Over-the-counter (OTC) market
Also known as: otc markets, negotiated market, otc markets group
The over-the-counter (OTC) market is a decentralized dealer network where securities trade directly between broker-dealers rather than on a centralized exchange. It hosts stocks that don't meet exchange listing standards, along with most bond trading.
The over-the-counter (OTC) market is a negotiated market with no central trading floor. Instead of buyers and sellers meeting on an exchange like the NYSE, trades occur through a network of broker-dealers who negotiate prices electronically or by phone. Market makers quote the prices at which they will buy (bid) and sell (ask) each security they trade.
Most OTC equity trading in the U.S. runs through OTC Markets Group, which organizes securities into three tiers based on the quality and quantity of information companies disclose. OTCQX is the top tier, reserved for established companies meeting the highest financial standards. OTCQB, the venture market, serves early-stage companies that are current in their reporting. The Pink market (historically the "pink sheets") carries the loosest requirements and includes companies that disclose little or no information.
A common point of confusion: NASDAQ began as an OTC quotation system, but it has been a registered national exchange since 2006. Today, "OTC" generally refers to securities that are not listed on NASDAQ or the NYSE. Bonds — government, municipal, and corporate — also trade predominantly over the counter.
OTC securities tend to be less liquid and more volatile than exchange-listed stocks, with wider spreads and greater risk of limited disclosure. The SIE, Series 7, and Series 6 exams all test the structure of the secondary market, including the OTC tiers, the role of market makers, and how the OTC market differs from exchange trading.
Key takeaways
- The OTC market is a decentralized network of broker-dealers who negotiate trades directly, with no central exchange floor.
- OTC Markets Group organizes unlisted stocks into three tiers: OTCQX (highest standards), OTCQB (venture-stage), and Pink (minimal requirements).
- NASDAQ is a registered exchange, not an OTC market — "OTC" today means securities not listed on an exchange.
- Most bond trading takes place over the counter.
- OTC securities generally carry lower liquidity, wider spreads, and less disclosure than exchange-listed securities.