NYSE Has the Bell, But OTC Has the Mojo

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R. Cromwell Coulson is President, CEO, and a Director of OTC Markets Group (OTCQX:OTCM)(NASDAQOTH: OTCM)[traded on OTCQX] which operates marketplaces for securities with a current combined market capitalization exceeding USD 13 trillion (more than twice the size of NASDAQ, and only a few trillion shy of the NYSE).

[continued from OTC Offers Chance for Redemption – And Asks Motleys, “What the Fool?”]

Nick Slepko:  What’s the difference between the US exchanges and the OTC marketplaces?

Cromwell Coulson:  Fundamentally, when international companies cross-list their companies on NYSE (NYSE: NYX) or NASDAQ (NASDAQ: NDAQ), they are making a statement that they are a global company, they want global investors, that they are investor friendly, that they are focused on providing the best market for their investors, and that they are confident in the quality of their disclosure.

You can talk about being either an exchange or a marketplace, but in reality both are bringing together the pricing, the transparency, the visibility, the liquidity, the valuation, the capital, and the confidence where companies can clearly convey their brand to consumers and reputation to investors.

There are all these great local and global securities out there for intelligent investors, and we are going to make it easier for you to trade them through the broker of your choice.  For the better, more engaged companies we are going to have a qualifications process with high financial standards and third party sponsorship.  It used to be that the negative of off-exchange trading was that you could not trust any of these companies.  With OTCQX we have been focusing on building confidence and facilitating the trust factor, and this is exciting because if we can create an investor experience that transactionally and informationally is similar to one they get with NYSE or NASDAQ securities, then that is a huge win.  And regardless, our market will become better informed and more efficient.

Our goal is to be the place where thousands of ADRs and ordinary shares trade.  If you want to trade an international security outside your home market, we want to be your first stop for your broker. 

For the most part, the biggest value for larger US companies being on NYSE or NASDAQ is that you are going to be in an index.  These billion-plus market cap companies get a lot of index investors that have to buy just because your stock is included in an index.  For international companies they get the index investors from their home market primary listing, but they are not going to be put in the S&P 500.  So, they don’t really get a big pop of new index investors if they do an ADR on an exchange unless they move their primary listing to the US.  They are instead using the ADR to provide information and access to the alpha investors, the stock pickers, the fundamental investors that put global securities into their US-managed, US-dollar accounts.

Whether you are an international company or a smaller US company, you want to build your secondary market around these intelligent investors looking for alpha.  What we do is provide information and communications solutions to create better informed and more efficient trading.  We empower the intelligent investor – that’s our focus.  How can we increase information (the quantity and the quality), so that an investor can do their own analysis and decide what something is worth, whether it is interesting, and then be able to trade efficiently through any broker.  So far we’ve made it possible to trade ADRs through any broker in theUS, and that’s our advantage. 

Slepko:  While researching depositary receipts for a recent series, Julio Lugo, the index guru at Bank of New York Mellon (NYSE: BK) commented, “I have to give great respect to Cromwell Coulson and the other folks over at OTC Markets because they have really stepped up the amount of transparency, the amount of pricing that they make available, the daily volumes, knowing of the market makers and their participation in the ADRs and domestics as well.”  BNY Mellon dominates the depositary banking business with 62% of all DRs in the world.  More than twice as many DRs are traded OTC than are listed on all the world’s exchanges combined.  How are you and BNY Mellon getting along these days?

Coulson:  Recently, we partnered with [BNY Mellon] to create the OTCM ADR Index, which tracks 535 of our most liquid ADRs and is the first step in a wider plan to promote and educate investors on the widening world of ADRs. 

When I started [with the OTC Markets Group] in 1997, there were around 200 ADRs trading on our marketplaces.  With our big focus on growing our number of international securities, we are now at 1,500 ADRs (as well as 1,400 F shares – the majority are primarily listed on the Toronto Stock Exchange).  I’ve always thought our international securities were our best product to quickly grow.  Companies are going public all around the world, but investors want to be able to trade them through their US broker.  As we got to a critical mass and got engagement from the better quality companies that wanted to qualify for OTCQX so their investors could make the best informed decisions, we thought it was time to do something more with our 1,500 ADRs.

It is a huge efficiency for a company to use their home country disclosure which they have already made a substantial investment in creating.  Driving our marketplaces off home country disclosure in English is a good idea.  It’s like if I go to France for a month, I should be able to use my US drivers license.  But if I move there for a year, I should get a French drivers license.

Same for these companies, their primary marketplace is going to be their home market.  Their management team is going to understand their home market disclosure, regulation, and accounting standards.  Around the world we’ve seen every country’s disclosures, regulations, and accounting improve.  They all do it a little bit differently, but we are seeing more and more national and global champions (and some small emerging companies) that want to meet only one standard and use it to inform investors in other jurisdictions.  While focused on their home country primary listing, they still want visibility and access to theUS, which is the largest pool of investors, brokers, financial advisors, mutual funds, pension funds, and hedge funds in the world.

Slepko:  BNY Mellon’s Lugo also went on to say that OTC Markets has developed, “tons of information that was previously not available which is why there used to be concerns about penny stocks, non-liquidity, and things of that nature about OTC.  At least from a pricing performance perspective, now I don’t think there’s much difference between an OTC security and a listed security.”  Do you agree? 

Coulson:  The investor informational, transactional and quality experience, especially for our OTCQX companies, can get close to parity with exchange listed companies.  With certain OTC Pink names, you may have to dig around more to get certain information, you may have a harder time getting advice from your broker or financial advisors, you may miss some press releases – but these are all things we are working on to get the OTC Pink companies upgraded.  Of course, there’s always going to be a certain amount of less engaged companies, and we are fine with that because our marketplace model is a lot like LinkedIn (NYSE: LNKD).  We only want our really engaged, investor-friendly companies to go over to our premium side.  That tells investors something too.  While there are activist investors who make a career investing in companies where management doesn’t focus on shareholder value, if you are a passive, long-term investor, you kind of want to focus on investor-friendly companies.

We aren’t going to give a company everything they are going to get from NYSE, but for an international company, if we can give you 70% of the benefits for 5% of the cost and complexity, that’s a great deal. 

Slepko:  What is one of those things that NYSE is better at giving?

Coulson:  I think they are better at the bell ringing ceremony.  We don’t have a bell.  We might build a bell, but I don’t know if it will be as good.  NYSE clearly has us beat on the bell technology.

Our goal is not to replace NYSE.  NYSE has been around for hundreds of years.  We are not going to be a stock exchange, but we do want to make available to investors everything else that is not available on a stock exchange.  Many international companies will use OTC Pink and OTCQX to test the market and then build up to a NYSE listing.  Although, many companies find that OTCQX works fine and gives them the visibility and access to the US investors that they need.  Companies joining OTCQX are comfortable with the quality of their disclosure.  Many companies with big cultures of compliance are nervous about the complexity of meeting two disclosure standards, and we let them focus on the one they know best. 

The NYSE brand is a better known brand, but if we provide the transparency for the companies where they can clearly convey their own reputation, we are fine.  We have all the major depositary banks [BNY Mellon, Citi, Deutsche, JPMorgan] sponsoring companies on OTCQX – and with one of these professional third-parties sponsoring a company, the OTCQX qualification process is trusted by investors. 

Slepko:  Since 2007, 28 companies have de-registered from the SEC and de-listed from the NYSE or NASDAQ to trade in the OTCQX marketplace. [The list includes Air France-KLM, Akzo Nobel, Allianz, AXA, BASF, BG Group, Danone, Deutsche Telekom, Publicis, and Repsol.]  Does OTC Markets Group actively court companies to leave the NYSE and NASDAQ exchanges?

Coulson:  We usually wait for them to make the choice.  We engage the OTC Pink companies, and we educate companies that don’t have ADR programs.  We have enough companies for which we can create a better, more informed, and more efficient marketplace that heavily courting NYSE or NASDAQ companies is not a big priority.  We all win with the success of US markets.

Slepko:  Well, it seems lately NASDAQ has been actively helping both NYSE and OTC Markets Group gain market share…Why has OTC Markets Group done so well recently?

Coulson:  I think the exchanges have done very well in this environment, and we have a different value quotient from the exchanges. Historically, one of the biggest reasons  international companies registered with the SEC was that it made a large group of investors take them more seriously.  But now the quality of accounting, reporting, and regulation around the world has improved so that local reporting standards offer high-quality information and credibility to the vast majority of US investors.

Slepko:  What’s in store for OTC Markets Group for the rest of the decade – and how much longer are you planning on heading it up? [Coulson is only 46.]  And should you disappear, what’s your management team looking like these days?

Coulson:  We have a great team, and one of the reasons we upgraded to the OTCQX marketplace was to create a more sustainable corporation.  We recently added to our board Neal Wolkoff, former CEO of the American Stock Exchange, and Louisa Serene Schneider, who runs the value investing program at Columbia Business School.  On the other side, you see strong executives across the board if you look at our annual report.

What I’m trying to do is create a sustainable corporation.  That said, I don’t want to retire.  I like what I’m doing.  It’s a fun job.  There’s a lot to accomplish, especially in the international space – and I’d love to help fix small company capital formation in the US.  I think we have a great platform.  The idea that a company can upgrade to OTCQX, be tradable through any broker, provide their disclosure – that’s really powerful.

We are building this community of third party sponsors among investment banks, law firms, and [depositary] banks.  We’ve created a lot of great things, and the team surrounding the business keeps getting better.  For me, it was tough ten years ago when we were a tiny company starting out. We were bootstrapping our way along. Our early technology was pretty basic. We joked it was two hamsters running on a wheel and we were scared that one hamster might fall off.    Now we are a bigger company and have a robust technology platform with high quality infrastructure so we all sleep a lot better. 

Slepko:  How many hamsters do you have now?

Coulson:  They left.  We sold them on eBay to a small startup, and today we have a great technology team surrounded by strong sales, support, finance and of course compliance teams.  We have built a great platform by working together with our customers – every broker-dealer in the US who directly trades securities is a subscriber of our OTC Link ATS alternative trading system.  Our market data is distributed across almost every professional market data system and every major online broker.  As for companies, we have a strong base of nearly 400 OTCQX companies with a combined market cap of close to USD 1 trillion which we expect to grow.   We provide a package of information and communication services that help create better informed, and more efficient financial marketplaces.

Over time, if we have a quality product that creates a good trading experience, and good information for investors, we’ll do fine.  The markets have been a little tough since Facebook and the election, but eventually people will start investing again.  We are already seeing a little bit of a perk up of market activity in the last few weeks. As we move past the fiscal cliff and Washington starts working on immigration reform and corporate tax reform, investor confidence and optimism should build.


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services recommend LinkedIn and NYSE Euronext. 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!

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