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The Unregulated Over-The-Counter (OTC) Market

Typically an Over-The-Counter (OTC) market is a decentralized virtual marketplace where financial products such as bonds, equities and currencies can be traded. In an OTC market or otherwise known as “Pink Sheets” there is no centralized structure or location perse and traders engage in exchange transactions via a number of non-physical modes of interaction that include the use of a proprietary online trading platform, email and telephone systems.

OTC is one of two principal markets that provides the means of organising and managing financial markets, the other being an exchange market. However, with an OTC marketplace the “dealers” are responsible for determining the prices at which financial products like currencies would be purchased or sold and in effect “dealers” achieve the moniker of “market-makers” under an OTC market.

In an OTC marketplace participants can trade amongst themselves in confidence and without a third party knowing about the delicate details of the transaction such as the transaction price. Consequently, OTC markets are less regulated and not as transparent as exchanges. While an OTC marketplace is mainly used for the trading in currencies, bonds, derivatives (CMOs & CDOs) and other structured financial products. What’s more, OTC markets can be a place where equities can be traded as well, some examples include OTCQB, OTC Pink and OTCQX markets.

Deal Or No Deal!

OTC markets are split into a Customer Market and Interdealer Market. The former involves trade between dealers and customers that can include institutions and corporate entities while the latter involves trade that occurs between dealers. It must be said that one difference between the two OTC market types is that prices may differ between the Customer and Interdealer markets. A dealer in a Customer Market can quote a price that is much higher than what he may quote under an Interdealer Market. Another difference is that the bid-ask rate in a Customer Market tends to be much larger than in an Interdealer Market.

OTC A Risky Business!

With less regulation and transparency in an OTC market, there are some inherent risks to participants in the marketplace. One common risk of OTC market operation is a

“Counter-party risk” where there is a default by a party in a trading transaction before the transaction comes to a logical end (i.e. a successful exchange).

As regulatory agencies take a back seat with OTC markets, there is an ever increasing risk that both current and potential investors are exposed to.

However, if corporate entities see these rules and regulations as too stringent or they are reluctant to adhere to established regulations, their natural reaction would be to move over to an OTC market where there are no such regulations and they have a free reign on affairs. This would over saturate the OTC market and worse still populate it with unscrupulous corporate entities and individuals wishing to reap off unsuspecting victims of their hard earned money.

In order to avoid being scammed participants in the OTC market should really equip themselves with the knowledge and tell-tale signs of a scam in progress in order to avoid falling for such scams. Below are some common scamming techniques used by some dubious participants in the OTC market that you should be aware of and also how you can avoid being susceptible to such scams.

A Little For MORE!

You have probably heard something close to this before “invest little now and earn massive ROI in a short space of time”. This is a common gimmick used by scammers in the OTC market to woo unsuspecting investors into parting with their scarce funds. The initial capital outlay in the investment may seem little and maybe it is really inconsequential to an investor, but imagine if a 100 or a 1,000 investors make a similar investment in the scam, the scammer would be the only one smiling to the bank.

Do not be deceived by the promise of unbelievably high ROI in a short period of time, like all investments even in the real-world, it takes time for an investor to start enjoying the dividends of their investment. To avoid falling prey to those dubious dealers luring you with huge ROI in a short time, you should do some background check on the dealer to know if they are reputable and can be trusted with their claims.

However, you will soon find that a good number of corporate entities in an OTC marketplace lack sufficient history for you to conduct a thorough corporate and financial background check on them. To this end, it is safer to deal with companies with some good amount of corporate history rather than a greenhorn making enticing mouthwatering offers.

A Classic “Pump And Dump” Scam

One other scam developed by scammers in an OTC marketplace is the classic “pump and dump”. This is where scammers are able to dubiously manipulate the OTC market by purchasing a huge amount of coins belonging to a corporate entity that is listed in the OTC market knowing that the demand for the coins purchased is quite low. Subsequently, the scammer then promotes the securities by releasing information usually through classified ads on the internet, promoting the possibility of the value of the securities rising in the shortest possible time.

Investors then unwittingly rush to buy the securities without applying due diligence in verifying the information provided on the Internet albeit the information released by the scammer would be near impossible to ascertain. Now with many investors purchasing the security, naturally the value of the security would rise (temporarily), but the rise in value is really short lived and a reflection of the demand for the security at the time.

The scammer then gets to work at this point knowing that the value of their security has risen and starts selling off their respective holdings and earning stupendous profits at the end of the day. However, for the unknowing investor, the securities they purchased are virtually of no real worth and no investor worth their salt will be interested in their securities going forward, consequently the hapless investor loses money to the hands of the scammer.

To avoid this sort of scam in the OTC market, you should be very cautious and weary of individuals brandishing “hot tips” on possible high yielding investment opportunities, they could be looking to significantly benefit at your own expense. As mentioned before, research is always key to successful investments in the OTC market. Make sure you do some valuable research that could save you lots of time, effort and money.

Put On Your Thinking Cap!

When looking to invest in an OTC market you should watch out for some signals that suggest something “fishy” may be brewing. Below is a list of some signs you should watch out for to avoid being scammed.

Hook, Line And Sinker!

If you are sent a contract form prior to any meaningful discussion on a possible transaction or deal being agreed, it is a strong possibility that you are being baited. The simple solution is not to fall for the bait as you know there is a sharp hook at the end of it!

If It’s Too Good To Be True…

Imagine if the size of the deal being brandished is pretty large, say 300,000 Bitcoins for example. In reality there are not too many sellers that have this quantity of Bitcoins up for sale, so if you are lured with such an offer that sounds too good to be true, beware it could be a scam in the offing.

Carriage Before the Horse!

As an investor you have to go through a process before a deal can be agreed in an OTC market. Usually it begins with a conversation and then gradually results in a request for important documentation and so on. Where a possible transaction begins with a document being sent to your email address and this document has the account details of the second party to a barely nascent deal, you are probably being scammed. As a baby needs to crawl before walking and then running, so also does a deal require meaningful conversations, verbal agreements reached and then documentation requests before and exchange can occur. What out for those that out the carriage before the horse, they could be out to scam you.

In Closing

Remember that there is no substitute for due diligence. Always do your research on any offer that is made no matter how little your financial contribution may seem to be. Scammers rely on investors weighing the “risk v investment” with the belief that the risk of a possible high ROI far outweighs the “little investment” made.