The Basics: What Is the Over-the-Counter Market?

by John Deysher

"Over-the-counter," or OTC, is a term loosely applied to securities that aren't listed on an organized exchange—such as the New York, American, Midwest, Boston, Pacific or Philadelphia exchange. OTC securities are traded through at least two, but often numerous "market makers" who maintain bids and offers for the securities they trade. Securities that trade on a listed exchange are quoted by a solo "specialist" who is charged with maintaining orderly trading in a security.

Over-the-counter trading traces its roots to the early 1900s when small firms that didn't qualify for an exchange listing were traded informally among brokers. The term refers to the actual countertops used by dealers to handle transactions. Up until about 30 years ago, volume on the exchanges dwarfed the OTC market. But in the mid-1970s, the OTC market began to pick up steam. Since then, the explosion of initial public offerings and subsequent OTC listings make it the biggest market in the world.

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The OTC market consists of four basic units, each with different qualification standards:

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