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OTC Trading and Broker-Dealers: How to Invest in the Unlisted Market



Over-The-Counter (OTC) Trading and Broker-Dealers Explained in One Minute

If you are interested in investing in stocks, you may have heard of the terms over-the-counter (OTC) trading and broker-dealers. But what do they mean and how do they work? Here is a quick overview of these concepts and some of the platforms that facilitate OTC trading.

OTC trading is the exchange of securities between two parties without the involvement of a formal exchange or a central clearinghouse. OTC trading can involve various types of securities, such as stocks, bonds, currencies, derivatives, and more. OTC trading is usually done through a network of brokers and dealers who communicate and negotiate directly with each other, either electronically or over the phone.

Broker-dealers are individuals or firms that act as both brokers and dealers in the OTC market. As brokers, they execute orders on behalf of their clients, who may be individual investors, institutions, or other broker-dealers. As dealers, they trade securities for their own account, buying and selling from their own inventory or from other sources. Broker-dealers provide liquidity and price discovery to the OTC market, as well as other services such as market making, research, and underwriting.

There are several platforms that enable OTC trading in the U.S., each with its own features and requirements. Some of the most popular ones are:

  • OTC Link: This is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for exchange-listed securities, OTC equity securities, foreign equity securities, and certain corporate debt securities. OTC Link is operated by OTC Markets Group, Inc., a private company that also offers three tiers of marketplaces for OTC securities: OTCQX, OTCQB, and Pink. OTC Link is registered with the SEC as a broker-dealer and as an alternative trading system, and is a member of FINRA. 12
  • OTC Bulletin Board (OTCBB): This was an electronic quotation service provided by FINRA to its members for OTC securities. It displayed quotes, last-sale prices, and volume information for many OTC equity securities that were not listed on a national exchange. All companies listed on this platform had to file current financial statements with the SEC or another relevant regulator. The OTCBB was created in 1990 after the Penny Stock Reform Act of 1990 mandated the SEC to develop an electronic quotation system for OTC stocks. In 2020, FINRA announced it was winding down the OTCBB, as the platforms provided by OTC Markets Group had taken the lion’s share of U.S. OTC stock trading and data. FINRA officially ceased operations of the OTCBB on Nov. 8, 2021. 34

OTC trading can offer some advantages and opportunities for investors, such as access to a wider range of securities, lower costs, greater flexibility, and round-the-clock trading. However, OTC trading also involves some risks and challenges, such as lower liquidity, higher volatility, less transparency, higher fraud potential, and limited regulatory oversight. Therefore, investors should exercise due diligence and caution when trading OTC securities, and seek professional advice if needed.

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