What is OTC Markets?
OTC Markets Group Inc. (OTCQX: OTCM) is a US financial services firm that operates the OTCQX® Best Market, the OTCQB® Venture Market and the Pink® Open Market of nearly 12,000 U.S. and global securities. Through their regulated OTC Link® Alternative Trading Systems, OTC Markets connects a diverse network of broker-dealers that provide liquidity and execution services.
OTCQX Best Market
The OTCQX Best Market is OTC Markets Group's premier market for established, investor-focused U.S. and international companies. To be eligible, international companies must meet numerous strict criteria that demonstrates compliance with U.S. securities laws, be current in their disclosure, and have a professional third-party sponsor introduction, which was assessed by OTC Markets. They range from securities of large, global issuers like Adidas, Heineken and Roche to small and growing US and international companies. Currently, there are over 600 companies on the OTCQX market. Trade volumes in the QX market are significantly higher per security than lower tiered markets such as QB and Pink. Trade data for the month of November 2021 can be seen below.
Source: OTC Markets Group
Foreign Ordinary Shares
Foreign ordinary shares are common shares of a foreign company listed on a foreign exchange that trade in the U.S. They can be identified as foreign ordinary shares on OTC Markets as their ticker ends with an F. For example, Magnis Energy Technologies Ltd which trades on the Australian Stock Exchange under ticker MNS, trades on the OTCQX market under ticker MNSEF. The foreign ordinaries are priced and settled in U.S. dollars in US trading hours via the OTC market, providing U.S. investors with access international companies directly. To learn more about foreign ordinary shares traded on OTC Markets, we encourage investors to watch the YouTube Video hosted by OTC Markets . Understand How Your Ordinary Shares Trade in the US and Why it is Important - YouTube
How does OTC Markets differ from an Exchange?
OTC markets is a broker-dealer market where market makers who provide liquidity by quoting bid and offer prices on securities and all trades are executed via them. As a result, they are commonly referred to as quote-driven markets. The image below illustrates both live bid and ask prices quoted by different market makers like Citadel Securities, MCAP, Canaccord Genuity, Virtu Financial etc for traded securities of Australian based Magnis Energy Technologies Ltd (MNSEF). Investors can find Real-Time Level 2 quotes for the also shows real-time quotes and volumes here. MNSEF - Magnis Energy Technologies Ltd. | Quote | OTC Markets
Listed exchanges like the Nasdaq, ASX, TSX etc are known as order-driven markets, meaning that orders of both buyers and sellers are visible to all market participants. Regardless, the OTC market allows foreign companies listed on their home exchange to effectively extend its trading hours on the OTC Market providing easier access for US investors to trade in US hours quoted in US Dollars.
Benefits of OTCQX for International companies
The OTCQX Best Market provides value and convenience to U.S. investors, brokers and institutions. A study conducted by Oxford Metrica, a strategic advisory firm, evaluated the benefits afforded to international companies joining OTCQX with a primary listing outside the US. It was found that after firms joined OTCQX, there were significant increases in liquidity, lower bid-ask spreads and an increase in the number of broker dealers per security. OTCQX provided considerable benefits without the need to incur the significant additional cost associated with listing on an established US exchange. The liquidity impact is measured by the change in the average daily Trading Volume on the local market and has been assessed for 180 trading days after joining the OTCQX Market.
Key results from their study are as follows:
- US ownership increased 7-fold after joining OTCQX
- Trading volume by number of shares increased 28% within the home market
By Size
- Smaller firms – 43%
- Larger firms – 12%
By Region
- Canada - 35%
- Europe - 12%
- Asia-Pacific - 30%
3. Trading volume by number of shares increased 37% within the OTC market.
The charts below are specific to smaller firms and firms in the Asia Pacific region which is relevant for investors in companies such as Magnis Energy Technologies. There are markedly increased volumes flowing through to the local market. Interestingly, there is a notable period before there is a meaningful pick up in trading volumes in the home market, suggesting it takes time for the company to create awareness amongst US investors.
Source: The OTCQX Advantage: Benefits for international Companies: Oxford Metrica
Conclusion
Access to several high growth international companies for US investors, even in today’s global markets is not as easy as one would think. This is particularly the case for the extremely large US retail investor base where trading outside the US is burdensome, expensive and complex. OTC Markets via their large broker-dealer network allow US investors to participate in such international companies directly thus bypassing the need to trade on the foreign exchange, in non-US hours and in a foreign currency. This can be very lucrative for international companies looking to deepen their shareholder base by accessing the large pool of US investors.
On Tuesday 23rd November 2021, Magnis Energy Technologies officially launched on the OTCQX® Best Market in the US under the ticker MNSEF providing easier access to investors in the largest investment market in the world. With Magnis’ strategic investments in homegrown US battery technology and a Gigawatt scale Lithium-ion battery plant, OTCQX traded MNSEF provides US investors the only option available currently to invest in such opportunities.
