Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.
Lesson Stocks 201
Risks of trading OTC securities
Understand the risks of trading OTC stocks.
Important note: Effective September 28, 2021, an amendment to SEC Rule 15c2-11, subject to certain exemptions, restricts broker dealers from publishing quotations on the U.S. OTC market for companies that have not made the required financial and company information available to investors and regulators. This will impact certain OTC stocks classified as Pink No Information, Grey Market, or Expert Market. As of September 28, it may be much more difficult to trade these stocks, as quotes and market liquidity may be limited. This may limit your ability to open or close positions in these stocks and you may not be able to trade at a price that you believe reflects the stock’s current value. For more information, see the section below.
Important note: As of Tuesday Oct 24, 2023 certain OTC securities are no longer able to be traded with GTD/GTC order durations. If you enter a GTC/GTD order for a security that is affected, you will receive an order rejected notification. Please try again with an order duration of DAY.
Companies that trade on the OTC/Pink markets are typically smaller, less liquid organizations that are unable to fulfill the listing requirements of exchanges like the TSX, NYSE or NASDAQ. We've listed below some of the common risks associated with trading OTC securities
- Non-DTC eligible:
Securities that trade on the OTC/Pinks markets face the risk of becoming non-DTC eligible, or in other words, lose their electronic trading eligibility.
You may still be able to trade non-DTC securities, but it would have to be done manually through our Trade Desk. Additional fees apply.
OTC-listed securities ending with the letter F and are typically five characters long face the highest risk of becoming non-DTC eligible.
- Route/Order rejections:
OTC/Pink symbols may be rejected at any time by our U.S executing brokers for a variety of reasons.
If you receive a reject you have the option to adjust the routing of your order from AUTO to MNGD or other available routes.
If changing the routing is not successful, you may call the Trade Desk at 1.866.980.9590 to review if any other options exist.
- Security delisting:
Takes place when companies go bankrupt, cease operations, or when they’re unable to meet the listing requirements.
When a security is delisted, it becomes untradeable and investors could lose their entire investment.
- Trading halt:
Stock exchanges have the authority to suspend (halt) trading of a particular security for regulatory or non-regulatory reasons at any time.
- Cease Trade Orders (CTOs):
Canadian Securities regulators may issue CTOs against selected securities for failing to meet their standard listing or trading requirements. Some securities that trade on the OTC/Pink markets also trade in Canada.
The U.S. Securities and Exchange Commission (SEC) has made an update to Exchange Act Rule 15c2-11 which will become effective on September 28, 2021.
The rule amendment, subject to certain exemptions, restricts broker dealers from publishing quotations on the U.S. OTC Market for companies that have not made the required financial and company information available to investors and regulators.
This will impact certain OTC securities classified as Pink No Information, Grey Market, or Expert Market.
As a result, after September 28, 2021 it may be much more difficult to trade these securities, as quotes and market liquidity may be limited.
This may limit your ability to open (buy) or close (sell) positions in these securities and you may not be able to trade at a price that you believe reflects the security’s current market value.
Why did the SEC change this rule?
According to guidance released last year, the SEC has decided to implement stricter reporting requirements for OTC issuers. Issuers that fail to meet these stricter requirements will essentially be “restricted” from being quoted by brokers with the intent to protect retail investors from fraud and illegitimate market activity.
What are the different “tiers” of the OTC Markets?
The OTC markets are organized into the following categories:
| Market | Description |
|---|---|
| OTCQX | Securities on OTCQX have to meet stricter qualification criteria, and are subject to more regulations. “Penny stocks”, shell companies, and companies in bankruptcy cannot qualify for OTCQX. Learn more about OTCQX Markets here. |
| OTCQB | Sometimes referred to as “OTC Venture”, securities on these markets do not meet the stricter requirements of OTCQX, but still must meet minimum reporting standards, pass liquidity tests, and undergo annual verifications. Learn more about OTCQB Markets here. |
| Pink Current | Pink securities generally have no reporting requirements, but securities in the pink current category voluntarily disclose financial reports and meet other disclosures. To qualify for pink current, issuers of securities must provide at least 2 years of annual reports, and continue to file regular quarterly reports among other requirements. You can read more about the issuer requirements for Pink Current here. |
| Pink Limited | Pink securities generally have no reporting requirements. Pink limited securities may be companies in bankruptcy or have limited financial information available. These issuers may also be unwilling to meet the OTC Pink basic disclosure guidelines. |
| Pink No information | Pink no information securities may not be able, or willing to provide any sort of financial reporting or company disclosure either to a regulator, an exchange, or OTC markets group. |
| Grey Market | Securities that are not in any of the above categories are considered to be in the “grey market”. The grey market is an opaque market where securities are not publicly quoted by broker dealers. The only information available publicly for these securities is the last traded date, and sometimes the price. |
| Expert Market | The Expert Market is a market tier that serves broker-dealer pricing and best execution needs in securities that are restricted from public quoting or trading. Securities can be on the Expert Market for reasons such as lack of issuer disclosure , security attributes, and investor accreditation. Quotations are restricted from public viewing. You can read more about the Expert Market on the OTC Markets website here. |
Which securities are affected?
Securities currently trading as Pink No Information, Grey Market, or Expert Market are affected by the SEC rule amendment.
The list of affected securities changes on an ongoing basis as companies become compliant or non-compliant with the financial and company information that is required to be made available to investors and regulators.
There are 2 ways to check if any of your current OTC holdings are affected:
- Using the OTC Markets’ quote lookup tool found on their homepage, search for the ticker symbol.
- Alternatively, you can also use the OTC Markets’ screener to search through the different categories/tiers.
- Make sure to check the Market the security trades on.
- Use the Questrade Edge Web or Desktop trading platforms, and log in to your account.
- In the Description and beside the name of the security, you’ll see which category/tier of OTC it falls under.
- QX = OTCQX
- QB = OTCQB
- PC = Pink Current
- PL = Pink Limited information
- PN = Pink No information
- GM = Grey Market
- CE = Expert Market
- In the Description and beside the name of the security, you’ll see which category/tier of OTC it falls under.
What if I’m currently holding a security affected by this rule change?
Please review your holdings of securities that are currently Pink No Information, Grey Market, or Expert Market and determine if you wish to continue to hold these securities.
By continuing to hold positions in affected securities, you may encounter a major lack of market data information and/or liquidity.
You may not be able to close your position(s) quickly or at a price(s) that you believe reflects the current value.
Can I transfer these securities to another broker?
Depending on the receiving institution, you may or may not be able to transfer these securities into accounts at other brokers.
If you choose to transfer these securities, please confirm with the receiving broker if they are able to hold, quote, and trade these securities.
This regulatory change may impact every broker who offers U.S OTC security trading.
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