Over-the-counter trading is a type of trading in which securities are traded in an over-the-counter market via a broker-dealer network. This trading occurs in a non-traditional market without the oversight of a regulator.

The over-the-counter market is a decentralized trading platform. This trading might include both equity and debt products. Over-the-counter trade is not limited to the trading of standardized items, and prices are not usually made public.

As over-the-counter trading doesn’t need to involve standardized items, the securities that do not meet the requirement to make it to the list in the standard market can be traded in the over-the-counter market. This helps to make the securities available to the investors which otherwise wouldn’t have been available to them through the standard market.

As over-the-counter trading is not centralized, it gives the whole trading process a lot more flexibility and the parties involved can make changes to the derivatives based on the expected risk. This also provides a lot of liquidity to the trading market.

As even the non-standardized items can be traded through the over-the-counter market, it gives the investors exposure to the securities that are not traded in the standard market.

As with any other trading market, the over-the-counter market also has its share of advantages and disadvantages.

Advantages:

Over-the-counter trading has much fewer rules and regulations as compared to centralized trading. The trading is through a broker and even companies that cannot or choose not to trade in other markets can be involved in the over-the-counter market.

Over-the-counter trading allows exposure to securities that are not listed in the standard market.

Disadvantages:

The lack of proper rules and regulations makes the over-the-counter market much more volatile and more prone to risks.

Also, the lack of information to the public leads to misinformation and may eventually lead to fraud.

What Is the Over-the-Counter (OTC) Market?

The OTC market is when securities are traded through a broker-dealer network rather than on a centralized exchange such as the New York Stock Exchange. Over-the-counter trading can include stocks, bonds, and derivatives, which are financial contracts whose value is derived from an underlying asset, such as a commodity.

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When a company does not meet the standards to list on a normal market exchange, such as the NYSE, its stocks can be traded over the counter (OTC), but the Stocks and Exchange Commission regulates this activity.

Stocks traded over the counter are typically smaller enterprises that cannot meet the traditional exchange listing standards. Stocks that trade on exchanges are referred to as listed stocks, whilst stocks traded over the counter (OTC) are known as unlisted stocks. Trades are conducted through OTC Markets Group’s market tiers: the OTCQX, the OTCQB, and the Pink Open Market.

Types of OTC Securities

Stocks: The equities that trade via OTC are often small companies prohibited by the $250,000 cost to list on the NYSE and up to $173,500 on the Nasdaq.

Bonds: Bonds do not trade on a formal exchange but banks market them through broker-dealer networks and they are also considered OTC securities.

Derivatives: These are private contracts arranged by a broker and can be exotic options, forwards, futures, or other agreements whose value is based on that of an underlying asset, like a stock.

American Depositary Receipts (ADRs): These are sometimes called ADSs or bank certificates that represent a specified number of shares of a foreign stock. 

Foreign currencies: Currency that trades on the Forex, an over-the-counter currency exchange.

Cryptocurrency: Digital coins like Bitcoin and Ethereum trade on the OTC market. 

OTC Markets Group operates the OTCQX Best Market, the OTCQB Venture Market, and the Pink Open Market. Although OTC networks are not formal exchanges such as the NYSE, they still have eligibility requirements determined by the SEC.

OTCQX: The OTCQX does not list stocks that sell for less than five dollars, known as penny stocks, shell companies, or companies going through bankruptcy. The OTCQX includes only 4% of all OTC stocks traded and requires the highest reporting standards and strictest oversight by the SEC.

OTCQB: Often called the “venture market” with a concentration on developing companies that report their financials to the SEC and submit to some oversight.

Pink Open Market: Formerly known as pink sheets, this is the riskiest level of OTC trading with no requirements to report financials or register with the Securities and Exchange Commission. Some legitimate companies exist on the Pink Open Market, however, there are many shell companies and companies with no actual business operations listed here.

Pros and Cons of the OTC Market

Bonds, ADRs, and derivatives trade in the OTC marketplace, however, investors face greater risk when investing in speculative OTC securities. The filing requirements between listing platforms vary and business financials may be hard to locate. 

Stocks trading OTC are not known for their large volume of trades. Lower share volume means there may not be a ready buyer when it comes time to trade shares. Also, the spread between the bid and the asking price is usually larger as these stocks tend to be more volatile based on market or economic data.

The OTC marketplace is an alternative for small companies or those who do not want to list or cannot list on the standard exchanges. Listing on a standard exchange is an expensive and time-consuming process, and often outside the financial capabilities of many smaller companies.

Pros

• OTC provides access to securities not available on standard exchanges such as bonds, ADRs, and derivatives.
• Fewer regulations on the OTC allow the entry of many companies that can not, or choose not to, list on other exchanges.
• Through the trade of low-cost, penny stocks, speculative investors can earn significant returns.

Cons

• OTC stocks have less trade liquidity due to low volume which leads to delays in finalizing the trade and wide bid-ask spreads.
• Less regulation leads to less available public information, the chance of outdated information, and the possibility of fraud.
• OTC stocks are prone to make volatile moves on the release of market and economic data.

The OTC market is generally considered risky due to lenient reporting requirements and lower transparency associated with these securities. Many stocks that trade OTC have a lower share price and may be highly volatile. While some stocks in the OTC market are eventually listed on the major exchanges, other OTC stocks fail.

The over-the-counter (OTC) market helps investors trade securities via a broker-dealer network instead of on a centralized exchange like the New York Stock Exchange. Although OTC networks are not formal exchanges, they still have eligibility requirements determined by the SEC.

What Does OTC Mean in Pay?

Any time worked by employees performing tasks required by the employer, and for the employer’s benefit, is compensable time for which the employees must be paid – – either their regular ‘straight-time’ pay, or overtime pay when applicable, or at least minimum wages.

When employees incur such time for which no payment is provided, this “off-the-clock” (or OTC) time typically violates both federal and state wage law. Such off-the-clock OTC work is usually incurred prior to the start of an employee’s scheduled, paid shift (pre-shift OTC time) or following the end of an employee’s scheduled, paid shift (post-shift OTC time). Employers are expected by law to pay for pre shift and post shift work.

Under CA wage law, such pre and post-shift OTC time is the compensable time whenever the employee is ‘under the control’ of the employer, is performing tasks that benefit the employer and is not free to engage in their own personal pursuits when performing such tasks. Under the federal Fair Labor Standards Act (“FLSA”), pre or post-shift OTC time is compensable whenever ‘suffered or permitted by the employer; meaning, whenever the employer knew or should have known the OTC tasks were being performed.

If an employee secretly engages in pre or post-shift tasks that the employer has no way of knowing about, such time is likely, not compensable; however, if any pre or post-shift OTC time is incurred by employees, and the employer knows or should have known about such time because the time is spent complying with requirements set or expected by the employer, such time is compensable.

Examples of compensable OTC in various trades include restaurant servers required to prepare the area they will be served prior to ‘clocking in’, law enforcement patrol employees required to prepare their patrol vehicles prior to the start of their paid shifts, and prison guards required to go through multiple security checkpoints, submit to searches, check out keys and equipment, and walk significant distances inside prison walls to get to their assigned ‘posts’ prior to the start of their paid shifts.

For employers that find themselves being accused of requiring employees to work ‘off the clock,’ it is important to seek out the help of an experienced working off-the-clock attorney.

The laws governing OTC are complicated, and there are many ways in which an employer can inadvertently violate these laws. An experienced work-off-the-clock overtime lawyer will be able to help you navigate these complicated laws and will fight to ensure that your rights are protected.

If you have been required to work off the clock, or if you believe that your employer has violated your rights, contact a working off-the-clock lawyer today to discuss your case.

Over-the-counter in Finance

Over-the-counter (OTC) or off-exchange trading or pink sheet trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price. In an OTC trade, the price is not necessarily publicly disclosed.

OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such products. Products traded on traditional stock exchanges, and other regulated bourse platforms, must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in stock exchange-based equities trading.

The OTC market does not have this limitation. Parties may agree on an unusual quantity, for example. In OTC, market contracts are bilateral (i.e. the contract is only between two parties), and each party could have credit risk concerns concerning the other party. The OTC derivative market is significant in some asset classes: interest rate, foreign exchange, stocks, and commodities.

In 2008, approximately 16% of all U.S. stock trades were “off-exchange trading”; by April 2014, that number increased to about 40%. Although the notional amount outstanding of OTC derivatives in late 2012 had declined 3.3% over the previous year, the volume of cleared transactions at the end of 2012 totaled US$346.4 trillion. The Bank for International Settlements statistics on OTC derivatives markets showed that “notional amounts outstanding totaled $693 trillion at the end of June 2013… The gross market value of OTC derivatives – that is, the cost of replacing all outstanding contracts at current market prices – declined between end-2012 and end-June 2013, from $25 trillion to $20 trillion.

An over-the-counter is a bilateral contract in which two parties (or their brokers or bankers as intermediaries) agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done online or by telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement. This segment of the OTC market is occasionally referred to as the “Fourth Market”. Critics have labeled the OTC market as the “dark market” because prices are often unpublished and unregulated.

Over-the-counter derivatives are especially important for hedging risk in that they can be used to create a “perfect hedge”. With exchange traded contracts, standardization does not allow for as much flexibility to hedge risk because the contract is a one-size-fits-all instrument. With OTC derivatives, though, a firm can tailor the contract specifications to best suit its risk exposure.

Importance of OTC Derivatives in Modern Banking

OTC derivatives are a significant part of the world of global finance. The OTC derivatives markets grew exponentially from 1980 through 2000. This expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. The notional outstanding of OTC derivatives markets rose throughout the period and totalled approximately US$601 trillion at December 31, 2010.

In their 2000 paper by Schinasi et al. published by the International Monetary Fund in 2001, the authors observed that the increase in OTC derivatives transactions would have been impossible “without the dramatic advances in information and computer technologies” that occurred from 1980 to 2000. During that time, major internationally active financial institutions significantly increased the share of their earnings from derivatives activities. These institutions manage portfolios of derivatives involving tens of thousands of positions and aggregate global turnover over $1 trillion.

At that time prior to the financial crisis of 2008, the OTC market was an informal network of bilateral counter-party relationships and dynamic, time-varying credit exposures whose size and distribution tied to important asset markets. International financial institutions increasingly nurtured the ability to profit from OTC derivatives activities and financial market participants benefitted from them.

In 2000 the authors acknowledged that the growth in OTC transactions “in many ways made possible, the modernization of commercial and investment banking and the globalization of finance”. However, in September, an IMF team led by Mathieson and Schinasi cautioned that “episodes of turbulence” in the late 1990s “revealed the risks posed to market stability originated in features of OTC derivatives instruments and markets.