What Is the OTCQX?
The OTCQX is the top tier of the three marketplaces for the over-the-counter (OTC) trading of stocks. The OTCQX is provided and operated by the OTC Markets Group. Stocks that trade on this forum must meet more stringent qualification criteria compared to the other tiers, which are the OTCQB/OTCBB and the Pink Sheets.
- The OTCQX is the highest quality tier of OTC markets and offers trading in companies that are not listed on traditional exchanges.
- Companies listed on the OTCQX markets have to follow certain rules and criteria and are subject to SEC regulation. For example, they have to adhere to governance transparency and must not be penny stocks.
- The two lower-tier venues for OTC trading in the U.S. are the OTCQB (formerly the OTCBB) and the Pink Sheets.
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 as with the NYSE, these dealers carry inventories of securities to facilitate any buy or sell orders. Penny stocks, shell companies, and companies in bankruptcy cannot qualify for a listing on the OTCQX.
The OTCQX roster, also called the OTCQX Best Market, includes a large number of blue-chip stocks from Europe, Canada, Brazil, and Russia. These large foreign stocks are frequently global household names.
Regulation of OTCQX
Companies trading on the OTCQX must follow standards to improve transparency. The OTCQX excludes companies that are most likely to be associated with stock promoters and other shady operations. The OTCQX sets standards that a company must meet for inclusion. A company must meet high financial standards, be current in its disclosure, and have sponsorship from a professional third-party advisor. Listed companies report to a U.S. regulator such as the Securities and Exchange Committee (SEC) or the Federal Deposit Insurance Corporation (FDIC).
The OTCQX marketplace is run by OTC Link, an electronic inter-dealer quotation and trading system developed by OTC Markets Group. OTC Link is registered with the SEC as a broker-dealer and also as an alternative trading system (ATS). OTC Link enables broker-dealers to not only post and disseminate their quotes, but to also negotiate trades through the system’s electronic messaging capability. This feature allows it to replace the Over-the-Counter Bulletin Board (OTCBB), which was a quotation-only system.
The OTCQX Marketplace provides some advantages to investors. It separates out the superior companies from the numerous OTC companies that are financially challenged, those involved in questionable activities, or both. It enables investors to participate in the growth of foreign blue chips. Investors may view real-time Level 2 quotes with detailed market data and market depth.
All broker-dealers that trade 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.
The reason large and prestigious companies list on the OTCQX rather than on a major exchange, such as the NYSE, is mainly to avoid the high costs associated with listing shares. Another reason is to bypass the expenses incurred in meeting the stringent ongoing disclosure and legal requirements that come with maintaining their listings. In contrast, the application fee for international and U.S. companies that meet the OTCQX requirements is much smaller.
To be eligible for a listing on the OTCQX U.S. Premier Tier a U.S. company must meet specific and additional requirements. Requirements include a minimum bid price of $1 for the preceding 90 business days and meeting the financial criteria for continued listing on the Nasdaq Capital Market.
The Premier Tier is designed to identify large, high-quality issuers that would qualify to list on a national stock exchange. The comparable OTCQX International Premier tier is for foreign companies that meet specific qualifications of the NYSE’s worldwide standards.
While stocks trading on the OTCQX have many of the same protections as more established, larger stocks, they are still considered to be speculative. There is also no guarantee that any item trading here will be of higher quality than stocks trading on other over-the-counter tiers, or even another OTC marketplace. As such, traders would be well served to implement robust due diligence before committing their capital.