Here you'll find quick answers to common questions about over the counter trading.

1. What is over-the-counter (OTC) trading?

Over-the-counter (OTC) trading, or off-exchange trading, involves direct transactions between parties through broker-dealer networks rather than centralized exchanges. Unlike formal exchanges, the OTC market operates without a physical trading floor or fixed membership structure, and transactions occur with less regulatory oversight and price transparency.

The OTC market includes approximately 10,000 different types of securities, such as major American Depositary Receipts (ADRs), foreign equities, and small-to-micro-cap growth stocks. While some OTC securities file disclosures with the US Securities and Exchange Commission (SEC), others may maintain alternative reporting standards or provide no public reporting.

2. Pros and Cons of OTC Trading

Securities traded on regulated exchanges must meet strict listing requirements and disclosure rules, which can be costly for smaller or startup companies. OTC-traded securities aren't necessarily lower quality—some issuers may choose not to list for strategic reasons. In the US, for instance, many government securities, municipal bonds, and corporate debt instruments trade exclusively OTC.

(Important note: OTC trading carries higher risks than exchange-based transactions. Investors should carefully evaluate each security's risk profile and background before investing.)

Pros

• Market Access: Provides smaller companies and startups an alternative to regulated exchanges where their securities might lack liquidity. Broker-dealers facilitate trades, fostering emerging market growth.
• Large Trade Execution: Enables block transactions that meet institutional needs while minimizing short-term price disruptions in public markets.
• Regulatory Flexibility: The lighter oversight structure may offer experienced investors opportunities for higher returns (with commensurate risks)

Cons

• Counterparty Risk: Lower regulatory oversight increases exposure to default risk compared to exchange-traded products.
• Limited Transparency: Absence of stringent disclosure requirements may leave investors with insufficient information for informed decisions.
• Illiquidity Concerns: Thin trading volumes can lead to execution challenges and unfavorable pricing.

3. OTC Market Tiers

OTC Markets Group categorizes securities through a three-tier system reflecting disclosure completeness—not investment quality. This classification helps investors assess transparency risks. The tiers are as follows:

OTCQX

OTCQX is the top tier of the three marketplaces. To qualify, companies must meet stringent requirements including regular regulatory disclosures, submission of audited financial reports, and exclusion from penny stock, shell company, or bankruptcy classifications. The tier also accommodates specific exceptions, particularly for foreign firms issuing US-traded ADRs that satisfy alternative eligibility standards.

OTCQB

The OTCQB tier serves as the intermediate marketplace for emerging growth companies. To qualify, companies must maintain a minimum bid price of USD 0.01 per share, file current regulatory reports, submit annual financial statements reviewed according to US Generally Accepted Accounting Principles (GAAP) standards, and demonstrate active operations without bankruptcy status.

Pink Market

At the base tier, the Pink Market operates with minimal requirements, accommodating a wide spectrum of participants including foreign issuers, penny stocks, shell companies, and non-reporting entities. This open market typically features smaller companies that have not yet established predictable growth patterns.

4. How do I view OTC stock?

To view OTC stocks, follow these steps in the Longbridge App: Navigate to Market, Tap the Magnifying Glass icon, and then enter the OTC stock symbol.

5. How do I know if a stock is traded OTC?

To check if a stock is traded OTC, follow these steps in the Longbridge App: Navigate to the Stock Details page, Tap the Stock symbol icon in the upper right corner.

6. Does Longbridge support trading OTC stocks?

Yes, Longbridge supports trading of select OTC stocks.

7. Do OTC stocks support pre/post-market trading?

OTC stocks are traded exclusively during standard US market hours and are not available for pre-market or after-hours trading.

8. Why was my OTC/pink sheet limit order not submitted to the market?

Your OTC/pink sheet limit order may have failed submission due to not meeting the minimum trade quantity requirements. Please verify your order complies with the specified minimum quantities below. You'll receive a rejection notification if the system cannot process your order.

Minimum trading quantity requirements for OTC stocks:

Disclosures

The currency exchange feature is only used for transaction settlement purposes. Please do not use it for currency speculation. Requests that are not related to a transaction will be rejected. Please be prudent when using this feature.

As our trading system supports precision to a specific number of decimal places, your cash balance in currency conversions will be rounded to two decimal places.

This article is for informational purposes only and does not constitute financial advice.