Demystifying the OTC Markets Group: A Closer Look at a Market's Evolution
In a blog post this week, Cromwell Coulson, CEO of OTC Markets Group, shared his thoughts on the two-decade transformation of the largest US marketplace for OTC securities. From an obscure, paper-based market known for its “Pink Sheets” to a fully regulated market now trading more than 10,000 securities, the OTC has come a long way from its beginnings more than a hundred years ago.
Despite the substantial progress made, Coulson argued that the OTC Markets are frequently thought of as the “Wild West” of the public markets. Further, he argued that the OTC market is often linked to the movie, “The Wolf of Wall Street” starring Leonard DiCaprio. The movie follows the life of a charismatic stockbroker as his firm duped clients into buying so-called "penny stocks" using hard-sell techniques. The ‘pump and dump’ scheme bagged him millions that he blew on drugs, prostitutes and cars. The association with the OTC centers around the penny stock, when in reality all the IPOs touted were listed on the Nasdaq, according to Coulson.
Aside from the inaccuracies, the image of the OTC as a lawless and chaotic market still persists in the mind of the public. The reality though is quite different, and as Coulson wrote, it’s time to set the record straight by taking a fresh look at the OTC market, and the imperatives the OTC is lobbying for that could further strengthen the market.
Of the more than 10,000 securities listed on the OTC, over 2,600 exceed a market cap of $1B. These companies, according to the OTC Markets Group, accounted for $238B in dollar volume through the 3rd quarter, representing 88.35% of the overall trading volume. These numbers back up the claim Coulson makes that the OTC no longer caters to smaller, newer companies or speculative penny stocks, but has become a viable alternative for companies seeking a more diverse and accessible trading platform outside of the major US exchanges.
Over the last 20 years, the OTC Markets Group has committed significant resources to bolster its voluntary compliance and market integrity teams, serving too, as a valuable support system for regulators. This collaborative approach between the regulatory entities has yielded positive results including enhancing company disclosures and generating numerous referrals to SEC enforcement.
Still, Coulson noted that while this separation of roles has proven beneficial for the OTC market, it has inadvertently created a blind spot for addressing problematic activities in exchange-listed securities due to FINRA's primary focus on the OTC market. Splitting the surveillance of market-wide fraud and manipulation from exchange SROs and consolidating it with FINRA, he said, could further enhance regulatory efforts.
OTC Markets Group has transformed markets using technology and transparency as carrots. They not only encourage but incentivize public companies to supply disclosure, demonstrate compliance, and share governance with investors. Recent enhancements include improved issuer disclosure requirements and the Transfer Agent Verified Shares Program, offering investors and broker-dealers reliable data to assess investments better.
The OTC has made great strides in shifting public perception and instilling market integrity since it began as the Pink Sheets in 1904 when the National Quotation Bureau (NTB) printed an inter-dealer quotation service on pink paper. Before adopting the name of OTC Markets Group, the organization underwent several name changes transitioning from the National Quotation Bureau to Pink Sheets LLC in 2000, then to Pink OTC Markets Inc. in 2008. The final name change to OTC Markets Group occurred in 2011. Its transformation is ongoing, and sets the stage for a new era of small cap investing, ultimately strengthening the financial landscape for everyone.