The National Association of Securities Dealers, Inc. (NASD®) Board has approved a pilot program that will provide protection to investors who place limit orders for some OTC Bulletin Board® (OTCBB) securities. If approved by the Securities and Exchange Commission (SEC), the program will require Market Makers in a select group of OTCBB securities to execute customer limit orders before trading for their own accounts.
Under the new program, Market Makers will be prohibited from executing proprietary trades at prices superior or equal to a customer's limit order without providing contemporaneous execution of the customer's order. Contemporaneous is defined as "within a reasonable time frame, but not to exceed five minutes." This definition takes into consideration the fact that, without an automated means of execution, Market Makers in OTCBB securities must execute those orders manually.
"Since the introduction of the Internet as a mainstream marketing communications tool for small issuers and innovative brokers, investor participation in the OTC equity market has grown dramatically," said J. Patrick Campbell, chief operating officer of Nasdaq. "We believe that these new investor protection provisions will greatly benefit the OTCBB market."
If approved by the SEC, the 12-month "Limit Order Protection Pilot" program will phase in 300 OTCBB securities over a period of several weeks. The securities selected to participate in the pilot will be chosen based on a price/volume liquidity measure. The limited pilot program will allow the NASD to track the trading patterns of the pilot securities to determine what, if any, effect the OTCBB limit order protection rule has on liquidity, price, and immediacy of execution before establishing a permanent rule.
In the last four years, the OTCBB has experienced growth of 106% in Market Maker positions, 687% in average daily share volume, and 96% in average daily dollar volume.