before the price moves at all.
📌 Takeaways
- Customers buy at the ask (offer) and sell at the bid
- Spread = ask minus bid; thinly traded securities usually have wider spreads
- Exchanges have listing standards; the OTC market is a network of dealers trading directly
📖 Terms in this lesson
Exchange: A registered, centralized marketplace such as the NYSE or Nasdaq where listed securities trade under the exchange's rules.
Over-the-counter market (OTC): A dealer network where securities trade through negotiation between firms rather than on an exchange.
Bid: The highest price a dealer or buyer will pay for a security right now; a customer selling receives the bid.
Ask (offer): The lowest price at which a dealer or seller will sell a security right now; a customer buying pays the ask.
Bid-ask spread: The difference between the bid and the ask prices for a security.
✅ Test yourself
A stock is quoted 32.40 bid, 32.55 ask. At what price can a customer sell at the market?
- 32.475
- 32.55
- 32.15
- 32.40
Answer: D · 32.40
Customers sell at the bid, the price a buyer will pay: 32.40. 32.55 is the ask, where customers buy; 32.475 is the midpoint; 32.15 is just a distractor built from the spread.
A quote shows 18.05 bid and 18.30 ask. What is the spread?
- $0.25
- $0.05
- $0.15
- $0.35
Answer: A · $0.25
Spread = ask − bid = 18.30 − 18.05 = $0.25 per share. The other figures come from subtracting the wrong digits.
Which statement about the over-the-counter market is accurate?
- It is a network of dealers trading directly
- It cannot be used for corporate bonds or municipal bonds
- It trades only exchange-listed stocks
- It is a single trading floor in New York
Answer: A · It is a network of dealers trading directly
OTC trading is negotiated between dealers and with customers rather than on a central exchange; most bonds and municipals trade this way. It is not one floor, and it is not limited to listed stocks.
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