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Wall St watchdog to shut penny-stock market, boost OTC oversight

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Wall Street's industry-funded watchdog plans to shutter its antiquated, quarter-century old trading system for penny stocks, while increasing its oversight of over-the-counter (OTC) securities traded elsewhere, according to a regulatory filing - PHOTO: REUTERS

[NEW YORK] Wall Street's industry-funded watchdog plans to shutter its antiquated, quarter-century old trading system for penny stocks, while increasing its oversight of over-the-counter (OTC) securities traded elsewhere, according to a regulatory filing.

In the early 1990s, if retail investors or other market participants wanted to see a price quote for an unlisted stock, the Financial Industry Regulatory Authority's OTC Bulletin Board (OTCBB) system, which was started for just that purpose, was the place to look. But over the years private firms have enabled electronic trading in OTC stocks, and the OTCBB, which brokers still have to pick up a phone to trade through, has seen its market share slide to well under 1 per cent.

Now FINRA aims to close the OTCBB, while tightening regulations around data collection from, and fair access to, OTC marketplaces, according to a document posted on the US Securities and Exchange Commission website on Wednesday.

There are nearly 10,000 US and global quoted OTC stocks. These securities are not listed on any national stock exchange and are often small companies that do not meet exchange listing requirements, though there are larger OTC-quoted entities as well, such as the government-controlled mortgage finance companies, Fannie Mae and Freddie Mac.

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There are so few market makers quoting bids and offers on OTCBB, that FINRA is concerned that investors looking to the inter-dealer quotation system for pricing information could be harmed, according to the filing. "FINRA believes that the remaining OTCBB information being disseminated to investors is so incomplete as to be potentially misleading with respect to the current pricing in these securities," it said.

FINRA also proposed in the filing that OTC marketplaces grant open access to their systems and that they be required to report each attributed quotation displayed on their systems by a broker-dealer, to the regulator. Currently, the brokers have to report the quotes.

OTC Markets Group Inc, which is now the dominant OTC marketplace, said it supports FINRA's decision to get out of the trading business, and to boost regulatory requirements of market operators, which for the most part OTC Markets already complies with. "FINRA shouldn't operate a system that nobody uses. What they should be is our regulator," Cromwell Coulson, chief executive officer of OTC Markets, said in an interview.

FINRA, which is the primary regulator of broker-dealer trading on most national securities exchanges, said it would continue to offer centralised last sale transaction reporting through the FINRA OTC Reporting Facility.

It added that if the availability of quality OTC quotation information to investors were to significantly decline, the regulator would consider getting back into the inter-dealer quotation system business. These differ from stock markets in that they do not match buy and sell orders, but rather connect brokers and provide pricing data. - Reuters

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