Secondary Securities Markets Continued: The Over-the-Counter (OTC) Market & Pink Sheets

The over - the - counter market is, by far, the largest market. Almost every security - including bonds, derivatives, and currencies—are traded in the OTC market. It generally operates by phone or through electronic systems, where individual dealers or brokers list bid and offer prices. There is generally no listing requirements. When a broker or dealer wants to buy an OTC stock, he contacts the market maker listing that security. For stocks, there are 2 specific OTC markets, the OTC Bulletin Board and the Pink Sheets.

OTC Bulletin Board (OTCBB)

The OTC Bulletin Board lists OTC equity securities, which is any equity security not listed on NASDAQ or a stock exchange. Equity securities include not only domestic and foreign stocks, but also American Depositary Receipts (ADRs), warrants, and Direct Participation Program (DDPs) securities. The issuers do not have to pay a fee for a listing, nor is there any financial reporting requirements with NASDAQ or the Financial Industry Regulatory Authority (FINRA). The companies must, however, maintain any required filings with the U.S. Securities and Exchange Commission (SEC) or with its banking or insurance regulator.

When an OTCBB company fails to file its reports on time, the NASD will add a fifth letter "E" to its 4-letter stock symbol. The company then has 30 days to file with the SEC or 60 days to file with its banking or insurance regulator. If it's still delinquent after the grace period, the company will be removed from the OTCBB. A watch list of delinquent companies and their securities is maintained at http://www.otcbb.com/DailyListContent/Delinquency_Eligibility.stm.

The OTCBB began as a pilot program in June 1990, then, after SEC approval, became permanent in April 1997. The Penny Stock Reform Act of 1990Section 17B of the Exchange Act. Since December 1993, firms have been required to report trades in all domestic OTC equity securities through the Automated Confirmation Transaction Service (ACT) within 90 seconds of the transaction. In May, 1997, DPPs became eligible for listing on the system, and in April, 1998, all ADRs and foreign securities that are registered with the SEC also became eligible for listing. mandated that the (SEC) to establish an electronic system that met the requirements of

Currently, there are about 3300 listed securities. The OTCBB transmits real-time quote, price, and volume information in domestic securities, foreign securities and ADRs; and displays indications of interest and prior-day trading activity in DPPs. Only qualified market makers can display quotes on the OTCBB. However, quotes and information can be obtained from the OTCBB website.


Pink Sheets

In the early 1900’s, new and outstanding stocks were advertised in financial newspapers or in the financial sections of large newspapers by investors, dealers, and brokers. The National Quotation Bureau started, in 1904, to consolidate and print this information for dealers and brokers. Through various incarnations, this has become the pink sheets of today, when, despite the name, most of the information is distributed electronically at the Pink Sheets website. 

Pink sheets lists mostly stocks that do not qualify for a listing on an exchange. These thinly traded stocks, often called penny stocks, are issues from small companies. The name is based on the color of the paper of the traditional sheets that were printed daily by Pink Sheets, LLC. Nowadays, listings are updated by fax or email, and real-time quotes are displayed on the Electronics Quotation System. The listings include the stock, the market makers dealing in the stock, their phone numbers, and may include a quote for the stock. However, these quotes are static quotes that the market maker is not obliged to uphold because they are only updated once per day. To buy a stock listed in the pink sheets, the customer’s broker would call 1 or more of the market makers listed for that security, and ask for a firm quote. 

Some OTC stocks are listed only on Pink Sheets, some only in the OTCBB, and some are listed on both services.