July 22, 2014
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Investor Alert: Differences Between OTCBB and Nasdaq

The OTC Bulletin Board (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities. An OTC equity security generally is any equity that is not listed or traded on Nasdaq or a national securities exchange.

It is important for investors to understand the following differences between the OTCBB and the Nasdaq Stock Market.

Issuer Differences

  • The Nasdaq Stock Market has rigorous listing standards to ensure the high quality of its issuers. The only requirement for inclusion in the OTCBB is that an issuer be current in required periodic filings with the Securities and Exchange Commission (SEC) or other appropriate federal regulatory authority.
  • There is no business relationship between the NASD/OTCBB and any OTCBB issuer. In the case of the OTCBB, it is the market maker who chooses to quote a security on the system, files the application, is obligated to comply with Rule 15c2-111 and pays a fee. Consequently, the NASD does not have regulatory authority over any OTCBB issuer.
Investor Protection

The following investor protection rules, which apply to the Nasdaq market, do not currently apply to the OTCBB:

Limit Order Protection (commonly referred to as Manning) - Limit Order Protection rules prohibit NASD member firms from trading ahead of customer limit orders in Nasdaq securities.

Limit Order Display - The Limit Order Display Rule requires a market maker that receives a customer limit order priced at or better than its current quote and does not immediately execute the order, to display the order to the entire marketplace. Alternatively, the Market Maker can choose to send the order to another Market Maker or ECN for display.

The following are investor protection measures that apply to the OTC market:

Penny Stock Rules - address sales-practice abuses and manipulation in penny stocks2 by requiring broker/dealers, prior to effecting a customer transaction in a penny stock, to approve the customer's account for transaction in penny stocks and to provide investors with material market and other information before effecting a transaction in a penny stock.

Risk Disclosure - SEC Rules require broker/dealers to receive written acknowledgement from a customer that the customer has received a Risk Disclosure Document that defines the term penny stock and identifies certain risks associated with investing in penny stocks.

The following are investor protection measures that apply to both the Nasdaq and OTC markets:

Best Execution Rule - requires broker/dealers to exercise "reasonable diligence" in obtaining the best possible price for their customers under prevailing market conditions. For OTC securities, this includes obtaining quotations from a minimum of three dealers, or all dealers if there are fewer than three.

Firm Quote Rule - prohibits broker/dealers from making an offer to buy or sell any security at a stated price unless the broker/dealer is prepared to purchase or sell at such price and under such conditions as are specified at the time of the offer. Pursuant to this, every broker/dealer has an obligation to identify accurately the nature of its quotations when they are provided to others and ensure that it is sufficiently staffed to be able to respond to inquiries during their normal business hours.

Market Differences

While The Nasdaq Stock Market is fully automated with multiple automatic execution and order delivery systems, such as SOES and SelectNet, OTCBB transactions are conducted almost entirely manually. Because there are no automated systems for negotiating trades on the OTCBB, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders.

Investors should be particularly aware of this situation when placing market orders - an order to buy or sell a specific number of shares at the current market price. It is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and getting an execution. When this happens, an investor's order may be filled at a price that is much different than he/she expected.


  1. SEC Rule 15c2-11 states the responsibility of a broker/dealer to obtain and keep in its files certain information about an issuer before initiating a quote for the issuer.
  2. SEC Rule 3a51-1 provides a formal definition of a "penny stock". Among the criteria necessary to be classified as a penny stock is a share price of less than five dollars. Refer to Rule 3a51-1 for a complete definition of this term.

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