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For companies to list on the classic equity market they must meet strict requirements around size, trading volume & consistent SEC filings. They must also pay exchanges hefty annual listing fees. If companies don't comply, they get delisted.
Where do delisted companies go? The OTC market, the land of penny stocks & Pink Sheets. OTC volumes are *much* smaller than the lit exchanges with ~$3 trillion in annual notional traded per year. There are more companies listed OTC than any other major exchange:pic.twitter.com/k8tdWMwNkf
The characteristics of much these OTC firms mirror the Wild West nature of the crypto market. Median Market Cap = ~$16 million Average Listing Period = ~9 years Average Total Returns = negative Average Volatility = extremely high
Liquidity in the OTC market is incredibly thin. A stunning 25% of OTC equities see no volume on 95% of trading days. Only the top 5-10% of OTC names see serious volume on a daily basis.
How does liquidity form in the OTC market? There is no central exchange for OTC trading. A network of broker dealers execute trades bilaterally & post quotes on OTC Link ATS. Think of OTC Link ATS as a pricing hub, not a true trading hub.pic.twitter.com/MysaUrtguW
There are no IPOs in the OTC market - trading for a security begins when brokers decide to quote prices for it. This is another similarity with the crypto market - DeFi exchanges don't "list" new coins, trading begins when users decide to make a market.
After COVID retail risk appetite exploded across all accessible markets, and OTC stocks were no exception. 2021 has seen volumes surge by 5x-10x inline with the options & crypto bonanza. https://www.bloomberg.com/news/articles/2021-01-14/one-trillion-off-exchange-shares-traded-is-latest-froth-marker …
Because no one talks about the OTC market, no one talks about its only legitimate exchange - OTC Markets Group. OTCM has connected this large network of brokers & illiquid stocks together for decades. They'll be the topic of my next paid post.https://frontmonth.substack.com/
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