Welcome to the Over-the-Counter (OTC) Stock Market
Over-the-counter (“OTC”) can refer to several things. Most of us hear this from medical professionals especially in the pharmacy where over-the-counter refers to medciations that can be sold directly to consumers without a prescription. In the investing world, however, over-the-counter generally refers to the trade of financial instruments through a dealer network or directly between two parties, versus through a centralized exchange. These financial instruments can include stocks, bonds, options, other derivatives, commodities, and other contracts. As we are fond advocates of Stock Tips, this article will focus on the latter over-the-counter market.
Stock Trading Overview:
As you may already know, equity securities in the U.S. are traded on stock exchanges, over-the-counter markets, or privately between two or more parties. Here we will discuss the public mediums for trading securities and will ignore private transactions including stock compensation plans.
In this centralized market, the “members” of the exchange trade shares of stock that are “listed” on that exchange.
In the U.S., the NYSE (New York Stock Exchange) and AMEX are considered true stock exchanges where stocks are bought and sold. NASDAQ, while technically operating as a dealer network, is also generally considered to be a true stock exchange. To trade on NASDAQ, stocks must be listed, and to be listed stocks must meet NASDAQ’s listing requirements.
Over-the-Counter Stock Market:
The U.S. OTC market generally includes stocks not listed or traded on NASDAQ or a national securities exchange. These companies whose securities are traded OTC include a broad range of companies – from small to giant, from those disclosing almost no information to those offering full disclosure, from companies in extreme financial distress to highly profitable companies, and so on.
Most OTC trading is facilitated by inter-dealer quotation systems. The two major U.S. inter-dealer quotation systems are:
OTC Bulletin Board (OTCBB)
…is owned and operated by FINRA. FINRA (the Financial Industry Regulatory Authority, Inc.) “is the largest independent regulator for all securities firms doing business in the United States.” To have their stock quoted on the OTCBB, companies must be registered and sponsored by an authorized OTCBB Market Maker. Companies must be fully SEC (or appropriate banking or insurance regulator) compliant to have their stock quoted on OTCBB.
…is owned and operated by the OTC Markets Group Inc. The OTC Markets Group organizes companies into three main tiers.
A) OTCQX – “The Intelligent Marketplace” for the companies with the highest financial standards and best disclosure policies.
B) OTCQB – “The Venture Marketplace” for companies current in their reporting to the appropriate regulator (SEC, etc.), but not required by OTC Markets Group to meet any financial or qualitative standards. Many OTCBB quoted companies (as many as 99%) are also quoted on OTCQB as the OTC Markets Group system also enables trading, which the OTCBB system doesn’t. This sometimes leads to confusion when investors see a company’s stock referred to as OTCBB:SYMB one place and OTCQB:SYMB somewhere else.
C) OTCPink – “The Open Marketplace”. This tier is further divided into three categories:
…i) OTC Pink Current for companies following the International Reporting Standard or the Alternative Reporting Standard and filing reports so they are publicly available.
…ii) OTC Pink Limited Information for companies unable, due to financial or other problems, or simply unwilling to make the information they have publicly available, but have made disclosures within the past six months.
…iii) OTC Pink No Information for companies unable or unwilling to provide required information for over six months.
The types of trades described briefly below generally fall more into the realm of private trades but are noted here to avoid confusion.
Securities not quoted on the inter-dealer quotation systems described above are traded on what is often called the “Grey Market”. On the Grey Market, there is no available bid and ask information and so these securities tend to be illiquid.
“Third Market” trading is the trading of exchange-listed stocks in the OTC market. This can allow institutional investors to trade blocks of stock directly. “Fourth Market” trading is institution to institution trading without using the services of a broker/dealer. “Dark Pools of Liquidity” refers to trading, usually large trades, anonymously away from public exchanges. Networks, sometimes called “Dark Pools”, have been set up to facilitate this trading.