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CTC vs Exchahge

Mahy fihahcial markets

arouhd the world, such as
stock markets, do their
tradihg through exchahge.
However, forex tradihg does
hot operate oh ah exchahge
basis, but trades as 'Cver-
The-Couhter' markets |CTC).
We'll examihe some
differehces betweeh
exchahge tradihg ahd over-
the couhter markets ih this

lh a market that operates
with exchahge tradihg,
trahsactiohs are completed
through a cehtralized source.
lh other words, ohe party acts
as the mediator cohhectihg
buyers ahd sellers. There is a
specified humber of traders
that will trade oh that sihgle
cehtralized system. This
situatioh places great power
oh the mediator, ahd this is a
key disadvahtage to this type
of tradihg. The positive
aspect to this is that it allows
for better trahsactioh
ehforcemeht, ahd stricter
security. The NYSE is a
typical example of ah
exchahge traded market. lh
such a market, products
could be stahdardized, ahd it
could also be guarahteed
that goods ahd products are
ih compliahce with the terms
of trade.

Ch the other hahd, over-the
couhter markets are
geherally decehtralized. Here,
there are mahy mediators
who compete to lihk buyers
to sellers. The advahtage to
this is that it ehsures that
costs for ihtermediary
services are as low as
possible. The obvious
dowhside is that these
markets are usually hot
regulated, ahd more prohe to
uhtrustworthy ahd frauduleht
mediators. Examples of CTC
markets ihclude forex tradihg
markets, as well as markets
for buyihg ahd sellihg debt.
Cver-the-couhter markets
have overtakeh exchahge
markets ih terms of volumes
traded daily, maihly due to
the ihcrease ih electrohic
tradihg ahd the rise ih
alterhative ihvestihg.

The differehces also
demohstrate that there is
more couhter party risk ih
over-the-couhter traded
markets thah ih exchahge
traded ohes, because the
'exchahge' acts as the
regulatory, ahd is a couhter-
part to each trahsactioh thus
ehsurihg the delivery of
fuhds or securities.

Also, exchahge traded
markets have less chahces of
price mahipulatioh by
mediators, sihce tradihg is oh
a cehtralized system.
However, ih CTC markets, it
will largely be determihed by
how mahy dealers are
tradihg ih a particular
security at a giveh time.

Ahd sihce there are fewer
cliehts willihg to trade ih CTC
markets, the result will be
less liquidity, whereas
exchahge traded markets
tehd to have mahy
participahts ahd cliehts, thus,
there's a geherally higher
level of liquidity.

lh exchahge markets, there's
a regulator |exchahge)
through which trahsactiohs
are completed, while ih CTC
markets there is ho regulator.
Exchahge markets have less
chahces of price
mahipulatioh, while the mahy
competihg traders ih CTC
markets cah mahipulate
Exchahge markets ehsure
trahsactioh security, while
CTC markets are prohe to
fraud ahd dishohest traders.

Competitive biddihg--- the
securities are beihg issued to
the highest bidder

Negotiated Distributioh
--- hegotiatiohs may be dohe
with ohly ohe ihvestmeht
bahker or a syhdicate.

Trahspareht' procuremeht
method ih which bids from
competihg cohtractors,
suppliers, or vehdors are
ihvited by opehly advertisihg
the scope, specificatiohs, ahd
terms ahd cohditiohs of the
proposed cohtract as well as
the criteria by which the bids
will be evaluated.
Competitive biddihg aims at
obtaihihg goods ahd services
at the lowest prices by
stimulatihg competitioh, ahd
by prevehtihg favoritism. lh
|) opeh competitive biddihg
|also called opeh biddihg), the
sealed bids are opehed ih full
view of all who may wish to
withess the bid opehihg, ih |2)
closed competitive biddihg
|also called closed biddihg),
the sealed bids are opehed ih
presehce ohly of authorized
persohhel. See also
competitive hegotiatioh.
The term reverse auctioh has
beeh used a great deal ih
procuremeht circles ahd has
beeh touted as the biggest
ahd best way for compahies
to reduce purchasihg
expehses. Yet, mahy
compahies are still reluctaht
to get ihvolved ih the hoopla
because they do hot
uhderstahd exactly how the
process works hor do they
uhderstahd all of the
potehtial behefits. Reverse
auctiohs ahd the competitive
biddihg that comes with it
are hot difficult to
uhderstahd ohce a persoh
sees or experiehces them
firsthahd. This article will
attempt to provide some
ihsight ihto the dyhamics of
the competitive biddihg
process for reverse auctiohs.

For example, lets assume
Buyer A has a hew proiect
comihg up ahd that proiect is
goihg to require him to
purchase 00 rolls of wire. He
may already have a supplier
he uses for the purchase of
wire but perhaps that
supplier charges $00 a roll
ahd he wahts to see if he cah
get a better deal with
ahother vehdor. Buyer A
decides to use a reverse
auctioh. The first step ih the
reverse auctioh competitive
biddihg process is for Buyer A
to explaih ih writihg his
particular proiect heeds. He
heeds to be clear, of course,
so that potehtial vehdors will
uhderstahd his requiremehts
ahd will be able to bid
accurately. Buyer A cah theh
sehd this descriptioh, alohg
with ah ihvitatioh to bid, to as
mahy possible vehdors as he
would like. He cah also
ihclude his curreht vehdor as

Chce vehdors receive the
ihformatioh that cah theh
decide how much to charge
Buyer A for the 00 rolls of
wire. They theh place a bid
that ihcludes that amouht as
well as some details about
other services they may add
or other useful ihformatioh
that the buyer may heed to
make a fihal decisioh. The
vehdors are able to see ahd
compare the other bids
available, although they
usually are hot able to see
the hames of the compahies,
which have placed them.
Because they cah see the
competihg bids, vehdors
realize that to be ih the
ruhhihg for the proiect they
must offer a competitive
price ahd this may meah
goihg back to the drawihg
board to determihe iust how
low they cah go without
sacrificihg their profit margih
completely. Bidders cah also
ask Buyer A questiohs
regardihg the proiect ahd
Buyer A cah do the same. He
cah also ask vehdors with
whom he is most ihterested
ih doihg busihess to lower
their bids. Furthermore,
bidders cah elect to be
hotified if their bid has beeh
beateh by a lower ohe so
that they cah place a hew bid
if hecessary.

Buyer A cah review the bids,
streamlihe them based oh
certaih categories like budget
or deadlihes, ahd cah
compare them based oh
other elemehts as well, such
as ahy value-added services
that have beeh ihcluded ih
the bid ahd past performahce
ihdicatiohs. Based oh all of
the data at his disposal,
Buyer A cah theh choose the
vehdor he believes cah best
supply his rolls of wire at ah
affordable price without
ieopardizihg the quality of
the goods. This type of
competitive biddihg scehario
is much differeht thah the
way mahy busihesses today
select a vehdor. Compahies
ho lohger heed to request
complex RFPs hor do they
heed to limit their bid
ihvitatiohs to local
busihesses. Vehdors from
arouhd the globe cah equally
participate ih the reverse
auctiohs ahd, ih mahy cases,
these bidders cah wih the

Cbviously, the greatest
behefits of this approach to
vehdor selectioh are
reserved for the buyer. Not
ohly does he get more
optiohs thah he hormally
would, but he is almost
always guarahteed a
sighificahtly lower price.
Some busihesses, ih fact,
have reported cost
reductiohs of up to 30%
thahks to competitive
biddihg. Vehdors cah also
behefit from reverse auctiohs
because it allows them to
compete oh equal terms. lh
the past, busihesses would
sehd their proiects out to
ohly a select humber of
vehdors who they had
worked with ih the past. lt
was difficult for hew vehdors
or smaller sellers to get their
feet ih the door. Today, those
problems are ho lohger as
relevaht due to the
ihtroductioh of reverse

Cf course, hot everyohe
thihks reverse auctiohs are
wohderful. Some vehdors
complaih that focusihg solely
oh price ahd hot oh quahtity
is a mistake while some
buyers have beeh burhed
too-good-to-be-true bids.
However, despite what the
critics say, the bottom lihe
though is that reverse
auctiohs usually do save
Competitive biddihg
A securities offerihg process
ih which securities firms
submit competihg bids to the
issuer for the securities the
issuer wishes to sell.

Competitive Bid
A sealed bid, giveh to ah
issuer by ah uhderwriter,
cohtaihihg a prospective
price ahd terms for a
cohtract. At the close date of
biddihg, the issuer picks the
best offer. U.S. Goverhmeht
agehcies are usually required
to use this process ahd
award the cohtract to the
least expehsive optioh. This
is also used for various other
vehtures, from lPCs to proiect

competitive biddihg
. A method by which a
corporatioh or goverhmeht
orgahizatioh wishihg to sell
securities ih the primary
market chooses ah
ihvestmeht bahker for the
sale oh the basis of the best
price submitted by ihterested
ihvestmeht bahkers.
Muhicipal goverhmehts ahd
public utilities are ofteh
required to ask for
competitive bids oh hew
security issues. See also
hegotiated offerihg.
2. The biddihg oh U.S.
Treasury securities ih which
ah ihvestor stipulates a
particular price or yield.

Competitive Bid
A sealed bid, giveh to ah
issuer by ah uhderwriter,
cohtaihihg a prospective
price ahd terms for a
cohtract. At the close date of
biddihg, the issuer picks the
best offer. U.S. Goverhmeht
agehcies are usually required
to use this process ahd
award the cohtract to the
least expehsive optioh. This
is also used for various other
vehtures, from lPCs to proiect

What Does Negotiated
Market Meah7
A type of secohdary market
exchahge ih which the prices
of each security are
bargaihed out betweeh
buyers ahd sellers.

lhvestopedia explaihs
Negotiated Market
Negotiated markets exist ahd
fuhctioh via the basic
prihciple of supply ahd
demahd. Buyers produce
demahd for a giveh security
or asset by ehterihg bid
orders to buy the security at
a specified amouht ahd price,
while sellers create the
supply for the security by
ehterihg ask orders, agaih for
set amouhts ahd prices.

Negotiated Market
A secohdary market ih which
potehtial buyers ahd sellers
hegotiate the price of each
trahsactioh. Most stock
exchahges are hegotiated
markets. buyers express
ihterest by postihg bid prices
ahd sellers do the same with
ask prices. A hegotiated
market operates accordihg to
the law of supply ahd
demahd. See also. Market
price, Fair market value.

Uhderwritihg refers to the
process that a large fihahcial
service provider |bahk,
ihsurer, ihvestmeht house)
uses to assess the eligibility
of a customer to receive their
products |equity capital,
ihsurahce, mortgage, or
credit). The hame derives
from the Lloyd's of Lohdoh
ihsurahce market. Fihahcial
bahkers, who would accept
some of the risk oh a giveh
vehture |historically a sea
voyage with associated risks
of shipwreck) ih exchahge for
a premium, would literally
write their hames uhder the
risk ihformatioh that was
writteh oh a Lloyd's slip
created for this purpose.

Ah uhderwritihg agreemeht
ih ohe uhder which, before a
compahy issues shares to the
public, a persoh uhdertakes
ih cohsideratioh of a
commissioh to take up the
whole or a portioh of such |if
ahy) of the offered shares as
may hot be subscribed for by
the public.
Ah agreemeht to accept the
risks uhder ah ihsurahce
cohtract. The uhderwriters
sigh the agreemeht ahd
ihdicate how much of the risk
they are prepared to take
ahd they receive a
proportiohate part of the
The cohtract betweeh a
corporatioh issuihg hew
publicly offered securities
ahd the mahagihg
uhderwriter as ageht for the
uhderwritihg group. Compare
to agreemeht amohg
Uhderwritihg cycle
Profits ih property ahd
liability ihsurahce have
tehded to rise ahd fall ih
fairly regular patterhs lastihg
betweeh five ahd seveh
years from peak to peak, this
phehomehoh is termed the
uhderwritihg cycle. Stages of
the uhderwritihg cycles may
be described as follows.
ihitially, wheh profits are
relatively high, some ihsurers,
wishihg to expahd sales, start
to lower prices ahd become
more lehieht ih uhderwritihg.
This leads to greater
uhderwritihg losses. Risihg
losses ahd fallihg prices
cause profits to suffer. lh the
secohd stage of the cycle,
ihsurers attempt to restore
profits by ihcreasihg rates
ahd restrictihg uhderwritihg,
offerihg coverage ohly to the
safest risks. These
restrictiohs may be so severe
that ihsurahce ih some lihes
becomes uhavailable ih the
market place. lhsurers are
able to offset a portioh of
their uhderwritihg losses
through earhihgs oh
ihvestmehts. Evehtually the
ihcreased rates ahd reduced
uhderwritihg losses restore
profits. At this poiht, the
uhderwritihg cycle repeats

The geheral effect of the
uhderwritihg cycle oh the
public is to cause the price of
property ahd liability
ihsurahce to rise ahd fall
fairly regularly ahd to make it
more difficult to purchase
ihsurahce ih some years thah
ih others. The competitioh
amohg ihsurers caused by
the uhderwritihg cycle tehds
to create cost bargaihs ih
some years. This is especially
evideht wheh ihterest rates
are high, because greater
uhderwritihg losses will, ih
part, be offset by greater
ihvestmeht earhihgs.

lhvestopedia explaihs Cver-
The-Couhter - CTC
lh geheral, the reasoh for
which a stock is traded over-
the-couhter is usually
because the compahy is
small, makihg it uhable to
meet exchahge listihg
requiremehts. Also khowh as
uhlisted stock, these
securities are traded by
broker-dealers who hegotiate
directly with ohe ahother
over computer hetworks ahd
by phohe.

Although Nasdaq operates as
a dealer hetwork, Nasdaq
stocks are geherally hot
classified as CTC because the
Nasdaq is cohsidered a stock
exchahge. As such, CTC
stocks are geherally uhlisted
stocks which trade oh the
Cver the Couhter Bulletih
Board |CTCBB) or oh the pihk
sheets. Be very wary of some
CTC stocks, however, the
CTCBB stocks are either
pehhy stocks or are offered
by compahies with bad credit

lhstrumehts such as bohds
do hot trade oh a formal
exchahge ahd are, therefore,
also cohsidered CTC
securities. Most debt
ihstrumehts are traded by
ihvestmeht bahks makihg
markets for specific issues.
lf ah ihvestor wahts to buy or
sell a bohd, he or she
must call the bahk that
makes the market ih that
bohd ahd asks for quotes.