Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Firms may also negotiate trades over the phone. While the same process and rules apply, the speed with which trades are executed is inherently slower than OTC Link.
OTC Markets has determined that there is a public interest concern regarding the security. Such concerns may include but are not limited to promotion, spam or disruptive corporate actions even when adequate current information is available.
The large number of American Depositary Receipts (ADRs) and Foreign Ordinaries that trade in the OTC market (e.g., Roche – RHHBY, adidas – ADDYY) make price imbalance a concern for OTC traders and investors. ADRs represent a set ratio of home market shares; thus, movement in the home market price and foreign exchange considerations will directly affect the price of the ADR. Foreign Ordinaries should theoretically mirror home market trading once currency rates are considered.
Limited Information – Companies that have limited financial information not older than six months available on the OTC Disclosure and News Service or have made required filings on the SEC's EDGAR system in the previous six months.
OTC Link LLC (OTC Link) is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities.
OTC Markets Group and the FINRA OTCBB distribute their market data to broker-dealers, investment professionals, market data re-distributors, and financial websites, including OTCMarkets.com.
While OTC Markets Group’s products and services facilitate the reporting, clearing, and settlement process by transmitting trade data to the broker-dealers, all three functions are the responsibility of the executing broker-dealers.
OTC Markets has determined that there is a public interest concern regarding the security. Such concerns may include but are not limited to promotion, spam or disruptive corporate actions even when adequate current information is available.
Does it sound too good to be true? Then it probably is. You should never make a decision about investing your money in a particular company solely on the basis of a "hot tip" or someone's advice. It is important that you make an informed decision based on your thorough research which includes the company's annual report, current financial statements and material news.
OTC issuers are not required to maintain current address or contact information with OTC Markets Group. With the exception of OTCQX companies, OTC Markets does not maintain listing agreements with OTC traded companies and has no other means of compelling companies to provide this information. Many investor-focused issuers do voluntarily provide their contact information and keep it current.
The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) regulate trading in the OTC market. FINRA's responsibilities include establishing rules governing the business conduct of its broker-dealer members.
If the order is not marketable, the broker-dealer may create or edit its existing quote on an Inter-dealer Quotation System (e.g. OTC Link) to reflect a new price or size. The quote lets all other broker-dealers know the price which they are willing to buy or sell. Broker-dealers are only required to update their quote if the price of the order is equal or superior to their existing quote.
OTC derivatives are significant part of the world of global finance. The OTC derivatives markets are large and have grown exponentially over the last two decades. The expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. The notional outstanding of OTC derivatives markets rose throughout the period and totaled approximately US$601 trillion at December 31, 2010.[5] In the past two decades, the major internationally active financial institutions have significantly increased the share of their earnings from derivatives activities.
Broker-dealers may not give their customers prices inferior to those currently being quoted on inter-dealer quotation systems.
Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via these facilities. An exchange has the benefit of facilitating liquidity, mitigates all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price is not necessarily made public information.
Broker-dealers may charge an additional ‘access fee’ to broker-dealers who want to trade at their quoted price. The fee maximums are based on the tick size (> .01) or price (< .01). OTC Markets QAP (Quote Access Payment) functionality allows broker-dealer to dynamically set their fees or rebates.
Complaints regarding companies should be directed to the SEC, while complaints regarding broker-dealers or other investment professionals should be directed to FINRA.
At such instances, as a matter of policy, when adequate current information is not made available, OTC Markets will label the security as "Caveat Emptor." Promotional activities may include spam email, unsolicited faxes or news releases, whether they are published by the issuer or a third party.
Minimum Quotation Size Requirements for OTC Equity Securities (FINRA Rule 6433) – FINRA members acting as market makers by submitting quotations into an inter-dealer quotation system must adhere to the minimum size requirements set by FINRA. For example, all quotations with a price less than or equal to $.50 must have a minimum size of 5,000 shares.
All states require financial institutions, including brokerage firms, to report when personal property has been abandoned or unclaimed after a period of time specified by state law — often five years. Before a brokerage account can be considered abandoned or unclaimed, the firm must make a diligent effort to try to locate the account owner.
OTC Markets Group does not regulate the OTC marketplace. It is neither a stock exchange nor self-regulatory organization (SRO) and is not itself regulated by FINRA or the SEC.
The term "person associated with a broker or dealer" or "associated person of a broker or dealer" means any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of section 15(b) (other than paragraph (6) thereof).
The best way to illustrate the OTC market trading process is to step through a specific example. This example is tailored for individual investors, although many of the same principles apply to institutional investors.
FINRA requires member firms to ascertain the best market to execute their customer orders. OTC Link and the OTCBB are the two recognized inter-dealer quotation systems in the OTC market that can be relied upon for electronic best execution if there are two priced quotes. If fewer than two quotations are displayed on an inter-dealer quotation system that permits quotation updates on a real-time basis, FINRA members must contact at least three dealers by phone to obtain other quotations.
Many OTC securities are relatively illiquid, or "thinly traded," which tends to increase price volatility. Illiquid securities are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in an OTC security may not be possible within a reasonable period of time.
Designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The Limited Information category also includes companies that may not be troubled, but are unwilling to provide disclosure pursuant to to OTC Pink Basic Disclosure Guidelines. Companies in this category have limited financial information not older than six months available on the OTC Disclosure
This is preferable for broker-dealers because they receive commissions on both the buy and sell-side of the trade. In executing client orders, broker-dealers may also buy or sell for their own (principal) account, at their own risk. If, however, there is no match for a trade or a broker-dealer does not wish to trade for their own account then a broker-dealer must find another broker-dealer willing to trade that particular security.
Short sellers are subject to price manipulation schemes – or short squeezes. In a short squeeze, traders believing that there are a lot of short sellers begin buying shares to force the price and the short sellers losses higher. These traders hope that the short sellers will be forced to buy pushing the price even higher at which point they can sell their shares at a profit. Short squeezes are easier to execute in illiquid securities.
The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers that operate in the over-the-counter (OTC) market. Many equity securities, corporate bonds, government securities, and certain derivative products are traded in the OTC market.
If the broker-dealer cannot, or chooses not to, execute the trade internally, they must attempt to execute the trade with another broker-dealer. This often means accessing the security on OTC Markets Group’s OTC Dealer application and ascertaining whether the order is marketable. Marketable orders are orders where the price specified can immediately be executed in the market. Market Orders are, by definition, marketable. Limit Orders are marketable if the limit price is better than or equal to the bid price (for sell orders) or ask price.
There are a wide variety of companies – spanning all major sectors and industries, with market capitalizations ranging from large cap to micro cap – quoted and traded in the OTC market.
Priced quotations in the OTC Link or the OTCBB inter-dealer quotation systems are firm for certain minimum sizes. Minimum quote sizes are based upon quote price. As the price of a quote decreases, the size associated with a price increases. Mandatory sizes assure a minimum amount of liquidity in the market and add weight to a member’s firm quote obligation.
Broker-Dealers – FINRA registered broker-dealers may participate in the OTC market by executing client orders and principal orders. Broker-dealers earn revenues from commissions charged on orders, the bid (buy) and ask (sell) spread (the difference between what an investor is willing to buy and sell a security), and principal trading (investing the firm’s capital in an investment/trading strategy).
Market Orders direct the broker-dealer to immediately execute either a buy or sell order at the current ‘market price’ – the best bid or offer.
The opposite is true for illiquid securities. Liquidity depends on a number of forces including supply and demand, price transparency, trading history, market venue, market participants and freely tradable shares (public float).
OTC Link allows broker-dealers to quote any OTC equity security eligible for quoting under SEC Rule 15c2-11. Currently, there are over 10,000 securities quoted on the OTC Link system. Broker-dealers access the OTC Link system either through OTC Markets Group’ OTC Dealer or OTC FIX applications. These applications allow broker-dealers to view all quotes for OTC securities and, if desired, trade those securities through OTC Link.
FINRA may halt trading and quotations in OTC Equity Securities in very limited circumstances where FINRA determines it is necessary to protect investors and the public interest. FINRA will exercise this authority only when 1) the OTC Equity Security or the security underlying an OTC ADR is halted on either a U.S. exchange or a foreign securities exchange or when FINRA determines that an extraordinary event has occurred that has a material effect on the market or may cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process.
Companies that are unwilling or unable to meet OTC Markets' Guidelines for Providing Adequate Current Information but have submitted some but not all of current information required are rated as having limited information. These are often companies with financial reporting problems, economic distress, or in bankruptcy.
Broker-dealers are required to report their trades to FINRA within 30 seconds of the execution. This information is then disseminated by FINRA to the market. OTC Markets Group offers this ‘real-time’ trade data within a number of its products (OTC Dealer, OTC Quote.com, OTCIQ – Market Intelligence). All other trade information is on a 15 minute delayed basis.
Generally, OTC Markets will remove Caveat Emptor designation once the security meets the qualifications for OTC Pink Current Information or OTCQB and we are satisfied that there is no longer a public interest concern, typically no sooner than 30 days. For information on how to qualify for the OTC Pink Current Information tier, please visit the Upgrade Your OTC Tier page.