A brief history of the OTC markets, beginning with stock trading in the middle ages and continuing to the NYSE, AMEX, the Pink Sheets, NASDAQ, OTCBB and OTC Markets Group. The presentation is a companion to the 5 WAVES LLC blog article, "A history of the OTC markets".

1. A history of the
over-the-counter
markets

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Page 2
Introduction:
The wild, wild west
Over-the-counter (OTC) markets
• Trading platform for stocks that don’t qualify for higher exchanges
(e.g., NASDAQ, NYSE)
• Reputation for risk, manipulation, illegal activity
This presentation will discuss the history of the OTC market.
It will provide some perspective on where it has been
and look at where it is today.

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Page 3
The middle ages
Trading stocks first began in Europe
• Ownership in any company, real or not
• Little or no regulation
• Fraud, deceit rampant
1300 1400 1500 1600 1700> >> >

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Beginning of the exchanges
in America
1792: First US exchange with listing requirements (to help prevent
fraud); later named the “New York Stock Exchange”
1842: The American Stock Exchange created
Both exchanges excluded companies that couldn’t afford fees
or meet listing requirements
1800 1815 1830 1845 1860> >> >
Source:
US Library of Congress
Stock Exchange, Buttonwood diorama
Museum of New York

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Page 5
Emergence of the over-the-
counter markets
1870s: Smaller companies, unlisted on exchanges, are traded
• Unlisted companies: couldn’t afford fees or didn’t meet listing
requirements
• Shares bought and sold in retail setting
• Certificates and cash traded, literally, “over-the-counter”
1860 1870 1880 1890 1900> >> >

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Babson, Elliott and the
“pink sheets”
Early 1900s: Roger Babson publishes circular with info on unlisted
companies and Arthur Elliott publishes price and volume info
1913: Babson and Elliott form the National Quotation Bureau (NQB)
and issue information on unlisted stocks
1930s: NQB prints info on pink sheets and delivers to brokerages
The “pink sheets” were unregulated for decades, and while it listed
many trustworthy, solid companies, fraud still abounded.
1910 1925 1940 1955 1970> >> >
Roger Babson

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Moving to legitimacy
1971: NASDAQ exchange is established; many pink sheet companies
become listed there
-- However, the smallest pink sheet companies still can’t qualify --
1990: SEC experiment - the OTC Bulletin Board (OTCBB)
Automated trading platform, managed by the National Association of
Securities Dealers (NASD, later called FINRA). Provided easy trading of
small / micro company stocks . . . it was hugely successful.
1970 1975 1980 1985 1990> >> >

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Page 8
OTC Markets
1997: OTCBB made permanent
1999: SEC requires companies trading on OTCBB to provide disclosures
(e.g., quarterly, annual reports) similar to those of exchange-listed
companies; those that don’t comply fall back to the pink sheets
~2008: FINRA announces divestment of OTCBB; companies on OTCBB
move to OTC Markets Group (descendant company of Babson and
Elliott’s NQB)
1990 1995 2000 2010 2015> >> >

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Page 9
Over-the-counter stocks today
OTC Markets has established trading “tiers” based on the size and
disclosure level of companies:
• OTCQX
stringent performance and
disclosure requirements; at this
writing, 448 securities are listed
here
• OTCQB
for SEC “reporting” companies;
many OTCBB stocks migrated
here; at this writing, 925
securities trade at this level
• Pink sheets
8,373 securities at this level
consisting of the following sub-
tiers:
• Current information:
provide current, periodic
information in accordance
with the International
Reporting Standard
• Yield sign / limited
information: not current in
their reporting; may have
some kind of “distress”
• Stop sign / no information:
companies that, for
whatever reason, do not
disclose information
publicly
• Caveat emptor: companies
that have been part of
unethical behavior

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A history of the over-the-counter markets
© 2016 | 5 WAVES LLC | 5waves.co
5wavesllc.blogspot.com