Regulation

In order to have a more comprehensive understanding of Market Structure and Trading, it is important to be familiar with some of the rules and regulations that govern trading in the OTCQX, OTCQB, OTCID and Pink Limited Information markets.

FINRA registered broker-dealers may participate in the market representing client orders and acting as market makers. Broker-dealers may earn revenues from commissions charged on orders or from internalizing transactions. A market maker stands firm to execute orders at their published quotation and may invest its own capital to provide liquidity to an order. Market makers are also obligated to display eligible limit orders that are not marketable and provide best execution for customer orders. (See FINRA Rule 5310 on Best Execution and Interpositioning)

Click here for a list of relevant SEC / FINRA Rules, some of which are described further below:

Best Execution (FINRA Rule 5310) — FINRA's Best Execution Rule requires that a broker-dealer in any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

See complete text of Rule 5310.

Plain speak: Broker-dealers must work to get the best available prices for their customers.

Prohibition Against Trading Ahead of Customer Orders (FINRA Rule 5320) — a member that accepts and holds an order in an equity security from its own customer or a customer of another broker-dealer without immediately executing the order is prohibited from trading that security on the same side of the market for its own account at a price that would satisfy the customer order, unless it immediately thereafter executes the customer order up to the size and at the same or better price at which it traded for its own account. See complete text of Rule 5320.

Plain speak: Broker-dealers cannot use their knowledge of customer orders to make money for their own accounts without satisfying the customer's order.

Display of Customer Limit Orders (FINRA Rule 6460) — FINRA members publishing quotations in an interdealer quotation system (such as OTC Link ATS) must publish the price and full size of a customer order if that order improves or is equal to the member's price. Exceptions exist for orders under minimum tier size, block orders and customer requests. See complete text of Rule 6460.

Plain speak: Broker-dealers must display customer orders that improve the broker's current quote

Bids and Offers at Stated Prices (FINRA Rule 5220) — FINRA members are prohibited from publishing quotations in any security unless such member is prepared to purchase or sell at such price and under such conditions as are stated at the time up to the size quoted. See complete text of Rule 5220.

Plain speak: Broker-dealers must honor their posted quotes.

Restrictions on Access Fees (FINRA Rule 6450) — FINRA members shall not impose, nor permit to be imposed, non-subscriber access or post-transaction fees against a published quotation in any OTC Equity Security that exceed or accumulate to more than: (a) $0.003 per share, if the published quotation is priced equal to or greater than $1.00; or (b) the lesser of 0.3% of the published quotation price on a per share basis or 30% of the minimum pricing increment under Rule 6434 relevant to the display of the quotation on a per share basis if the published quotation is less than $1.00. See complete text of Rule 6450.

Plain speak: Broker-dealers may charge an additional 'access fee' to other broker-dealers who want to trade at their quoted price. The maximum fees depend on the price of the security. OTC Markets Group QAP (Quote Access Payment) functionality allows broker-dealers to dynamically set their fees or rebates.

Initial Quote Disclosure Requirements (FINRA Rule 6432) — Compliance with the Information Requirement of SEA Rule 15c2-11 — To initiate quotations on an interdealer quotation system (such as OTC Link ATS) for an OTC security not currently being quoted or to resume quotations after a four day absence or SEC suspension, a Qualified IDQS must submit a Form 211 to FINRA. Once FINRA processes the Form 211, the market maker may submit a quotation to the applicable interdealer quotation system(s) they selected on the Form 211. See complete text of Rule 6432.

Plain speak: In most cases, FINRA submission of Form 211 is required for new security to be quoted on OTC Link® ATS.

Short-Interest Reporting (Rule FINRA 4560) — FINRA members must report their short interest positions in OTC equity securities at mid-month and end of the month. See complete text of Rule 4560.

Plain speak: FINRA publishes the short interest list seven days after the 15th and last day of each month. This information is available for every OTCQX, OTCQB, OTCID and Pink Limited Information security on www.otcmarkets.com.

Minimum Quotation Size Requirements for OTC Equity Securities (FINRA Rule 6433) — FINRA members acting as market makers by submitting quotations into an interdealer quotation system must adhere to the minimum size requirements set by FINRA. For example, all quotations with a price less than or equal to $.1999 but >$.10 must have a minimum size of 5,000 shares. See complete text of Rule 6433 and view a complete price-size table.

Plain speak: Broker-dealers must post quotes in increments that meet certain minimum sizes.

More information may be found on the FINRA and SEC websites.