The over-the-counter market is where securities which do not trade on an exchange are traded. Securities traded on the this market are typically from smaller companies that do not meet the listing requirements from the exchanges.
The OTC market is the default exchange for some securities, like corporate bonds. Alternatively, some companies may opt to remain on the OTC market by choice, in order to avoid an exchange’s the listing fees or reporting requirements.
There are more than 12,000 securities that trade on the OTC market, including stocks, exchange-traded funds (ETFs), bonds, commodities and derivatives.
Unlike traditional exchanges such as the New York Stock Exchange (NYSE) or the NASDAQ, there is no physical location associated with the OTC market. Rather, all trades occur electronically and directly between two parties in a decentralized market.
“Dealers” act as market makers by quoting prices at which they will buy and sell a security. Dealers then trade the security and buy from investors who want to sell and sell to investors who want to buy.
Even though OTC securities are not “listed” with the major exchanges, these companies can still sell their stocks to the public over the counter. To the average investor, buying stocks in the OTC market may appear no different than the same process for exchange-listed securities: Stocks are assigned a unique ticker symbol, and typically are available for trading via the major online brokers.
OTC Bulletin Board
The OTCBB was an electronic inter-dealer quotation system that displays quotes, last sale prices, and volume information for many OTC securities that are not listed on a national securities exchange. In 2020, FINRA announced it was winding down the OTCBB, since most of the OTC stock trading occurred on OTC Market’s platforms.
OTC Link is an electronic inter dealer quotation system that displays quotes, last sale prices, and volume information in exchange listed stocks and other securities. In addition to publishing quotes, OTC Link gives subscribers the ability to send and receive trade messages, allowing them to communicate for the purpose of negotiating trades and company information. OTC Link is registered with the SEC as a broker-dealer and as an alternative trading system, and is a member of FINRA.
Risks of the OTC Market
Sometimes the securities being traded over the counter lack buyers and sellers. As a result, the value of a security may vary widely depending on which market markers trade the stock.
Liquidity. Stocks trading over the counter often have less liquidity than stocks which are listed on an exchange. This lack of liquidity could make it difficult to sell and can affect pricing.
Volatility. Because of lower trading volume and bigger spreads, these stocks are subject to more volatility.
Information. These stocks often have less publicly available information regarding their financials, which increase the risk of investing in these stocks. However, information regarding these issuers will be available at EDGAR.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.