Defining the OTC Market

The OTC, or "Over-the-Counter", market is not an organized marketplace or exchange. OTC is a catchall phrase for any market in an equity security that is not listed on a US exchange or on the NASDAQ Stock Market. OTC securities are issued by companies that either choose not to list, or are unable to meet the standards for listing on NASDAQ or a US stock exchange.

OTC equity securities can be quoted on Pink OTC Markets' quotation system, and/or, the OTCBB, if the securities are registered with the SEC and the company is current in it's reporting obligation. Some OTC securities are not quoted on either Pink OTC's quotation system or the OTCBB; these securities are sometimes referred to as grey market or "Other-OTC" securities. Because Other-OTC securities are not quoted on any quotation service, bid and ask quotations for these securities are not available. However, FINRA rules require its members to report transactions in all OTC equity securities to NASDAQ, so last sale and volume information is available for all OTC securities, including those categorized as "Other OTC." Pink OTC Markets provides a centralized quotation service that collects and publishes market maker quotes for OTC securities in real time. Pink OTC Markets is neither a Securities and Exchange Commission (SEC) Registered Stock Exchange nor a Broker-Dealer.

The OTC equities market in the U.S. has seen rapid changes in the past ten years that have made OTC trading more transparent and efficient. Pink OTC Markets has been the leader in bringing positive changes to the OTC market for the benefit of investors as well as broker-dealers and OTC-traded companies. Pink OTC’s electronic interdealer quotation and trading system has become the leading platform in the U.S. OTC market and many market makers are now exclusively using Pink OTC’s platform to quote and trade OTC securities – regardless of their reporting status.

Quotation of OTC securities on Pink OTC's quotation system is subject to Rule 15c2-11. The issuer of the securities may not apply to list or quote securities on Pink OTC's quotation system. It is a market maker that determines whether to quote an OTC security and initiates quotation by submitting a Form 211 to FINRA. It is possible for a market maker to quote securities in Pink OTC's quotation system without the knowledge or permission of the issuer of the securities.

Stock markets (including NASDAQ and the registered exchanges, such as NYSE or AMEX) have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock market have reporting obligations to the market, and an on-going regulatory relationship exists between the market and its listed companies. OTC quotation services (Pink OTC's quotation system and the OTCBB) facilitate quotation of unlisted securities. As such, any regulatory relationship between an OTC quotation service and the issuers may be relatively limited or non-existent. Many OTC issuers are not subject to SEC registration requirements and therefore do not make regular filings of financial information and other corporate events with the SEC. Because Pink Sheets is not an issuer listing service and has no "listing requirements," OTC issuers are not required to provide financial information to Pink OTC Markets, though some do so on a voluntary basis.

Below is a chart detailing the differences between each of the tiers that make up the OTC Market, focusing specifically on the method of trading and type of companies found on each tier.

Chart as of March 31, 2010

Investing in OTC Securities

The OTC market presents investment opportunities for intelligent, informed investors, but also has a high degree of risk. Investors should never purchase any security without first evaluating the fundamentals of the company and carefully reviewing the financial statements, management background and other data. Investors who purchase securities based on a "hot tip" or the advice of chat room touts will often be disappointed. Unsophisticated or passive investors should completely avoid the OTC markets.

Many OTC securities are relatively illiquid, or "thinly traded," which can enhance volatility in the share price and make it difficult to sell an equity position at a later date. To learn more, visit our Investor Protection Information page.