On September 28, 2021, an amendment to the U.S. Securities and Exchange Commission (SEC) Rule 15c2-11 came into force with significant implications for retail investors trading the more than 12,000 securities in the OTC Markets.
Previously, the rule required market makers to only review basic issuer information before publishing quotations for that issuer's securities. The SEC writes, “Market makers must have a reasonable basis for believing that the information is accurate and from reliable sources. The Rule describes the kind of information that the broker-dealer must review.”
Outlining previous issues with Rule15c2-11, the SEC writes: “The problem.. is that once one market maker has published quotations for a security for at least 30 days, other market makers can publish quotations for the security without reviewing any information (i.e., they can ‘piggyback’ onto the quotes of the first market maker). Market makers then can quote indefinitely without reviewing any updated information (unless the commission suspends trading in the security).”
In a recent study by Oxford Metrica on OTC Markets Group Inc. OTCM, figures showed that since the revision of Rule 15c2-11 came into effect, there has been greater investor interest, visibility and liquidity in the OTC Markets. The report shows that clear improvements occurred as securities moved “up” the chain of markets. OTC Markets provides a natural infrastructure for companies to aspire to trade on the highest market for which they qualify, creating an environment based on merit, transparency and accurate information.
Key Findings In The OTC Markets Group Report
Based on a 140-day trading period after the enactment date of SEC Rule 15c2-11, OTC Markets Group outlined the following findings:
- 16.7% gain in value for OTCQX and OTCQB issuers compared to a 1% gain for Pink issuers.
- 21% gain in value for upgrades from Pink to OTCQX and OTCQB tiers compared to a 2.7% loss for downgrading from Pink Current to Pink Limited.
- A massive 23.7% approximate average value gap between the upgrades to premium tiers (OTCQX and OTCQB) and downgrades from Pink Current to Pink Limited.
- An almost threefold average decrease in relative trading volumes of the issuers that downgraded from Pink Current to Pink Limited.
- Spreads widened by 6% for downgrades from Pink Current to Pink Limited.
- Spreads tightened by 3% for upgrades from the Pink to OTCQX and OTCQB tiers.
Figure demonstrating key finding No. 2
The findings above summarize two broader themes: Upgrading from Pink tiers to Premium tiers not only resulted in valuation benefits to the securities in question but also to liquidity enhancements. Trading volume, the bid-ask spread and the number of market makers were all key areas of improvement.
Material Differences Between Premium OTCQX and OTCQB Markets And Pink Tiers
The report concludes that “the enactment of the amendment to SEC Rule 15c2-11 allows the OTC Markets to better fulfill their role as market operators entrusted with the delivery of the best quality information disclosures to the U.S. investment community. The paper reports strong evidence that investors and brokers have adapted positively and the price formation process in these markets has improved as reflected in value increases and enhanced liquidity. The value and liquidity gap between the OTCQX & OTCQB and the Pink tiers has increased. Pink issuers should upgrade to a premium tier.”
The new regulation recognizes the progress that OTC Markets Group has made in building transparency for the investment community over the last 15 years. Market tiers, first introduced in 2007, have set standards for quality of disclosure and helped make information easily accessible for investors.
OTC Markets Group continues to be the home for many of the world’s top securities, including adidas AG ADDYY, Grayscale Bitcoin Trust GBTC, Heineken N.V. HEINY, Air Canada ACDVF and BNP Paribas S.A. BNPQY to name a few.
Click here for the full report.
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