The small-cap equity market, which operates across listed and OTC venues, plays a vital role in the U.S. capital markets and economy.  Companies gain access to capital and investors are able to take a stake in venture stage firms. Even though small-cap equities trade both over-the-counter and on the national exchanges, there is a perception  that an exchange listing provides an air of legitimacy on a company. However, the truth is that investors and market professionals benefit from added due diligence when assessing and trading all small-cap stocks.

Looking at the numbers, just under 1/3 of exchange-listed stocks[1] have market caps below $500M. In the past 2 years, 134 securities currently listed on an exchange were previously quoted on the OTC markets, while 101 moved from an exchange to the OTC markets.

Stock promotion occurs in exchange-listed securities in a similar manner as with OTC securities

Due to the relatively low liquidity in small cap securities, stock promotion occurs in exchange-listed securities in a similar manner as with OTC securities. Since the beginning of 2018, OTC Markets has tracked the promotion of 123 listed securities. Of these securities, we find that, on average, a new exchange-listed security is actively promoted once every 2 days, and over $24.0 Billion of $volume worth of these securities was traded while the promotion was ongoing. Fraudulent stock promotion is not the same as quantitative research that can benefit a security, but rather a manipulative practice intended to artificially alter the price of securities. Investors often believe that these practices do not exist or occur on a national exchange, but our data clearly indicates otherwise.

What does this data tell us? Securities with market caps below $500M that are listed on an exchange behave in a similar manner as those stocks quoted OTC.  As such, the same scrutiny should be applied to the entire universe of small-cap securities when analyzing and considering investments in these stocks.

OTC Markets Group introduced a first of its kind compliance product

Recognizing its leadership role in the small-cap space, in late 2018 OTC Markets Group introduced a first of its kind compliance product designed to standardize the process for evaluating over 1,800 sub $500 million market cap equities listed on a national stock exchange.  This new product provides broker-dealers and compliance and risk management teams with an efficient, turnkey data set to enhance their due diligence process and establish a standardized framework to analyze securities across the listed and OTC equity small cap market. Fields such as Former Shell Status, Penny Stock Status, Serial Name Changes, most recent split information, and Promotion are found across our data file products. This provides end users with a more streamlined approach for evaluating the significant number of small cap listed securities. The file also provides comprehensive active and historical stock promotion data for small cap listed securities.

Small cap equity markets are the engine of innovation and growth for the global economy

Small cap equity markets are the engine of innovation and growth for the global economy. They also may offer investors access to an early stage investment in the next unicorn. Small cap equity markets need to foster this growth by using data to help participants and investors property identify both risk and opportunity. We believe that when people have access to data, they can discern the truth for themselves.

For more about the Small Cap Listed Compliance product as well as  OTC Markets Group’s suite of market data products, including connectivity information,  please visit https://www.otcmarkets.com/market-data/overview.

 

 

[1] This number is for equity securities only and does not include ETF’s.