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What is OTC?


Over-the-counter may refer to OTC market or process of trading securities that are not listed on some of major exchanges. On OTC market securities are traded via broker dealers who quote the stock unlike exchanges which function as auction market. Companies that can't meet listing requirements of major exchanges usually because they are too small and volatile or they don't want to be subjected to strict regulations and requirements of exchange trade on OTC market as so called unlisted securities.

Over-the-counter market is decentralized market, without physical location. Broker dealers who are regulated by Financial Regulatory Agency (FINRA) act as market makers by quoting the prices but it is possible that transaction can happened between two parties without others knowing information about price. This makes market less transparent alongside fewer regulatory requirements. Stocks trading on OTC are considered to bear additional risk, especially default risk but it is also the alternative to exchanges and opportunity to sell securities otherwise unavailable to investors. It is used for trading bonds, currencies, derivatives and equities. 

Penny Stock Reform Act of 1990 directed that Securities and Exchange Commission (SEC)create a uniform quotation system for OTC, after which Over-the-counter bulletin board was started. It is electronic quotation and trading service provided by FINRA. Even though it still provides investors with real time securities data it is suppressed by OTC Market Group which is currently the largest operator in this market. In 2007 it reorganized into three separate market places: the Best market (OTCQX), the Venture market (OTCQB) and Pink open market (OTC Pink). This means that not only small companies trade their securities on OTC but also a big companies, especially foreign firms that want to avoid double regulation, in the the country of origin and U.S. Companies have to fulfill listing requirements for OTCQX, one of them being that only companies that trade above $5 per share. All issuers have to meet financial and reporting criteria and undergo management review. Venture stage marketplace known as OTCQB list early stage and developing companies.They have to file reports on a regular basis but there is no financial requirements so it can include shell companies, penny stock and small foreign issuers. Pink sheet is an open market place with no filing or financial requirement but companies may file reports. Company trading on Pink sheets is classified under three categories depending on level of disclosure. Pink current company has submitted quarterly and audited annual report. Pink limited information has filed reports within last six months and the company categorized as Pink no information hasn't submitted any filing in the last six month. Firms from the last two categories often experience financial hardship or insolvency.
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