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OTC Stocks - Over-The-Counter Bulletin Board (OTCBB)

What Is the Over-The-Counter Bulletin Board?

The over-the-counter bulletin board (OTCBB) is an electronic quotation service provided by the Financial Industry Regulatory Authority (FINRA) to its subscribing members. In many ways, the OTCBB is a shell of what it once was in that it has been eclipsed by OTC Markets Group's offerings in the same space.

Understanding the Over-The-Counter Bulletin Board (OTCBB)

In the past, the OTCBB offered traders and investors up-to-the-minute quotes, last-sale prices and volume information for equity securities traded over-the-counter. All companies listed on this platform had to file current financial statements with the Securities and Exchange Commission (SEC) or a regulator.

The over-the-counter bulletin board (OTCBB) was started in 1990 after the Penny Stock Reform Act of 1990 stipulated that the SEC must develop some type of electronic quotation system for stocks that could not be listed on one of the major exchanges. Stocks that traded over the counter were traded between individuals and market makers using computers and telephones.

As is the case today, the over-the-counter stocks on the OTCBB were not part of any major exchanges. This is primarily because OTC stocks tend to be small and volatile. This makes meeting listing requirements difficult. More importantly from the trading standpoint, the bid-ask spread is typically larger for these stocks as they typically trade with less frequency than exchange-listed stocks. Only a select few OTCBB stocks successfully moved from the OTC market to a major exchange.

The Importance of the OTCBB and OTC Markets

For those small companies that cannot meet the listing requirements to trade their securities on national exchanges, the OTCBB was an important alternative and the current offerings of OTC Markets continues to play this role. Small companies need financing from investors even to grow, even though their total market value might never rival a mid-cap stock. Investors, in turn, are attracted to the outsized returns that can still occur the OTC market as some of these firms do find ongoing success and outsized profits.

While these companies use the OTC markets in place of one of the major exchanges, it is important for investors to remember that the OTCBB and OTC Markets are not, in fact, an actual exchange but merely a quotation service. All securities traded over-the-counter are, in reality, traded by a web of market makers who input different quotes and trades through a secure computer network that can only be accessed by those who subscribe.

As mentioned, pretty much all of the trading is now done on OTC Markets Group's platforms including OTCQX, OTCQB and OTC Pink. OTCBB still provides market information through FINRA's website, but it is all but obsolescent now.

REVIEWED BY WILL KENTON Updated Apr 11, 2019

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