OTC Market and Nasdaq – Series 7 Exam

🧾 OTC Market and Nasdaq – Series 7 Exam
📘 Key Points You Must Know About the Over-the-Counter Market and Nasdaq for the Series 7

The Over-the-Counter (OTC) Market and the Nasdaq Stock Market are essential topics on the Series 7 exam, especially in understanding how securities are traded off traditional exchanges like the NYSE. Here’s a clean, focused summary to prepare you for OTC- and Nasdaq-related questions.

🎯 1. What Is the OTC Market?

• Definition:
  The OTC market is a decentralized market where securities are traded directly between dealers and investors, rather than on a centralized exchange.
• How It Works:
  • Dealers (market makers) quote prices at which they are willing to buy (bid) and sell (ask) securities.
  • Negotiations happen over computer networks or by phone.
  • No physical trading floor.
• Securities Traded OTC:
  • Stocks not listed on major exchanges
  • Corporate bonds
  • Municipal bonds
  • U.S. government securities
  • Derivatives (some)
• OTC Bulletin Board (OTCBB):
  • Lists smaller companies that don’t meet exchange listing standards.
  • Requires current SEC reporting.
• Pink Market (formerly “Pink Sheets”):
  • Lists very small or distressed companies.
  • Minimal reporting requirements; buyer beware.

🎯 2. What Is the Nasdaq?

• Definition:
  Nasdaq (National Association of Securities Dealers Automated Quotations) is the largest electronic stock market in the U.S. It operates as a dealer market, not an auction market like the NYSE.
• Key Features:
  • Multiple market makers quote prices.
  • Fully electronic, no trading floor.
  • Known for technology and growth companies.
  • Listing standards are strict (financial strength, corporate governance, minimum share price).
• Nasdaq Market Tiers:
  1. Nasdaq Global Select Market (highest standards)
  2. Nasdaq Global Market
  3. Nasdaq Capital Market (smaller companies)

🎯 3. Key Differences: OTC vs Nasdaq

🎯 4. How Securities Are Quoted in OTC and Nasdaq

• Bid-Ask Spread:
  • Bid = price at which a dealer will buy.
  • Ask (or offer) = price at which a dealer will sell.
• Markup/Markdown:
  • Dealers make money on the spread between buying and selling prices.
  • When selling to a customer, a markup is added.
  • When buying from a customer, a markdown is subtracted.
• Nasdaq Quotes:
  • Firm Quotes: A market maker must honor their displayed bid/ask prices (subject to small permitted variations).
  • Subject Quotes: Rarely used on Nasdaq; means the price is negotiable.

🎯 5. Important Series 7 Exam Points

• Nasdaq is a negotiated dealer market, not an auction market like the NYSE.
• Multiple market makers provide liquidity on Nasdaq.
• OTC transactions involve negotiation between broker-dealers (not customer-to-customer).
• Markups and markdowns apply in principal transactions in the OTC market.
• The 5% Policy (a FINRA guideline) applies to markups, markdowns, and commissions — but it’s a guideline, not a rule.
• Nasdaq Level 1, Level 2, and Level 3 services provide different depths of market data for traders.

🚀 Summary for the Exam

• OTC = decentralized, dealer-driven, includes Pink Sheets and OTCBB.
• Nasdaq = electronic dealer market with strict listing standards and real-time trade execution.
• Understand quotes, spreads, markups/markdowns, and differences in regulation.
• Always watch for wording: auction market = NYSE, negotiated market = Nasdaq/OTC.

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