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May 31, 2003

An OTC 101

By Peter Chapman

If the U.S. stock market was a cherry pie, the over-the-counter market would be one of five slices. There's the New York Stock Exchange; the American Stock Exchange; the regional exchanges; Nasdaq; and the OTC.

Technically Nasdaq is part of the OTC, but is generally considered a separate and distinct market - a de facto stock exchange. By most accounts, the OTC is split between two quoting venues: Nasdaq's OTCBB and the Pink Sheets.

The OTCBB has the better reputation of the two. That's because of its association with Nasdaq and its modest requirement that companies file with the Securities and Exchange Commission. Pink Sheets has no standards.

The OTCBB is sponsored and regulated by the NASD and run by Nasdaq. The Pink Sheets is a private company previously known as the National Quotation Bureau. The entire over-the-counter arena is littered with risky, financially dubious issues. Many trade in fractions of a cent. Both venues operate inter-dealer quotation systems. Pink Sheets also operates an order delivery system. Neither group "lists" securities as do the exchanges and Nasdaq. They require market makers to vouch for the securities they trade.

The combined volume of the two OTC venues averages about 1.3 billion shares per day. That compares to Nasdaq's one billion shares. Dollar volume, though, is a different story. Combined, the OTCBB and Pink Sheets record $193 million per day, just one percent of Nasdaq's $16 billion daily. The large number of penny stocks traded over-the-counter accounts for the difference.