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The OTC Market: What the Pickup in Activity Means


When we see activity in Over-The-Counter issues perk up, it's almost always after the broader equity market has done well, and vice versa.

The latest figures from the Nasdaq exchange show that traders in the most speculative part of the market, Over-The-Counter issues, picked up their pace of activity. These lottery-ticket stocks, also known as Pink Sheets or penny stocks, usually don't meet the minimum requirements to list on a major exchange.

When we see activity in these issues perk up, it's almost always after the broader equity market has done well, and vice versa.

The number of OTC shares traded in January increased 13% from December's levels, and 44% from last January.

At the same time, volume in stocks in the Nasdaq Composite index increased only 6% in January from December's levels, and actually decreased 20% from last January (using Bloomberg data).

With that increase in OTC volume and decrease in Composite volume, the former as a percentage of the latter just hit a new all-time record high.

In October 2008, OTC volume made up only 73% of Nasdaq Composite volume, but by last month that jumped to 391%.

The previous record was 386% in March 2006, right before the Composite lost more than 10% over the next four months.

It seems odd that speculative activity compared to the more staid Composite would be higher now than in 2000, but there was a big ramp up in OTC volume beginning in the fall of 2003, and that has never really ebbed too much since then except for during the depths of the 2008 crisis.

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No positions in stocks mentioned.

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