Achievable Series 10

6. Federal rules and regulations

6.3. The third market

Our FINRA Series 10 course is currently in development and is a work-in-progress.

The OTC Market

7 min read

OTC equities are those that either don’t qualify to be listed on Nasdaq or did and have been delisted, kicked off. The OTC Markets Group is an American financial services corporation, headquartered in New York City, that provides price and liquidity information for over 12,000 OTC securities.

The OTC Markets Group organizes the securities into four tiers. One of which is new, introduced in 2025.

OTCQX Best Market: Established, investor-focused, global companies are listed in this top tier of the OTC securities. These companies do not have to register with the SEC, but must post financial information with the OTC Markets Group. US companies must have ongoing operations (no shell companies), and not in bankruptcy. Foreign issuers must meet the requirements of their qualified foreign exchange in which they trade.
OTCQB Venture Market: These companies would be early-stage or developing companies, and have a minimum bid of $0.01, so definitely penny stocks can trade here. They verify annually that their company information is current, including reporting status, profile, boards, major shareholders, etc.
OTCID Integrated Disclosure: This is the new one, launched July 2025. It replaced the pink current tier. It is the baseline for companies with timely reporting, certifications, and profiles. The purpose was the old tier, before basically being split between this and the next tier, had confusion between companies actively engaged in disclosure and those that aren’t. OTCID companies must publish quarterly and annual reports and maintain updated disclosures. Failure in these, get them pushed down further.
Pink Limited: Now we get into the junky of the junk. Remember, junk doesn’t mean useless garbage like we often think of that word; it simply means risky. Well, in many cases, probably means more “very risky, no riskier than that, keep going, stop walking, run, yeah, keep going, yeah, about that very risky”. But with great risk comes great potential return. This category has no minimum stock price. These are companies that may have financial reporting problems, economic stress, or are simply in bankruptcy.

The Consolidated Quotation System (CQS) is a centralized electronic service that displays real-time bid/ask quotes, last sale, and volume information for US-listed securities across multiple exchanges. It aggregates from NYSE, Nasdaq, and regional exchanges to provide a comprehensive “best price” view. It covers and lists equities (common and preferred, including convertibles), warrants, rights, and unit-listed securities. CQS operates from 4:00am to 8:00pm ET. Executing dealers must report within 10 seconds to the Consolidated Tape System (CTS).

The Consolidated Tape System (CTS) is an electronic system that collects and reports real-time data of securities trading on exchanges. The data includes price and volume. The CTS consolidates data from exchanges, alternative systems, broker-dealers, and similar entities. There are 2 networks: network A reports for securities listed on the NYSE, and network B reports trades from NYSE Amex, Bats, ECNs, and regional exchanges.

There are some transactions that are exempt:

Private placements, as these don’t trade on exchanges, and are generally exempt
Transactions in connection with the exercise of options
Transactions involving tender offers or exchange offers.
Transactions with securities under a prospectus, primary, and registered subsequent offerings.
Odd-log transactions appear to be in flux. Previously, they were exempt, but that is changing. Odd-lot data will be added to the Consolidated Tapes in May 2026, while odd-lot depth of book is deferred into 2028.

There are currently 3 active Trade Reporting Facilities (TRFs); FINRA/Nasdaq TRF Carteret, FINRA/Nasdaq TRF Chicago, and FINRA/NYSE TRF. Each TRF provides FINRA member firms with a mechanism for reporting transactions effected other than on an exchange. Market makers are required to file TRF reports for trades involving Nasdaq securities and CQS securities within 10 seconds. Similar to TRFs, is the Over-the-Counter Reporting Facility (ORF), which is a service provided by FINRA for reporting of trades in OTC equity securities executed other than on or through an exchange and for trades in restricted equity securities effected under Rule 144A.

The Electronic Communications Networks (ECNs), as defined by Reg NMS, are electronic trading systems that automatically match buy and sell orders at specified prices. ECNs register with the SEC as broker-dealers and are subject to Reg ATS (Alternative Trading Systems, specifics are not required). An ECN subscriber can send information about orders, execute transactions during and after normal trading hours, and is able to buy and sell at least to a certain level of anonymity

The 5% policy

FINRA implemented the 5% policy in order to help firms assess their charges, markups, markdowns, and commissions. The policy only applies to the secondary market transactions, not primary, and is a policy, not a binding rule. It is guidelines, again to assist the firms. There are times when 5% is actually considered excessive, just like there are times when the reasonable commission, markup, or markdown might be more than 5%.

Basically, the rule stipulates a broker or dealer should not charge commissions, markups, or markdowns in excess of 5% on standard trades, stock exchange listings, agency transactions, over-the-counter transactions, principal transactions, proceeds transactions, and riskless transactions.

Characteristics of situations that could justify one of the 3 charges being in excess of 5% would include:

What’s the price? If the price is low, the risk associated could justify a higher charge. There could be execution costs that are a large portion of a small order of a cheap security, and the firm is justified in recovering its costs.
What is the security? The type of security can determine a lot, based on the risk. Individual equity, common stock, could justify higher charges, simply because stocks are more volatile and pose a greater risk.
How available is the security? If the security is easy to find, the charges should be lower, but some securities are thinly and could be difficult to acquire. The difficulty in acquiring a thinly traded security could justify higher charges.
How much total money are we talking about? Many costs the firm incurs associated with execution are basically fixed, meaning if the transaction is for a relatively small amount of money, the execution costs to the firm could be a high percentage, and again, the firm is justified in recovering all costs of acquisition.
What other services and functions does the firm provide? If the firm provides additional services that would separately cost more, there is no reason they can’t be compensated for those additional services. It likely makes the total cost, including those services, cheaper and easier than if the customer had to go to 2 places for it.

Definitions

Types of transactions

agency transactions: Where the broker-dealer is acting as a broker, and basically being a middleman for the trade. The broker has someone who wants to sell, someone else who wants to buy, they introduce the two of them, and get a commission for the setting up the trade. The broker introduces the 2 contra parties.

over-the-counter transactions: When the transaction is completed through a decentralized network. Either dealer-to-dealer or customer-to-dealer.

principal transactions: Where a broker-dealer is acting as a dealer, and buying and selling from their own inventory. If someone wants to sell, the dealer will buy it for their inventory; if someone wants to buy, the dealer will sell from their inventory. The dealer is always the contra party to the customer.

proceeds transactions: Where a customer directs a member firm to sell a position and to use the proceeds from the sale to purchase another security. With the 5% rule, the firm computes the mark-up as if the customer paid in cash for the securities and then add any changes that the firm receives from the sale to the charge from the purchase. The total should be no more than 5% (without extenuating circumstances)

riskless transactions: When a firm purchases an asset because it has an order for that asset from a customer. It is considered riskless, as they already have a buyer for it.

Next | 6.4.1 MSRB rules and regs mostly for inside the firm

The OTC Market

The OTC Markets Group organizes the securities into four tiers. One of which is new, introduced in 2025.

OTCQX Best Market: Established, investor-focused, global companies are listed in this top tier of the OTC securities. These companies do not have to register with the SEC, but must post financial information with the OTC Markets Group. US companies must have ongoing operations (no shell companies), and not in bankruptcy. Foreign issuers must meet the requirements of their qualified foreign exchange in which they trade.
OTCQB Venture Market: These companies would be early-stage or developing companies, and have a minimum bid of $0.01, so definitely penny stocks can trade here. They verify annually that their company information is current, including reporting status, profile, boards, major shareholders, etc.
OTCID Integrated Disclosure: This is the new one, launched July 2025. It replaced the pink current tier. It is the baseline for companies with timely reporting, certifications, and profiles. The purpose was the old tier, before basically being split between this and the next tier, had confusion between companies actively engaged in disclosure and those that aren’t. OTCID companies must publish quarterly and annual reports and maintain updated disclosures. Failure in these, get them pushed down further.
Pink Limited: Now we get into the junky of the junk. Remember, junk doesn’t mean useless garbage like we often think of that word; it simply means risky. Well, in many cases, probably means more “very risky, no riskier than that, keep going, stop walking, run, yeah, keep going, yeah, about that very risky”. But with great risk comes great potential return. This category has no minimum stock price. These are companies that may have financial reporting problems, economic stress, or are simply in bankruptcy.

There are some transactions that are exempt:

Private placements, as these don’t trade on exchanges, and are generally exempt
Transactions in connection with the exercise of options
Transactions involving tender offers or exchange offers.
Transactions with securities under a prospectus, primary, and registered subsequent offerings.
Odd-log transactions appear to be in flux. Previously, they were exempt, but that is changing. Odd-lot data will be added to the Consolidated Tapes in May 2026, while odd-lot depth of book is deferred into 2028.

The 5% policy

Characteristics of situations that could justify one of the 3 charges being in excess of 5% would include:

What’s the price? If the price is low, the risk associated could justify a higher charge. There could be execution costs that are a large portion of a small order of a cheap security, and the firm is justified in recovering its costs.
What is the security? The type of security can determine a lot, based on the risk. Individual equity, common stock, could justify higher charges, simply because stocks are more volatile and pose a greater risk.
How available is the security? If the security is easy to find, the charges should be lower, but some securities are thinly and could be difficult to acquire. The difficulty in acquiring a thinly traded security could justify higher charges.
How much total money are we talking about? Many costs the firm incurs associated with execution are basically fixed, meaning if the transaction is for a relatively small amount of money, the execution costs to the firm could be a high percentage, and again, the firm is justified in recovering all costs of acquisition.
What other services and functions does the firm provide? If the firm provides additional services that would separately cost more, there is no reason they can’t be compensated for those additional services. It likely makes the total cost, including those services, cheaper and easier than if the customer had to go to 2 places for it.

Definitions

Types of transactions

over-the-counter transactions: When the transaction is completed through a decentralized network. Either dealer-to-dealer or customer-to-dealer.

riskless transactions: When a firm purchases an asset because it has an order for that asset from a customer. It is considered riskless, as they already have a buyer for it.

The OTC Market

The OTC Markets Group organizes the securities into four tiers. One of which is new, introduced in 2025.

OTCQX Best Market: Established, investor-focused, global companies are listed in this top tier of the OTC securities. These companies do not have to register with the SEC, but must post financial information with the OTC Markets Group. US companies must have ongoing operations (no shell companies), and not in bankruptcy. Foreign issuers must meet the requirements of their qualified foreign exchange in which they trade.
OTCQB Venture Market: These companies would be early-stage or developing companies, and have a minimum bid of $0.01, so definitely penny stocks can trade here. They verify annually that their company information is current, including reporting status, profile, boards, major shareholders, etc.
OTCID Integrated Disclosure: This is the new one, launched July 2025. It replaced the pink current tier. It is the baseline for companies with timely reporting, certifications, and profiles. The purpose was the old tier, before basically being split between this and the next tier, had confusion between companies actively engaged in disclosure and those that aren’t. OTCID companies must publish quarterly and annual reports and maintain updated disclosures. Failure in these, get them pushed down further.
Pink Limited: Now we get into the junky of the junk. Remember, junk doesn’t mean useless garbage like we often think of that word; it simply means risky. Well, in many cases, probably means more “very risky, no riskier than that, keep going, stop walking, run, yeah, keep going, yeah, about that very risky”. But with great risk comes great potential return. This category has no minimum stock price. These are companies that may have financial reporting problems, economic stress, or are simply in bankruptcy.

There are some transactions that are exempt:

Private placements, as these don’t trade on exchanges, and are generally exempt
Transactions in connection with the exercise of options
Transactions involving tender offers or exchange offers.
Transactions with securities under a prospectus, primary, and registered subsequent offerings.
Odd-log transactions appear to be in flux. Previously, they were exempt, but that is changing. Odd-lot data will be added to the Consolidated Tapes in May 2026, while odd-lot depth of book is deferred into 2028.

The 5% policy

Characteristics of situations that could justify one of the 3 charges being in excess of 5% would include:

What’s the price? If the price is low, the risk associated could justify a higher charge. There could be execution costs that are a large portion of a small order of a cheap security, and the firm is justified in recovering its costs.
What is the security? The type of security can determine a lot, based on the risk. Individual equity, common stock, could justify higher charges, simply because stocks are more volatile and pose a greater risk.
How available is the security? If the security is easy to find, the charges should be lower, but some securities are thinly and could be difficult to acquire. The difficulty in acquiring a thinly traded security could justify higher charges.
How much total money are we talking about? Many costs the firm incurs associated with execution are basically fixed, meaning if the transaction is for a relatively small amount of money, the execution costs to the firm could be a high percentage, and again, the firm is justified in recovering all costs of acquisition.
What other services and functions does the firm provide? If the firm provides additional services that would separately cost more, there is no reason they can’t be compensated for those additional services. It likely makes the total cost, including those services, cheaper and easier than if the customer had to go to 2 places for it.

Definitions

Types of transactions

over-the-counter transactions: When the transaction is completed through a decentralized network. Either dealer-to-dealer or customer-to-dealer.

riskless transactions: When a firm purchases an asset because it has an order for that asset from a customer. It is considered riskless, as they already have a buyer for it.

The OTC Market

The OTC Markets Group organizes the securities into four tiers. One of which is new, introduced in 2025.

OTCQX Best Market: Established, investor-focused, global companies are listed in this top tier of the OTC securities. These companies do not have to register with the SEC, but must post financial information with the OTC Markets Group. US companies must have ongoing operations (no shell companies), and not in bankruptcy. Foreign issuers must meet the requirements of their qualified foreign exchange in which they trade.
OTCQB Venture Market: These companies would be early-stage or developing companies, and have a minimum bid of $0.01, so definitely penny stocks can trade here. They verify annually that their company information is current, including reporting status, profile, boards, major shareholders, etc.
OTCID Integrated Disclosure: This is the new one, launched July 2025. It replaced the pink current tier. It is the baseline for companies with timely reporting, certifications, and profiles. The purpose was the old tier, before basically being split between this and the next tier, had confusion between companies actively engaged in disclosure and those that aren’t. OTCID companies must publish quarterly and annual reports and maintain updated disclosures. Failure in these, get them pushed down further.
Pink Limited: Now we get into the junky of the junk. Remember, junk doesn’t mean useless garbage like we often think of that word; it simply means risky. Well, in many cases, probably means more “very risky, no riskier than that, keep going, stop walking, run, yeah, keep going, yeah, about that very risky”. But with great risk comes great potential return. This category has no minimum stock price. These are companies that may have financial reporting problems, economic stress, or are simply in bankruptcy.

There are some transactions that are exempt:

Private placements, as these don’t trade on exchanges, and are generally exempt
Transactions in connection with the exercise of options
Transactions involving tender offers or exchange offers.
Transactions with securities under a prospectus, primary, and registered subsequent offerings.
Odd-log transactions appear to be in flux. Previously, they were exempt, but that is changing. Odd-lot data will be added to the Consolidated Tapes in May 2026, while odd-lot depth of book is deferred into 2028.

The 5% policy

Characteristics of situations that could justify one of the 3 charges being in excess of 5% would include:

What’s the price? If the price is low, the risk associated could justify a higher charge. There could be execution costs that are a large portion of a small order of a cheap security, and the firm is justified in recovering its costs.
What is the security? The type of security can determine a lot, based on the risk. Individual equity, common stock, could justify higher charges, simply because stocks are more volatile and pose a greater risk.
How available is the security? If the security is easy to find, the charges should be lower, but some securities are thinly and could be difficult to acquire. The difficulty in acquiring a thinly traded security could justify higher charges.
How much total money are we talking about? Many costs the firm incurs associated with execution are basically fixed, meaning if the transaction is for a relatively small amount of money, the execution costs to the firm could be a high percentage, and again, the firm is justified in recovering all costs of acquisition.
What other services and functions does the firm provide? If the firm provides additional services that would separately cost more, there is no reason they can’t be compensated for those additional services. It likely makes the total cost, including those services, cheaper and easier than if the customer had to go to 2 places for it.

Definitions

Types of transactions

over-the-counter transactions: When the transaction is completed through a decentralized network. Either dealer-to-dealer or customer-to-dealer.

riskless transactions: When a firm purchases an asset because it has an order for that asset from a customer. It is considered riskless, as they already have a buyer for it.