By John McCrank
NEW YORK, Oct 8 (Reuters) – Wall Street’s industry-funded
watchdog plans to shutter its antiquated, quarter-century old
trading system for penny stocks, while increasing its oversight
of over-the-counter (OTC) securities traded elsewhere, according
to a regulatory filing.
In the early 1990s, if retail investors or other market
participants wanted to see a price quote for an unlisted stock,
the Financial Industry Regulatory Authority’s OTC Bulletin Board
(OTCBB) system, which was started for just that purpose, was the
place to look. But over the years private firms have enabled
electronic trading in OTC stocks, and the OTCBB, which brokers
still have to pick up a phone to trade through, has seen its
market share slide to well under 1 percent.
Now FINRA aims to close the OTCBB, while tightening
regulations around data collection from, and fair access to, OTC
marketplaces, according to a document posted on the U.S.
Securities and Exchange Commission website on Wednesday.
There are nearly 10,000 U.S. and global quoted OTC stocks.
These securities are not listed on any national stock exchange
and are often small companies that do not meet exchange listing
requirements, though there are larger OTC-quoted entities as
well, such as the government-controlled mortgage finance
companies, Fannie Mae and Freddie Mac.
There are so few market makers quoting bids and offers on
OTCBB, that FINRA is concerned that investors looking to the
inter-dealer quotation system for pricing information could be
harmed, according to the filing.
“FINRA believes that the remaining OTCBB information being
disseminated to investors is so incomplete as to be potentially
misleading with respect to the current pricing in these
securities,” it said.
FINRA also proposed in the filing that OTC marketplaces
grant open access to their systems and that they be required to
report each attributed quotation displayed on their systems by a
broker-dealer, to the regulator. Currently, the brokers have to
report the quotes.
OTC Markets Group Inc, which is now the dominant OTC
marketplace, said it supports FINRA’s decision to get out of the
trading business, and to boost regulatory requirements of market
operators, which for the most part OTC Markets already complies
with.
“FINRA shouldn’t operate a system that nobody uses. What
they should be is our regulator,” Cromwell Coulson, chief
executive officer of OTC Markets, said in an interview.
FINRA, which is the primary regulator of broker-dealer
trading on most national securities exchanges, said it would
continue to offer centralized last sale transaction reporting
through the FINRA OTC Reporting Facility.
It added that if the availability of quality OTC quotation
information to investors were to significantly decline, the
regulator would consider getting back into the inter-dealer
quotation system business. These differ from stock markets in
that they do not match buy and sell orders, but rather connect
brokers and provide pricing data.
(Reporting by John McCrank; Editing by Lisa Shumaker)