Business Research

U.S. Over-the-counter (OTC) Markets

How do regulatory and disclosure regimes affect market quality?

Alberta School of Business researcher finds:

  • The U.S. over- the- counter (OTC) market contains over 10,000 small and low-priced stocks that are governed by diverse regulatory and disclosure regimes.
  • A vast majority of these OTC stocks trade very little, are highly volatile, and perform poorly, making them similar to a lottery ticket for investors.
  • OTC stocks in mandatory regulatory and disclosure regimes that are more strict have higher market quality - meaning a greater ease of trading, higher trading volumes and lower risk of stock price crashes. 
  • Voluntary regulatory initiatives and disclosures by firms also promote market quality. 

Research Abstract:

Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show that OTC firms subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: lowering regulatory requirements reduces the compliance burden for smaller firms, but it also reduces market quality.

The article, "The Twilight Zone: OTC Regulatory Regimes and Market Quality" is co-authored by Aditya Kaul and is published in The Review of Financial Studies.


Lukas Roth Aditya Kaul is an Associate Professor of Finance at the Alberta School of Business. He is also a Jarislowsky Fellow and Alberta Stock Exchange Fellow. Aditya attended the Delhi University where he obtained a BA in Economics and MBA. At the University of Rochester, he received an MS in Applied Economics and a PhD in Finance. His research interests are in the areas of market microstructure, international finance and asset pricing, and ongoing projects examine the role of trading in price formation and market anomalies.