OTC Markets Group Grows, Despite Fewer Market Makers

OTC Markets Group, the primary supplier of quoting and trading technology to over-the-counter market makers, grew last year despite a decline in the number of dealers using its services.

The New York-based markets operator grossed $35 million in 2012, up 6 percent from $33 million the previous year. The company booked a net profit of $5.5 million, up 13 percent from $4.8 million the previous year.

“The year 2012 was one of continued growth for the company during a difficult economic period for the securities trading industry,” OTC Markets president and chief executive officer Cromwell Coulson said during the company’s quarterly earnings call.

Growth in revenues at OTC Markets was due to the company’s development of its OTCQX marketplace, which has the highest standards of its three markets. The company added 86 new issuers to the tier, bringing the total to 400. The increase expanded revenues in OTC Markets’ issuer services group by 22 percent to $9.8 million.

Revenues in issuer services have more than doubled in the past two years and are now poised to catch those from OTC Market’s trading services department. Behind the surge are efforts by OTC Markets in recent years to expand the number of ADRs quoted in the OTCQX marketplace.

Growth in OTCQX is slowing, however, company executives said during their quarterly call. The annual subscription renewal rate was only 87 percent in January 2013 versus 95 percent in January 2012. Much of the decline was due to a falloff in renewals by firms active in Canada’s troubled natural resources sector, OTC Markets executives said.

OTC Markets’ trading services division reported no growth in 2012. Revenues from a successful new service—QAP One statements—offset a decline in broker-dealer subscription revenues. Company executives attributed the decline in payments for trading and quoting services from dealers to a 14 percent drop in the number of dealers using its services.

According to the company, there are 130 market makers quoting on OTC Markets’ three marketplaces—OTCQX, OTCQB, and OTC Pink. On a recent day, only 90 reported trades. The drop in the number of dealers was due to low trading volume last year, as well as industry consolidation and financial problems at smaller, less automated broker-dealers.

“The automation of trading has resulted in a reduction in the number of broker-dealers and users,” Wendy Fraulo, chief financial officer, explained on the earnings call. “We expect that trend to continue.”

Dollar volume traded across all three of OTC Markets’ marketplaces declined by 41 percent last year to $135.6 billion. Over three-quarters of the total is derived from trading in ADRs and foreign ordinaries, according to the company.