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Market Structure

OTC Markets

A decentralized network where stocks trade directly between buyers and sellers through broker-dealers, outside of major exchanges like NYSE and NASDAQ.

What are OTC Markets?

OTC stands for Over-the-Counter. Unlike centralized exchanges such as the NYSE or NASDAQ, OTC markets have no physical trading floor and no central order book. Trades happen directly between buyers and sellers through a network of broker-dealers who negotiate prices electronically.

OTC Markets Group operates the primary platform for OTC trading in the United States. They organize thousands of securities into tiers based on how much financial information the company discloses to investors.

The four OTC tiers

OTCQX (Best Market)

  • The highest OTC tier with the strictest requirements
  • Companies must meet financial standards, be current on disclosures, and pass a qualitative review
  • Many large foreign companies trade here because they list on a home exchange abroad but want US investor access without a full NYSE/NASDAQ listing
  • Minimum bid price of $0.25 and SEC or equivalent reporting required

OTCQB (Venture Market)

  • Designed for early stage and developing companies
  • Must file regular reports with the SEC or a US banking regulator
  • Requires a minimum bid price of $0.01 and an annual certification process
  • Common for small US companies working toward a major exchange listing

Pink Sheets (Pink Open Market)

  • The broadest tier with minimal requirements and no SEC reporting obligation
  • Ranges from legitimate small businesses to highly speculative penny stocks
  • Subcategories: Pink Current (some disclosure), Pink Limited (minimal), and Pink No Information
  • Accessible to retail investors through most standard brokerages
  • Where most penny stock trading and pump-and-dump schemes occur

Expert Market

  • The most restricted tier, created after a 2021 SEC rule change
  • Stocks with no current financial information available to the public
  • Quotes are not publicly displayed and most retail brokerages block trading entirely
  • Some brokers will execute "unsolicited" orders if specifically requested

Why stocks trade on OTC

  • Foreign companies: listed on a home exchange abroad but available to US investors through OTC ADRs
  • Too small: don't meet minimum requirements for NYSE or NASDAQ
  • Delisted: removed from a major exchange for failing to meet ongoing requirements
  • Choose not to list: prefer to avoid the cost and regulatory burden of a major exchange

Trading OTC stocks

Most US brokerages (Schwab, Fidelity, Interactive Brokers) allow trading on OTCQX, OTCQB, and Pink tiers. Always use limit orders when trading OTC. The spread between bid and ask can be wide, and a market order may fill at a much worse price than expected.

Over 12,000 securities trade on OTC Markets. The OTC label does not automatically mean a stock is risky, but the lower tiers require extra caution and research before trading.

Related Terms

Dark Pool

A private trading venue where institutional investors execute large block orders without displaying them on the public order book.

Institutional Trader

A professional trader employed by a firm to trade large positions on behalf of clients or the firm itself.

NASDAQ

The second largest stock exchange in the world, fully electronic with no physical trading floor. Known as the home of technology stocks.

NYSE (New York Stock Exchange)

The largest stock exchange in the world by market capitalization, home to many blue-chip companies like Apple, JPMorgan, and Walmart.

Pink Sheets

The broadest tier of OTC Markets with minimal disclosure requirements, named after the pink paper quotes were originally printed on.

Retail Trader

An individual trading their own money through a personal brokerage account, typically with smaller position sizes than institutions.