It's been maybe 10+ years since my OTC days. when I researched and learned the OTC market rules. So much of what I post now is more of a recalled feeling, then factual black & white thing.
Meaning as I recall the way the OTC market is set up. In order for a non listed non public company t becomes listed, on the OTC. They must have a market maker back their entry. This market maker must hold a % age of the company OS to settle unanswered trades on the market.
Basically most start ups with low price stock don't find the amount of liquidity needed to be freely traded without a market maker who has a large enough inventor to help orders close.
Thus the OTC market: where M&M receive orders and if they see enough interest in the electronic system they place the orders there. If not, they are to close the order from their inventory, keeping the trading flow going.
All M&Ms must have a private inventor of the company stock they represent, that's how you see the M&M ID's. I think the inventory is far less then the M&M which back the company entry onto the OTC. But they need an inventory.
So you place an order. It goes to the M&M with a relationship with your broker. You're order isn't handled by you broker any longer. Unless you broker is a broker/dealer on the OTC. At any rate your order is in the hands of a market maker before it is closed. And this M&M decides if he needs to close it from his inventory or to place it on the electronic open market for another M&M to close.
This is the difference from the big boards. You need to be an OTC broker/dealer to place and close orders on the OTC electronic system. All brokers don't have access like the big boards. Not sure if this is still allowed but M&M dealers use to be able to close trades they received by phone, with other dealers. Keeping much of the actual trade flow from retail sight. Then they would report the trade settling between M&Ms, end of day with a "T" trade. I think now "T" trade reporting is only for large block orders given to the market maker by a major client now. And every trade closed off market needs to be placed on the electronic system with in 1 hr. ?
This is the 2 tier system designed to keep trade flow within a low liquidity market. This system allows for M&Ms to front trade and arbitrage for profits. Also naked short during emotion run. And believe me before 2006 that was the OTC market. 90% manipulated by M&Ms. But since REG SHO was given teeth, the M&M manipulation was cut way down. WAY down.
So this is my feeling on the OTC market operation as I recall. There may be some minor errors and also changes made over the years; I haven't keep up. But basically this is the market we trade.
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Back in the day you would see 30 M&M IDs on every OTC stock. Most of those firms have been fined and regulated out of existence. To now days there are 5,7,9 M&Ms. And they don't cheat as much as they use to.
Bac in e only way succeed on the OTC was day trade based on the bid/ask stacks builds. You had to be a master of seeing burst trades, double block order closes, trade close stalls, bid/ask opening and closings and the like. Everything was manipulation ahd how well one could inturpid it.
