The importance of the OTC markets in the financial world

The OTC markets are the complex of securities trading transactions that are not listed on the stock exchange

by Lorenzo Ciotti
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The importance of the OTC markets in the financial world

The OTC markets are the complex of securities trading transactions that are not listed on a major stock exchange, whose functionality is organized by some players, and the characteristics of whose contracts, which are negotiated, are not standardized.

Listing on markets (OTC) takes place according to the principle of matching supply and demand only; therefore their value changes continuously and uncorrelated with the performance of the world stock exchanges. OTC markets are used for wholesale transactions between institutional intermediaries.

OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such products. Products traded on traditional stock exchanges, and other regulated bourse platforms, must be well standardized.

This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in stock exchange-based equities trading.

Negotiations take place informally, through bilateral conversations between the parties, by telephone or electronically. The Alternative Trading System model is particularly widespread, offered by the same providers such as Bloomberg, which allows the operator to create a telematic page in which to enter their own quotations for a series of securities; such quotes can be viewed and applied by any other Bloomberg user.

Another notable example is OTC Link® ATS, an SEC-regulated alternative trading system owned and run by OTC Markets Group that is subject to, among other things, the SEC’s Regulation Systems Compliance and Integrity.

The OTC financial markets

The application is the act that indicates one's willingness to negotiate and must be accepted by the offeror; following acceptance, the system sends an electronic confirmation with all the details of the completed transaction.

The OTC Bulletin Board was a trading system created in 1990 to give a minimum of transparency to OTC trading. The OTCBB was an electronic trading system for securities not traded on official markets. On this type of trading system there were over 3000 securities with over 300 market makers.

The OTC Bulletin Board ceased operation on November 8, 2021. For decades the National Quotation Bureau published the quotes of stocks and bonds in paper form, publishing the quotes in volumes on pink (Pink Sheets) and yellow (Yellow Sheets) pages respectively.

The publications were named after the color of the paper they were printed on. In September 1999 it became an electronic trading system (Electronic Quotation Service). It took on its current company name, OTC Markets Group, in 2011.

OTC Markets Group

OTC Markets Group currently facilitates trading in over 12,000 U.S. and global securities with over $500 billion in trading volume transacted in 2022. Of these, approx. 75% are international, and seeking to increase their exposure to U.S.

investors. This includes large U.S. companies like Fannie Mae and Freddie Mac; well-capitalized community banks; innovative asset classes such as cryptocurrency; and international enterprises like Adidas AG, Air Canada, Heineken, and Roche.

OTC Markets Group standards are practical, cost-effective and create better informed financial markets. All activity on OTC Markets Group’s market tiers is conducted by SEC-registered, FINRA-member broker-dealers and is subject to U.S. state and federal securities laws.

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