“I Was a Frustrated Trader”
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R. Cromwell Coulson is President, CEO, and a Director of OTC Markets Group (OTCQX:OTCM)(NASDAQOTH: OTCM). In 1997, Cromwell led a group of investors in acquiring OTC Markets Group’s predecessor business, the National Quotation Bureau. Cromwell led the transformation of what was an opaque and inefficient market into a technology-driven Open, Transparent, and Connected marketplace platform. Currently, two-thirds of all US public companies trade on OTCQX, OTCQB, and OTC Pink – which combined have a market capitalization exceeding USD 13 trillion (more than twice the size of NASDAQ, and only a few trillion shy of the NYSE).
Nick Slepko: Today’s OTC is definitely not my father’s OTC. What happened?
Cromwell Coulson: We’ve transformed.
Twelve years ago, I was a frustrated trader. Mainly I bought deep-valued stocks that traded on exchanges and OTC. At the time, the Pink Sheets were a phone book that gave you a list of stocks and the phone numbers of the brokers that might be trading them. Then you got on the phone. I hated the trading process for securities that were quoted on the Pink Sheets because brokers only had to call three market-makers. If I was the fourth call in a stock, even if I was bidding three dollars, it would sometimes trade at two dollars. I just hated that the best prices were not easily available.
So, I bought the company that published the phone book with a group of investors and started the process of making things better. My viewpoint has always been how do you empower the intelligent investor by creating better informed and more efficient financial marketplaces – and that is what we have been spending our time doing. If you are a marketplace operator, then the investors are the beneficiaries, but you also work with two other groups. For the transactional experience, we work with our broker-dealer subscribers. For the company information experience, we work with the companies themselves.
Initially, we thought we were just going to make the phone book electronic. What happened was that we made the prices electronic and they became firm under FINRA rules. The regulation and the community of electronic broker-dealers then grew up around the price transparency. We provided the communication for them to trade electronically. The SEC saw we had grown into an important part of US markets, and felt they should fit us under their regulatory umbrella. As of the first half of this year, our trading system, OTC Link ATS, began operating as an SEC-registered and regulated alternative trading system.
Our alternative trading system has really improved the quality of trade executions broker-dealers provide for investors in non-exchange traded securities. Today, if you look at the broker-dealers listed on our website, they are the same major ones that are trading NYSE and NASDAQ securities. That quality of broker-dealers providing liquidity and execution services is a real win for investors.
We created an electronic trading system. We registered it as an alternative trading system with the SEC, so it’s a regulated mini-exchange. Then we segmented the companies based on the availability and quality of information, and for our highest tier we used financial standards and professional third party sponsorship to create a marketplace that has quality companies with freely accessible information, which are easily tradable through the broker of your choice.
Slepko: How does the investor fit into OTC Markets’ strategy?
Coulson: There are five essential elements that investors need to intelligently analyze, value, and trade securities: They need to be able to see prices. They need to be able to meet other buyers and sellers. They need to be able to analyze company information. They need a marketplace that reaches other investors. They need information about companies, management, and operations so they can trade with confidence – the trust factor and reputation verification.
These are the features we’ve been building our marketplaces around because the OTC market is different than an exchange market. In an exchange every company chooses to list, whereas OTC’s marketplaces serve broker-dealers that are trying to get the best prices for investors (their customers). So, on the trading side, we created an electronic platform which (1) made trading much more transparent and efficient, and (2) broker-dealers were able to change from a manual process to highly-automated electronic execution and liquidity providing business. As a result, all the large broker-dealers that trade NYSE and NASDAQ securities now all trade OTC securities on our OTCQX, OTCQB, and OTC Pink marketplaces. This has been really transformative for the investor experience and has closed the gap [with the US exchanges] in trading efficiency.
When investors trade Roche (OTCQX:RHHBY) (NASDAQOTH:RHHBY) which trades on our highest marketplace, OTCQX, through E-Trade (NASDAQ: ETFC) or other online brokers, there is now a real-time price. If the investor just wants to buy on the offer, they get an electronic execution back, they get best execution, they get market order protection. If an investor says, the market is USD 51.10 to USD 51.18, then I’m going to go bid USD 51.15. The broker-dealer automatically displays the limit order so the inside bid price moves from 51.10 to 51.15. There’s limit order display and limit order protection and that’s created an investor experience that is great on the trading side.
Slepko: From international major Nestle (OTCPink:NSRGY) to the ABA's top-ranked Oxford Bank (OTCQB:OXBC), what is it that OTC does well?
Coulson: There are two groups of securities that we serve really well. The first are smaller US companies, and that includes over six hundred community banks (which don’t really fit on an exchange). We often find that these companies have a high percentage of officer and director ownership.
The second group of securities that we serve well are international companies listed on a non-US exchange. What we’ve done – and what is kind of unbelievable – is that it is often cheaper to buy a Roche ADR [RHHBY on the OTCQX] through a US broker than to go through your broker and trade on the Swiss exchange [a Roche ordinary share is ROG on the SIX] with all the custody and currency exchange fees. We’ve created this great way to invest internationally, and now across our marketplaces [OTCQX, OTCQB and OTC Pink] we have over 1,500 ADRs, and we also have a whole bunch of cross-listed TSX F-shares [Canadian stocks]. So we are creating this incredibly efficient experience for investors to buy and sell international securities.
The ADR is such a great way to invest because it’s taxed like a US security, it’s priced like a US security, you get your dividends in US dollars, it’s held at the DTC, and you do it through your US broker. US brokers are the most efficient in the world, and the most low cost, plus around the world more and more companies are going public.
Slepko: How has OTC Markets Group changed since you took over in the late ‘90s?
Coulson: The big difference for us was that up until 2006, we didn’t really have a relationship with any of the companies traded on our marketplaces. Whether it was an international company or a small US company, in most cases, company information wasn’t readily available for US investors. We really started to work on giving investors easy access to information about companies – and information comes from different places. For OTCQX, if you are an international company, you have to post your disclosure in English on our website and that gets distributed through Bloomberg and is freely available to investors. Also now when companies post their disclosure, we then take that data and convert into an XBRL database. Roche’s financial statements and balance sheets now show up on Yahoo Finance – normalized into US dollars. Investors can now see all this data in the places that they analyze, value, and trade securities.
For international companies with OTCQX we are doing two things. One, we are helping them provide efficient access through US brokers. Two, we are normalizing their information into the US. OTCQX is a relatively new invention and it adds some things – like helping companies become blue sky-compliant to the majority of the US population. Blue sky compliance is important because if you go to an investment advisor, broker, or research analyst and ask for advice about a security, it needs to be blue sky’d in that state for an investment professional to give you advice. OTC Markets is unlocking more information for investors from the advisory side by helping companies demonstrate their compliance with blue sky.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!