What Is OTC Pink?
The OTC Pink, now branded as the Pink Open Market, is the lowest and most speculative tier of the three marketplaces for the trading of over-the-counter (OTC) stocks. All three tiers are provided and operated by the OTC Markets Group. This marketplace offers to trade in a wide range of equities through any broker and includes companies in default or financial distress.
Since it has no disclosure requirements, the categorization of OTC Pink companies is from information provided by the company. OTC Markets Group now markets OTC Pink as Pink Open Markets, but the historical name still persists.
- OTC Pink, also known as the "pink sheets," is the most speculative of OTC Markets Group's platforms.
- Companies on OTC Pink are not held to particular disclosure requirements or high financial standards seen with the stocks listed on major exchanges.
- Due to the wide variety of companies listed on OTC Pink, including dark companies, delinquent companies, and worse, only sophisticated investors with a high risk tolerance should consider it.
Understanding OTC Pink
The over-the-counter (OTC) market is a decentralized market where securities, not listed on major exchanges, are traded directly by a network of dealers. Instead of providing an order matchmaking service like the NYSE, these dealers carry inventories of securities to facilitate any buy or sell orders. Because information was initially printed on pink paper, the OTC Pink is also referred to as the Pink Sheets.
The OTC Pink, as well as its companion tiers, OTCQX and OTCQB, is run by OTC Link. The link is an electronic inter-dealer quotation and trading system developed by OTC Markets Group. Registered with the SEC as a broker-dealer, OTC Link is also an alternative trading system (ATS).
OTC Link allows broker-dealers not only to post and disseminate their quotes but also to negotiate trades through the system’s electronic messaging capability. This feature enabled it to replace the Over-the-Counter Bulletin Board (OTCBB), which was a quotation-only system.
Regulation of the OTC Pink Marketplace
Because of the variable, self-reporting nature by OTC Pink companies, they are classified based on the quality and quantity of information they provide to investors. Classification is as follows.
- Current Information companies are those that follow the International Reporting Standard or Alternative Reporting Standard. These companies make filings publicly available through the OTC Disclosure & News Service.
- Limited Information companies include troubled firms in financial distress, bankruptcy, or those with accounting issues. This category also includes companies that are unwilling to meet the OTC Pink Basic Disclosure Guidelines.
- No Information companies are those businesses that do not provide any disclosure at all.
All broker-dealers that trade on the OTCQX, OTCQB, and OTC Pink securities have to be Financial Industry Regulatory Authority (FINRA) members. Further, they must register with the SEC and are subject to state securities regulations. In this way, as with exchange-traded securities, investors trading OTC securities are protected from an unethical broker-dealer’s illegal practices by the same SEC and FINRA rules such as Best Execution, Limit Order Protection, Firm Quotes, and Short Position Disclosure.
Who Should Invest Through OTC Pink?
OTC Pink provides for transparent trading and best execution, although there are no financial standards or disclosure requirements. The marketplace trades a wide range of domestic and foreign companies including penny stocks, shell companies, distressed companies, and dark companies that cannot or will not provide company information to investors.
Because of the lack of reporting requirements, only professional and sophisticated investors with a high risk-tolerance should trade here. Investors should perform all the proper due diligence by researching the companies they are considering and reviewing all business activities.