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The broker relies on this information to determine which investments to recommend to you. If a broker tries to sell you an investment before asking you these questions, that's a very bad sign. It signals that the broker has a greater interest in earning a commission than determining whether the investment is consistent with your investment goals and tolerance for risk.
The OTC Bulletin Board (OTCBB) is a listing of securities that are also traded "over the counter" similar to the OTC Markets. OTCBB companies are required to file timely reports to a US regulatory agency. Almost all OTCBB companies are also quoted via OTC Markets' electronic quotation system.
These participants each perform different functions and each has different constituents. Understanding how they work together and compete against each other to create a more efficient OTC marketplace will help make understanding more complex market concepts easier.
Investigation of Fraud or Other Criminal Activities — There is an investigation of fraudulent or other criminal activity involving the company, its securities or insiders. When OTC Markets becomes aware of such investigation, the companies’ securities may be subject to Caveat Emptor.
There is no central ‘exchange’ in the OTC market; therefore, broker-dealers must communicate and trade directly with other broker-dealers. In order to notify other broker-dealers that they are willing to trade a security at a particular price, broker-dealers post their ‘quotes’ on an Inter-dealer Quotation system such as OTC Link. The aggregation and ranking of these quotes defines the ‘market’ for a security. The highest ‘bid’ (purchase price) and lowest ‘ask or offer’ (sale price) becomes the ‘inside market’ or NBBO – the National Best Bid and Offer.
The real-time dissemination of quote information provides price transparency, which leads to a more efficient investment/trading process. The dissemination of price information and company financial data to the investment community (including individuals) leads to the development of new prices via trading decisions. This continuous flow of information between participants defines the OTC market and all market places.
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.
OTC Pink is an open marketplace that has no financial standards or reporting requirements. The stock of companies in the OTC Pink tier are not required to be registered with the SEC. Companies in this category are further categorized by the level and timeliness of information they provide to investors and may have current, limited or no public disclosure.
If a broker-dealer decides to trade they can communicate with other broker-dealer(s) using OTC Link – OTC Markets Group’s electronic messaging and trade negotiation system – or they may contact the broker-dealer through other means of communication and negotiate the trade.
The OTC market and broker-dealers’ activities in the market are regulated by The Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) and various state securities regulators. In addition, companies with SEC-registered securities are regulated by the SEC. OTC Markets Group is neither a stock exchange nor self-regulatory organization (SRO) and is not regulated by FINRA or the SEC.
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges such as the NYSE.
Many companies in the lower market tiers of the OTC categorization system do not meet the U.S. listing requirements for trading on a stock exchange such as the New York Stock Exchange or NASDAQ. Many of these issuers do not file periodic reports or make available audited financial statements, making it very difficult for investors to find reliable, unbiased information about those companies. For these reasons the SEC views many of the lower tier companies traded on OTC Markets as "among the most risky investments.
The OTC market and broker-dealers’ activities in the market are regulated by The Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) and various state securities regulators. As well, companies with SEC-registered securities are regulated by the SEC. OTC Markets Group is neither a stock exchange nor a self-regulatory organization (SRO).
Once a broker-dealer receives an order, they often go through the following steps/decisions as part of the trading process.
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.
FINRA members may not trade for their own account at prices that are equal to or better than the prices of limit orders that they have received from their customers or from another FINRA member firm on behalf of its customers. Protecting customer limit orders encourages the use of such orders by the investing public and results in more capital committed to securities trading in the secondary markets by a source other than securities dealers. The protection of customer limit orders for all OTC securities was implemented in the 4th quarter of 2008.
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.
Many OTC equities are Penny Stocks. Penny Stocks Can be Very Risky. Due to the high level of risk involved in investing in Penny Stocks, brokers cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received agreement to the transaction in writing from the customer.
Arbitrage is the trading strategy that takes advantage of the price differential between two or more markets for the same underlying asset. Investors and traders profit from the price differential by buying at the cheaper price and selling at the higher price or vice versa. In liquid markets, arbitrage is a short-term strategy because traders quickly recognize the imbalance and correct their prices.
The FINRA OTCBB system, on the other hand, is a quotation only system, as it lacks the electronic messaging capabilities of OTC Link. Furthermore, only companies that are SEC-reporting (or bank/insurance reporting) are eligible for quotation on the FINRA OTCBB. Since these securities may also be quoted on OTC Link, many BB eligible securities are ‘Dually-Quoted’ on both inter-dealer quotation systems. Currently, 99% of OTCBB eligible securities are quoted on OTC Link.
The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you. The firm's lending of securities does not affect the value of your account.
Quotes for all OTC securities are available on OTCMarkets.com by entering a symbol in the quote search area at the top left of any page. All OTCQX securities display real-time level 2 quotes while all OTCQB and OTC Pink securities display real-time inside (best bid and ask) quotations. Quotes are updated from 6:00 AM to 4:00 PM on all trading days.
FINRA requires every member to trade a security at its publicly quoted (OTC Link or FINRA's OTC Bulletin Board) price and size.
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.
OTCQX is the intelligent marketplace for the best OTC companies with the highest financial standards and superior information availability.
All OTC securities are assigned a market tier based on their reporting method (SEC Reporting, Alternative Reporting Standard) and disclosure category – Current, Limited or No Information. Securities on OTCQX, the highest tier of the OTC market, are required to have Current disclosure and meet minimum financial qualifications. Securities in OTCQB tier must be SEC, Bank or Insurance reporting and must be Current in their disclosure.
Arbitrage is the trading strategy that takes advantage of the price differential between two or more markets for the same underlying asset. Investors and traders profit from the price differential by buying at the cheaper price and selling at the higher price or vice versa. In liquid markets, arbitrage is a short-term strategy because traders quickly recognize the imbalance and correct their prices.
FINRA requires member firms to find the market with the best price to execute their customer order. OTC Link and the FINRA's OTC Bulletin Board TM Quotation System are the two recognized inter-dealer quotation systems for facilitating electronic best execution by broker-dealers. The two quotation systems may only be used to satisfy best execution if there are two or more priced quotes in a security. If less than two priced quotes exist for a security, broker-dealers must contact three other dealers for priced quotations.
The OTC market is not suitable for unsophisticated or novice investors. You should gain a thorough understanding of your rights as an investor and investigate the background of the issuing company, individual broker, and brokerage firm before you invest.
Liquidity follows transparency. Companies that provide current disclosure either through a regulator or directly to OTC Markets Group experience significantly greater levels of liquidity, improved price discovery, and more efficient trading.
The OTC market and broker-dealers’ activities in the market are regulated by The Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) and various state securities regulators. In addition, companies with SEC-registered securities are regulated by the SEC.
Setting qualification standards for securities industry professionals; examining members for their financial and operational condition, as well as their compliance with appropriate rules and regulations; investigating alleged violations of securities laws; disciplining violators of applicable rules and regulations; and responding to inquiries and complaints from investors and members.
Limit Orders allow investors to specify the exact price they are willing to accept for a buy or sell order. While Limit Orders are designed to offer more price protection for investors, a Limit Order may not be executed if the price of the security does not reach the price stated in the Limit Order.
The security is being promoted to the public, but adequate current information about the issuer has not been made available to the public. OTC Markets believes adequate current information must be publicly available during any period when a security is the subject of ongoing promotional activities having the effect of encouraging trading of the issuer's securities.
OTC Markets Group Inc. (“OTC Markets”) identifies securities with a Caveat Emptor symbol to inform investors that, in OTC Markets’ opinion, there is reason to exercise additional care and perform thorough due diligence in making investment decisions for a particular security.
The OTC Bulletin Board (OTCBB) is a listing of securities that are also traded "over the counter" similar to the OTC Markets. OTCBB companies are required to file timely reports to a US regulatory agency. Almost all OTCBB companies are also quoted via OTC Markets' electronic quotation system.
Inter-dealer Quotation/Trading Systems allow broker-dealers to post and disseminate their ‘quotes’ (prices) to the market place and, in the case of OTC Link, negotiate trades at agreed-upon prices.
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.
Companies may issue and sell shares in the OTC market pursuant to the safe-harbor guidelines under SEC Rule 144 and 144A.
Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group.