Skip to main content

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.

Comments

Popular posts from this blog

Trade Unions 101: What They Are, Why They Matter, and How They Wor

  The history of trade unions is a long and complex one, involving social, economic, and political factors. Here is a brief summary of some key events and developments: Trade unions originated in Great Britain, continental Europe, and the United States during the Industrial Revolution, when workers faced harsh and exploitative conditions in factories and mines 1 . Trade unions were initially illegal and persecuted by employers and governments, who used laws such as restraint-of-trade and conspiracy to suppress their activities 1 . Trade unions gradually gained legal recognition and protection through acts such as the Trade-Union Act of 1871 in Britain 1 and a series of court decisions in the United States 2 . Trade unions adopted different strategies and structures depending on the country, industry, and sector they operated in. Some examples are craft unions, general unions, and industrial unions 1 2 . Trade unions also developed political affiliations and influences, such as the...

The Zero-Based Budgeting Method: How to Make Every Dollar Count

Hey friends! Are you tired of living paycheck to paycheck and never being able to save any money? It's a common problem, but there's a solution. Enter the zero-based budgeting method. Zero-based budgeting is a budgeting system where you start with zero dollars in your budget and then allocate every dollar to a specific category, whether it be savings, housing, or entertainment. The idea is that at the end of the month, your income minus your expenses should equal zero. Sounds simple, right? Well, the trick is sticking to it. But with a little discipline and effort, zero-based budgeting can be a game-changer for your finances. So, how do you get started with zero-based budgeting? Here's a step-by-step guide: Write down all of your monthly income, including your salary, any side hustle income, and any other sources of income. Write down all of your monthly expenses, including everything from rent and utilities to groceries and entertainment. Make sure to include all of your f...

How to Avoid Buying a Lemon: What George Akerlof Taught Us About Information Asymmetry and Market Failures

How the Market for Lemons Explains Why We Can’t Have Nice Things Have you ever wondered why it is so hard to find a good used car, or a reliable contractor, or a trustworthy insurance company? You might think that the market would reward the sellers of high-quality products and services, and weed out the low-quality ones. But sometimes, the opposite happens: the market becomes flooded with “lemons”, or defective goods, and the good ones disappear. This is what Nobel laureate George Akerlof called the “market for lemons” problem, and it has profound implications for many aspects of our economy and society. What is the market for lemons? The market for lemons is a situation where there is asymmetric information between buyers and sellers, meaning that one party has more or better information than the other. In particular, the seller knows more about the quality of the product or service than the buyer, and the buyer cannot easily verify it before making a purchase. This creates a problem...