Information > Financial Terms > This page

Over-the-Counter Market
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

The largest of all securities markets because of the large quantities of debt securities traded in it.  U.S. government securities (which alone make up the biggest of all sectoral markets), issues of states, countries and municipalities and most corporate bonds are traded over the counter, by dealers making markets in such securities.  The total value of debt instruments traded in this fashion in a year in the U.S. alone has been estimated at $90-$100 trillion, with U.S. government securities the overwhelming part of the total.

Dealers in this market are subject to monitoring and on-site inspection and examination by the National Association of Securities Dealers, Inc.  The NASD is the self-regulatory organization for the over-the-counter market, operating under the oversight of the Securities and Exchange Commission.  Congress, by the Securities Acts Amendments of 1985, assigned the NASD the responsibility for examining dealers in municipal securities for their compliance with federal securities laws and the rules of the Municipal Securities Rule-making Board.  In 1986, Congress passed the Government Securities Act, which gave the NASD the further responsibility of monitoring, inspecting and examining firms dealing in government securities.

Many corporate bonds are listed for trading on the New York Exchange.  However, it is generally understood that the exchange trading volume in such bonds is a minuscule percentage of that done by over-the-counter bond dealers.

Equity issues listed on stock exchanges are traded over-the-counter in the so-called third market.  While exchange member firms are forbidden by exchange rules from trading lists stocks off the floors of the exchanges, firms not belonging to the exchanges are under no such prohibition.  A number of non-exchange member firms specialize in off-board block transactions.

There are also an estimated 11,000 other equity securities traded over-the-counter, issues that generally are too small to qualify for inclusion in the computerized NASDAQ market or for listing on an exchange.  These issues continue to be traded with the aid of the "pink sheets," daily bulletins that indicate which firms make markets in these stocks but seldom quote bid and asked prices.  The aggregate share and dollar volume in these securities is very small, compared to the NASDAQ.

The SEC has recently become concerned about the regulation of this non-NASDAQ market, and has asked the NASD to become more active in it.  Accordingly, the NASD is requesting dealers in non-NASDAQ securities to report their trading activity to the NASD by electronic means.  This permits the market surveillance department of the NASD to capture non-NASDAQ trade data and to analyze them for possible instances of wrongdoing.  The NASD has also built an electronic bulletin board display service, which makes the non-NASDAQ trade data available to registered dealers.  This provides the dealers and their customers with better information on the non-NASDAQ market, and introduces into it some of the orderliness that the NASD's automated NASDAQ system provides to the NASDAQ market.


COLLINS, J.O.  The Individual Investor's Guide to OTC Stocks, 1989.
Moody's Handbook of O-T-C Stocks.  Quarterly.
Moody's otc Industrial Manual.  Annual, with weekly supplements.
Moody's OTC Unlisted Manual.  Annual, with supplements.
NASD Manual.  Commerce Clearing House, Chicago , IL .  Looseleaf.
National Association of Securities Dealers Manual.  Commerce Clearing House, Chicago , IL .  Annual.
OTC Chart Manual.  Standard and Poor's Corp., New York , NY .  Bimonthly.
OTC Penny Stock Digest.  C.S. Metos, Publisher.  Annual.
Over-the-Counter Securities Handbook.  Review Publishing Co. Annual.  

Back to Information