By Stevie Rosignol-Cortez
Investors are no doubt familiar with the two largest stock exchanges in the U.S.: the New York Stock Exchange on Wall Street and the Nasdaq Stock Market in Times Square.
However, there are alternatives to these major markets that act similarly -- but don't meet the same stringent requirements of the NYSE and Nasdaq.
Over-the-counter, or OTC, markets are alternative trading systems that list companies for trade in a similar way to exchanges, but under a different set of rules and regulations. (You might be familiar with their predecessor, "pink sheets.")
The unsurprisingly named New York-based company OTC Markets Group specializes in these markets, which are made up of businesses that aren't listed on major U.S. exchanges due to reasons such as their size, location, or lack of financial disclosure.
CEO Cromwell Coulson told Barron's editor at large Andy Serwer that the financial services company provides three OTC markets, which each offer "a slightly different market structure to serve different broker-dealer business needs." Securities, Coulson says, are organized in the three markets based on the quality and quantity of the information that companies disclose.
OTC Markets also provides market data and corporate services to investors. Coulson said that the OTC Markets Group has actually become a "better substitute to listing on a regular stock exchange."
"We're regulated in many of the same ways as an exchange," he said. "The idea of alternative trading systems is an 'exchange lite' to do innovative things."
But because they fall under different SEC criteria and are made up of smaller companies with cheap stocks and generally less public information, OTC markets are riskier than major exchanges -- and more susceptible to fraud. Cheap "penny" stocks, whose shares frequently go for less than $5, are thought to be more vulnerable to pump-and-dump scams.
Coulson says that OTC Markets Group is working to protect investors from concerns like this by prioritizing transparency.
"We have a market integrity team that is very much focused on, how do you put the information into the market so that an intelligent investor can make an informed decision," he said. "It's a bit different from the exchange model... our platform, we build so that companies can own and earn their reputation and their valuation."
Coulson says that OTC Markets Group flags the different risks it might see in companies, and tries to provide their investors with the most information they can about the risks flagged, including company comments.
"We want to flag risk... If we see promotion, we put up a promotion flag, " he said. "That promotion flag goes out to warn investors that promotion is taking place, it also gets fed into broker-dealers and clearing firms, so they can heighten their own compliance processes... We then go back to the company and have them do a market announcement and say whether they paid for the promotion, whether they agree with what the promotion said, whether insiders are trading in the market, or there's a blackout period, whether they're doing an offering... we're using the tools of the public market to, when the market is showing something, let's have the companies comment."
If Coulson's push for transparency succeeds in allaying fears of risk, investors' trust could in OTC markets could grow.
Write to Stevie Rosignol-Cortez at stevie.rosignol-cortez@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 15, 2024 02:00 ET (06:00 GMT)
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