OTC Market Research Articles

Over‐the‐counter prenatal multivitamin/mineral products: chemical analysis for the Dietary Supplement Ingredient Database (809.3)

Many women use OTC prenatal MVM products to optimize nutrient intake before pregnancy, during pregnancy and lactation. Most prenatal MVM are purchased as prescription products, but the OTC market has increased, especially in the natural health and direct sales channels. Using a statistical sampling plan, 71 DS products were purchased, with 16 from mass market, 45 from natural health and 33 from direct channels. Multiple lots of each product were sent to qualified labs with quality control materials for the analysis of vitamins and minerals. Analytical results were compared to label and evaluated by regression across a range of labeled levels. The predicted mean % differences from label at the most common level ranged from 0 to <10% above label for 12 nutrients (iron, magnesium, zinc, copper, selenium, manganese, riboflavin, folic acid, vitamins A, B‐12, C, E); 10 to <20% for vitamin D and calcium; 20 to <30% for iodine and potassium, and >40% for chromium. The predicted mean % differences for thiamin, niacin and vitamin B‐6 were in the ‐10 to 0% range. For most ingredients, predicted mean analytical values are similar to and above the label, but some are significantly different. These data will be released in DSID‐3 (http://dsid.usda.nih.gov) and can provide researchers with more accurate estimates of nutrient intake from OTC prenatal MVM.Grant Funding Source: Supported by USDA‐ARS and NIH‐ODS

The place of dosage form innovation and the OTC market: The price to pay

Aims and ObjectivesThe aims and objectives of this article are to provide a background to the innovations that are made in over the counter market and to outline the time and costs involved in these activities.

Competing for Order Flow in OTC Markets

Competing for Order Flow in OTC Markets

Option pricing and Greeks via a moving least square meshfree method

We apply a meshfree method using the fast moving least squares approximation to option pricing, particularly for the purpose of obtaining high-order Greeks. The method is shown to be accurate and efficient in obtaining prices and Greeks of European, Asian and Barrier options. We also include a complicated Equity Linked Security (ELS) from the Korean OTC market, as a real-world example.

The Twilight Zone: OTC Regulatory Regimes and Market Quality

We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are 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 (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

The Credit Derivatives Market – A Threat to Financial Stability?

Credit derivatives occurred as a solution to the needs of managing credit risks by the financial institutions, mainly banks. Besides the role of means of hedging and diversifying credit risks, derivatives become tempting for those likely to take on more risk to make more money. Therefore, the users of credit derivatives for protective purposes were outnumbered by the speculative ones. The result consisted in an ever-growing OTC market, with huge volumes traded. The players achieved very high leverage on increased credit exposures, without being suspected by creditors or regulators of inconsistency. The very first signs of the current global crisis revealed the weaknesses of the relations and dependencies developed on the credit derivatives markets, as big players on these markets have failed. This paper considers the benefits of credit derivatives for risk management, along with the perils they pose for systemic risk. Finally, the paper outlines the actions that should be undertaken in order to strengthen the operational efficiency of credit derivatives markets so as to ensure that they do not harm financial stability.

Analysis of the traded volume drivers of the Iberian power futures market

A comprehensive assessment of the liquidity development in the Iberian power futures market managed by OMIP (“Operador do Mercado Ibérico de Energia, Pólo Português”) in its first 4years of existence is performed. This market started on July 2006. A regression model tracking the evolution of the traded volumes in the continuous market is built as a function of 12 potential liquidity drivers. The only significant drivers are the traded volumes in OMIP compulsory auctions, the traded volumes in the “Over The Counter” (OTC) market, and the OTC cleared volumes in OMIP clearing house (OMIClear). Furthermore, the enrollment of financial members shows strong correlation with the traded volumes in the continuous market. OMIP liquidity is still far from the levels reached by the most mature European markets (Nord Pool and EEX). The market operator and its clearing house could develop efficient marketing actions to attract new entrants active in the spot market (energy intensive industries, suppliers, and small producers) as well as volumes from the opaque OTC market, and to improve the performance of existing illiquid products. An active dialogue with all the stakeholders (market participants, spot market operator, and supervisory authorities) will help to implement such actions.

Network Features of European Trading Venues

Consider a stock which is simultaneously traded on two or more venues, either because its company is cross-listed or because regulation allows multi-trading. We set the idea that these venues are 'indirectly' connected and represent a network. If the 'importance' of a venue is traditionally measured by its isolated-centrality (e.g. trading volumes observed inside it), we introduce a network measure, the degree-centrality, which includes trading activity due to its connections with other stock markets. Using trading volume data of nearly 22,000 equities we study the dynamic of market centrality among the various European trading venues between 2005 and 2009. European Regulated Stock Exchanges (SEs) and Alternative Trading Venues (ATVs), introduced in Europe in 2007, are the nodes/vertexes of our network. We observe that the birth of European ATVs (Multi-lateral Trading Facilities, Systematic Internalisers and the OTC market) eroded the isolated-centrality of certain European SEs (particularly London), but not for all. In contrast, degree-centrality significantly increased for the majority of the 48 SEs analyzed, in favor of multi-markets coexistence. Moreover, European ATVs did not act as substitute to the secondary market for cross-listed shares. Paradoxically, our results show that for medium size European SEs, cross-listing trading activity Granger-causes multi-trading on European ATVs.

Darrell Duffie: Dark markets, asset pricing and information transmission in over-the-counter markets

In response to the financial crisis of 2007 to 2009, a large number of financial assets, such as derivatives, collateralized debt obligations, and repurchase agreements, which are traded in over-the-counter markets (OTC) are receiving increasing attention. A key feature of OTC market is its decentralized nature, that is, agents negotiate prices with each other, often pairwise, and thereby may be uninformed of prices currently traded elsewhere in the OTC market. In this opaque market, the bargaining game between market participants can be complex due to different levels of private information and various sets of outside opportunities. As a result, agents have difficulty assessing the prices and risks of OTC instruments and thus the investment behavior in OTC markets has intensified the financial crises. Some regulatory steps have been taken by the U.S. and European governments to increase competition and transparency in the OTC markets (e.g., Dodd–Frank Act in the United States). In this context, Darrell Duffie is a key contributor to the promising new research area of OTC markets, which is relatively undeveloped compared with literature on central market mechanisms. Dark Market provides an introduction to the topic and gives an overview of different asset pricing models in OTC markets characterized by symmetric and asymmetric information. Duffie seeks to understand and model the behavior of participants in decentralized markets and study the effects on asset prices and returns. He also provides a valuable framework for the analysis of how information is transmitted and how asset prices behave over time. He explains key concepts and modeling techniques for search and random matching in economies with numerous agents. The book is divided into a more theory-oriented main part and an appendix that provides further methodological support for the more advanced

Endogenous Intermediation in Over-the-Counter Markets

We provide a theory of trading through intermediaries in over-the-counter markets. In our model, the role of intermediaries is to sustain unsecured trade. When agents borrow funds to invest in risky projects without pledging collateral, total surplus can increase. We propose a set-up in which traders in the OTC market are connected through a network. Agents observe the actions of their neighbors, and, at the same time, can trade with their counterparty in a given period through a path of intermediaries in the network. Both borrowers and intermediaries can renege on their obligations when trade is unsecured. We show that trading through a network is essential to support unsecured trade, when agents are unlikely to meet the same counteparty again in the market. However, intermediaries must receive fees to ensure they have the incentive to implement unsecured trades. While trade without collateral can be sustained in various classes of networks, we find that the gains from unsecured trade in a star network are higher than in many other networks. The center agent in a star network can receive a higher fee as well. We show that concentrated intermediation is both an efficient and stable structure when agents incur linking costs.

How Do OTC Markets Contribute to Global Financial Market Inefficiency? - Evidence from Asymmetric Information Biases in the Context of the European Carbon Derivatives

How Do OTC Markets Contribute to Global Financial Market Inefficiency? - Evidence from Asymmetric Information Biases in the Context of the European Carbon Derivatives

Did Stop Signs Stop Investor Trading? Investor Attention and Liquidity in the Pink Sheets Tiers of the OTC Market

In 2007, OTC Markets Group assigned each Pink Sheets company to a disclosure tier and on its websites affixed a colorful graphic to its stock symbol signifying the company’s public disclosure level. This unique innovation allows us to investigate the impact of increased salience of disclosure practices on liquidity. Using a difference-in-difference design, we find evidence that firms that are categorized and labeled as Current Information experience an increase in liquidity while firms categorized and labeled as No Information experience a decrease in liquidity, both relative to other OTC firms. This suggests that increases in the salience of disclosure practices via assignment to disclosure tiers with labels and graphics affects investors’ attention, leading to changes in trading behavior that ultimately translate into liquidity changes in the Pink Sheets market. We also provide evidence that some investors anticipated the resulting liquidity changes because stock returns around a key event date leading up to the release of the disclosure tiers are positively associated with subsequent liquidity changes.

Inferring trading dynamics for an OTC market: the case of the euro area overnight money market

Inferring trading dynamics for an OTC market: the case of the euro area overnight money market

The OTC Market in Peru

The article will show how the OTC market works in Peru and how the participants works closely in order to increase the volume.

The Regulation and Pricing of Special Purpose Acquisition Corporation IPOs

Special Purpose Acquisition Corporations (SPACs) are large blank check companies formed to acquire operating assets or an existing business. They provide public investors with a private equity style investment with the security of having the majority of their funds returned if an acceptable business combination is not approved within a set time limit. While originally restricted to the OTC market SPACs gained a more prominent role as AMEX began listing them in 2005, followed by the NYSE and NASDAQ in 2008. For firms with such uncertainty about their future prospects there is surprisingly little mispricing evident in their IPOs. Valuing SPACs is complicated by the warrants included in the unit offers. Examination of the stock and warrants in SPAC units suggests that investors may be simply pricing the units based on the offer price or the market price of recent issues, pricing stock at a small discount to liquidation value, and pricing warrants as the residual difference between unit and stock prices.

Symptoms and Their Interpretation in Patients Self-Treating Abdominal Cramping and Pain with a Spasmolytic (Butylscopolamine Bromide)—A Pharmacy-Based Survey

Background: A majority of people suffering from functional abdominal complaints treat themselves with OTC medication. Aim: To gain information on symptoms and their interpretation in patients self-treating abdominal cramping and pain with a spasmolytic (butylscopolamine). Method: 4,680 questionnaires were distributed by 306 pharmacists in Germany to patients suffering from abdominal complaints and buying butylscopolamine. Key findings: Questionnaires from 1,539 respondents were returned, and 1,417 could be evaluated. Abdominal cramping was the major reason for buying butylscopolamine. Only a minority of respondents had consulted a general practitioner (27.3%) and even less a specialist (12.5%). Only a minority of subjects met expert criteria for irritable bowel syndrome (13%). There was a large overlap between self-reported dysmenorrhoea and bowel symptoms (35%). Conclusions: Real life conditions do not seem to be well covered by expert criteria. Differentiating bowel origin from uterine origin in pelvic pain syndromes seems especially problematic. This may particularly apply to the OTC market.

Making OTC Derivatives Safe: A Fresh Look

Recent regulatory efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper looks at the possibility that central counterparties (CCPs) may be too-big-to-fail entities in the making. The present regulatory and reform efforts may not remove the systemic risk from OTC derivatives but rather shift them from banks to CCPs. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a public utility model for the OTC market infrastructure.

A Search-Based Pricing Model of Credit Default Swaps

We characterize the equilibrium spreads of Credit Default Swaps traded in an over-the-counter market. The OTC market involves a continuum of traders indexed by their beliefs about risk. Traders encounter standard search frictions. Once agents are matched, they adjust their preferred spread according to their subjective risk measures of both the reference entity and their counterparty. In the absence of search frictions, agents do not consider counterparty risk in determining the optimal spread. Under the assumption that buyers do not own the underlying debt, gainful trade occurs only when beliefs about risk differ. When buyers own the debt, the spread grows and gainful trade can occur even when beliefs about risk coincide. The limiting spread is the risk-neutral spread up to an affine transformation.

Out of the Black Hole: Regulatory Reform of the Over-the-Counter Derivatives Market

Unregulated OTC derivatives have been at the heart of recent systemic or near systemic collapses. After each financial crisis, governments worldwide proclaim that the OTC market has to be regulated for transparency, capital adequacy, regulation of intermediaries, self regulation, and strong enforcement of fraud and manipulation. But, aided by the passage of time, Wall Street always deflates those aspirations with aggressive lobbying. The present financial reform regulatory effort may be the only chance to get this issue right before the country devolves into a further financial quagmire with more bankruptcies and more job losses. This paper is a chapter of Make Markets Be Markets that presents a comprehensive plan for what must be done to fix our broken financial system. Specifically the chapter focuses on the role of derivatives in the recent financial crisis and put forth a number of recommendations to H.R. 4173 (Wall Street Reform and Consumer Protection Act of 2009) to enhance the regulatory reform. The paper was prepared as a chapter in the Make Markets be Markets report for the Roosevelt Institute, March 2010.

Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

ABSTRACTWe study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.