Market 101 – Market Structure The OTCQX, OTCQB

Market 101 – Market Structure

The OTCQX, OTCQB and OTC Pink marketplaces represent U.S. and global public companies that are traded in the U.S. off the exchanges. Investors in the OTCQX, OTCQB and OTC Pink marketplaces can buy and sell securities in a manner almost identical to that of trading NYSE or NASDAQ securities, through the broker of their choice (institutional, online, retail).

There are a few key differences between trading our securities and trading exchange-listed securities which is explained here:  Part 2 - Trading . The five major market participants include:

• Companies


• Investors


• Broker-dealers


• Regulators


• Inter-dealer Quotation/Trading Systems (e.g., OTC Markets Group’s OTC Link® ATS)

Each of these participants plays a role in providing information to the marketplace, facilitating liquidity, and driving price transparency.

Companies – Companies sell their securities in public marketplaces to raise capital, complete an acquisition or provide liquidity for existing shareholders to exit their investments. Companies may issue and sell shares in the market pursuant to the safe-harbor guidelines under  SEC Rule 144 and 144A .

Companies that qualify and are current in their financial disclosure may choose to apply to OTC Markets Group’s best marketplace, OTCQX. These companies have the highest average market cap and most liquidity of all the marketplaces. Small and developing companies may report to a U.S. regulator and trade on the OTCQB marketplace, although there are no minimum financial standards. All other companies trade on OTC Pink, which is the default marketplace for broker-dealers who want to trade a security. There is a wide spectrum of securities that provide variable reporting on this marketplace.

Investors – Investors that trade in our marketplaces vary in their knowledge and experience and range from large institutional money managers to high-net worth individuals and other retail investors. OTC Markets Group facilitates information transparency in the market by aggregating and disseminating real-time broker-dealer prices and sizes and by operating the electronic trading platform on which companies trade. OTC Markets Group also provides Investor Relations services to all companies so that they can make their financial and other corporate disclosure readily and widely available to investors.

All investors must execute their transactions (buy and sell orders) in OTCQX, OTCQB and OTC Pink securities through a FINRA-registered broker-dealer. More information on trading is available in  Part 2 – Trading .

Broker-Dealers – FINRA registered broker-dealers may participate in the market by executing client orders and principal orders. Broker-dealers earn revenues from commissions charged on orders, the bid (buy) and ask (sell) spread (the difference between what an investor is willing to buy and sell for a security), and principal trading (investing the firm’s capital in an investment/trading strategy).

Broker-dealers often receive buy and sell orders that ‘match’ – meaning, one client is willing to sell a security for the same price that another client is willing to buy the same security. In this situation, broker-dealers will execute the trade “internally”. Internal execution is preferable for broker-dealers because they receive commissions on both the buy and sell-side of the trade. In executing client orders, broker-dealers may also buy or sell for their own (principal) account, at their own risk. If, however, there is no match for a trade or if a broker-dealer does not wish to trade for his/her own account, then the broker-dealer must find another broker-dealer willing to trade that particular security.

Irrespective of a trade decision regarding a customer order, all broker-dealers must comply with  FINRA Rule 5310 on Best Execution and Interpositioning . ‘Best Execution’ and other customer protection rules are discussed in more detail in  Part 3 - Regulation .

There is no central ‘exchange’ for securities that trade in the OTCQX, OTCQB and OTC Pink marketplaces; therefore, broker-dealers must communicate and trade directly with other broker-dealers. In order to notify other broker-dealers that they are willing to trade a security at a particular price, broker-dealers post their ‘quotes’ on an Inter-dealer Quotation system, such as OTC Link® ATS. The aggregation and ranking of these quotes defines the ‘market’ for a security. The highest ‘bid’ (purchase price) and lowest ‘ask or offer’ (sale price) becomes the ‘inside market’ or NBBO – the National Best Bid and Offer.

If a broker-dealer decides to trade a security, he/she can communicate with other broker-dealer(s), using OTC Link® ATS – OTC Markets Group’s electronic messaging and trade negotiation system – or they may contact the broker-dealer through other means of communication and negotiate the trade.

Regulators – The  Financial Industry Regulatory Authority (FINRA) and the  U.S. Securities and Exchange Commission (SEC) regulate OTC Link® ATS, a trading platform operated by OTC Link LLC, a wholly owned subsidiary of OTC Markets Group. Companies with SEC-registered securities are regulated by the SEC. Similarly, broker-dealers who trade securities using OTC Link® ATS are FINRA members and SEC registered, and may also be subject to various state securities regulations.

Complaints regarding companies should be directed to the  SEC , while complaints regarding broker-dealers or other investment professionals should be directed to  FINRA . More information about specific OTC regulations is covered in  Part 3 – Regulation .

Inter-dealer Quotation/Trading Systems – Inter-dealer Quotation/Trading Systems allow broker-dealers to post and disseminate their ‘quotes’ (prices) to the marketplace and, in the case of OTC Link® ATS, negotiate trades at agreed-upon prices. OTC Link® ATS is the only electronic quotation and trading system in this space. FINRA’s OTC Bulletin Board (OTCBB), on the other hand, is a quotation only system, as it lacks the electronic messaging capabilities of OTC Link® ATS. Furthermore, only companies that are SEC-reporting (or bank/insurance reporting) are eligible for quotation on the FINRA OTCBB. The vast majority of broker-dealers now electronically quote the securities of SEC-reporting companies on the OTCQB marketplace (designed for U.S. companies that report to the SEC or other bank/insurance regulator) through OTC Link® ATS. OTC Link® ATS has effectively replaced FINRA’s OTCBB.

OTC Link® ATS allows broker-dealers to quote any OTC equity security eligible for quoting under  SEC Rule 15c2-11 . Currently, there are over 10,000 securities quoted on the OTC Link® ATS. Broker-dealers access OTC Link® ATS either through OTC Markets Group’s  OTC Dealer or  OTC FIX applications. These applications allow broker-dealers to view all quotes for OTCQX, OTCQB and OTC Pink securities and, if desired, trade those securities through OTC Link® ATS.

OTC Markets Group distributes market data to broker-dealers, investment professionals, market data re-distributors, and financial websites, in addition to providing data through  www.otcmarkets.com .

The real-time dissemination of quote information along with the availability of company financials and news provides price transparency, which allows investors to analyze, value and trade a security. This continuous flow of information between participants defines efficient securities markets.