The OTC Market

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. OTCQX also has the highest minimum bid price of the tiers: generally $0.25 to be admitted and $0.10 to stay.
• OTCQB venture market: These are early-stage or developing companies, and they must maintain a minimum bid price of $0.01. Admission takes a higher bid, at least $0.05. If the bid falls below that, the company gets a 90-day cure period to get back above it; if it can’t, it’s removed from OTCQB and moves to a lower tier. OTCQB companies 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 old Pink Current tier blurred companies actively providing disclosure with those that were not, so it was split into OTCID and Pink Limited. OTCID companies must publish quarterly and annual reports and maintain updated disclosures. Companies that fail to meet these requirements are demoted to a lower tier.
• Pink limited: The lowest tier, with no minimum stock price. These are companies that may have financial reporting problems, economic stress, or are in bankruptcy, making this the highest-risk tier of the four.

The consolidated quotation system (CQS) is a centralized electronic service that displays real-time bid/ask quotes, gathered across multiple exchanges, for securities listed on the NYSE and the other exchanges except Nasdaq (Nasdaq-listed securities have their own feed). It aggregates those quotes from every market that trades them 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. (In June 2026 the SEC approved longer hours, expected to start December 6, 2026: from 9:00pm ET Sunday to 8:00pm ET Friday, with a one-hour pause at 8:00pm Monday through Thursday.) 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 trades in securities listed on the NYSE, and network B reports trades in securities listed on NYSE American, NYSE Arca, Cboe (formerly Bats), and the regional exchanges, wherever those trades happen, including on ECNs.

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-lot transactions (fewer shares than a round lot) are not exempt; they have been reported to the consolidated tape since December 2013. What changed more recently is odd-lot quotes: since May 2026, the consolidated quote feeds also carry the best odd-lot bids and offers priced at or better than the national best bid and offer, while deeper odd-lot quote data is deferred to 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.

Watch-out: TRF trade reports and ORF reports of OTC equity trades, odd-lot trades included, are due within 10 seconds of execution, while CQS carries quotes, not trade reports. Confirm which system a question is actually asking about before picking a deadline.

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 applies to secondary market transactions, not to securities sold under a prospectus or offering circular at the public offering price (as in a primary offering), 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%.

The secondary market, where securities trade after the primary offering, is often described in four parts. The first market is exchange-listed securities trading on an exchange. The second market is unlisted securities trading over-the-counter. The third market is exchange-listed securities trading over-the-counter. The fourth market is institutions trading directly with each other, without a broker-dealer in between.

Watch-out: The 5% policy is FINRA guidance for transactions in stocks, corporate debt, and government securities - it isn’t a binding rule, and it doesn’t apply to municipal securities. Municipal securities markups fall under the MSRB’s own fair-pricing rules instead. An exam question pinning the 5% policy on a municipal bond trade is testing that mix-up.

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.

A markup or markdown is measured from the prevailing market price at the time of the customer’s trade, not from what the dealer originally paid. The dealer’s own cost stands in for that price only when it is contemporaneous, meaning recent enough to reflect the current market, so a gain or loss on inventory bought earlier is not part of the markup (FINRA Rule 2121).

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 traded 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. The charge must be for a service the firm actually performs, and be reasonable and not unfairly discriminatory among customers (FINRA Rule 2122). A firm can’t relabel part of a commission or markup as a fee for an unrelated service.

Types of transactions

Definitions

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. A market maker selling from its inventory acts in this capacity, and the 5% policy applies to it like any other dealer. Being a market maker is not one of the factors that can justify a higher charge.

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. Under the 5% policy, the firm computes the mark-up as if the customer had paid cash for the new securities, and includes in it any profit or commission the firm made on the securities sold, so the sale and the purchase are treated as one combined charge. 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.

Example: Proceeds transaction markup

A customer sells $5,000 of stock A and directs the firm to use the proceeds to purchase stock B. The firm’s markdown on the sale of stock A is $100, and its markup on the purchase of stock B is $140. What’s the combined markup, and does it comply with the 5% policy?

• Total charge: $100 + $140 = $240
• Markup percentage: $240 ÷ $5,000 = 4.8%

Answer: The combined markup is 4.8%, which is within the 5% guideline.

Supervisory review of trade activity is covered in other chapters of this course: solicited-versus-unsolicited order handling in Orders, Reg SHO short-sale rules in Most of the regulations, and trading halts and market access in Additional FINRA, SEC, and NYSE rules.