Glitch at OTC Markets Halts Trading of Unlisted Shares

Updated Nov. 7, 2013 8:08 p.m. ET

Trading in thousands of unlisted shares, including those of Fannie Mae FNMA -3.32%and Freddie Mac, FMCC -1.76% was frozen for more than five hours Thursday after a network failure knocked out stock quotes at OTC Markets Group Inc. OTCM -0.64%

The outage prevented trading on OTC Markets' platform from opening until 3 p.m. EST, sidelining brokers and traders and keeping investors in the dark as buy and sell orders piled up.

The New York company's president and chief executive, R. Cromwell Coulson, said trading would open on time Friday following what he called the company's longest-ever outage. The marketplace contemplated switching over to its disaster-recovery site in Philadelphia but opted to wait until its network came back up, Mr. Coulson said.

"The industry wanted us to be careful, that trading was orderly," he said on a media conference call.


Thursday's glitch follows a series of malfunctions that have roiled financial markets in recent years. Outages such as the May 2010 "flash crash," in which the Dow Jones Industrial Average tumbled more than 700 points in a few minutes, and a three-hour August freeze in Nasdaq Stock Market NDAQ +2.31% -listed securities have drawn scrutiny from regulators and raised questions among investors over the resilience of U.S. market systems.

"All it does is undermine the public's confidence," said Peter Sidoti, founder of small-cap equity research firm Sidoti & Co. "It's one thing after another."

Mr. Coulson said the problems originated with an outage at Lightower Fiber Networks and Sidera Networks, which maintain some of OTC Markets' systems. Representatives for Lightower, which merged with Sidera earlier this year, didn't immediately respond to requests for comment.

Thursday's shutdown took place in a century-old marketplace that operates largely outside the purview of regulators, comprising scores of little-known, thinly traded companies whose shares trade for fractions of a penny. Investors flock to the market to deal in the securities of firms that in many cases are too small, lightly traded or troubled to make it on a big stock exchange.

Along with government-backed mortgage companies Fannie Mae and Freddie Mac, the list of household-name companies whose shares trade outside the major exchanges includes AMR Corp. AAMRQ +4.23% , the American Airlines parent that is operating in bankruptcy proceedings, and some U.S. securities issued by global giants such as Nestlé SA and Adidas AG ADS.XE -0.23% . OTC Markets provides a marketplace for about 10,000 companies.

"It was definitely a huge issue for us and our clients," said Jacob Rappaport, head of Americas trading at INTL FCStone Securities, which trades American shares of foreign companies over the counter. "Orders piled up, and it was a real question if they don't open. It was really fortunate that they got open."

OTC Markets staff noticed technology problems around 6 a.m. Thursday and opted not to begin trading when the U.S. stock market opened at 9:30 a.m., Mr. Coulson said.

The Financial Industry Regulatory Authority later halted trading in all OTC equity securities because of the "lack of current quotation information." Finra sounded the all-clear Thursday afternoon. A spokeswoman for Finra, the Wall Street-funded regulator for the securities industry, directed questions to OTC Markets.

Though OTC Markets' systems were down, brokers were still able to trade some unlisted securities directly with one another and match up trades internally.

The glitch left traders in Fannie and Freddie, which were among the most frequently traded over-the-counter stocks last month by dollar volume, unable to access the main venue for trading unlisted securities on a day when the companies reported their latest quarterly profit.

"We were truly in the dark all day," said Richard Sgueglia, a trader at Guggenheim Securities LLC, which normally handles thousands of trades daily.

Since their shares were delisted from the New York Stock Exchange NYX +1.54% in 2010, Fannie and Freddie have become enormously profitable, buoyed by a federal backstop, an improving housing market and little competition from private investors. The profits have sparked heavy trading in the companies' common and preferred shares.

For much of Thursday, Fannie Mae was listed as up 10 cents at $2.40 on volume of 391,880 shares, according to the OTC Markets website. After trading reopened Thursday afternoon, the stock inched up a penny to close at $2.41 a share on volume of 12.1 million shares.

Average daily volume in Fannie Mae over the past three months was 19.4 million shares, according to the OTC Markets website.

Market-wide trading volume on OTC Markets on Thursday was $488 million, the company's website said. That compares with a daily average of $26 billion on the New York Stock Exchange, according to data from BATS Global Markets Inc.

Before a corporate makeover in the past decade, OTC Markets was long known as the "pink sheets," a venue that had a reputation as a Wild West of stock trading. The marketplace got its name because of the pink-colored sheets of paper once used to maintain prices for stocks in unlisted companies. Most trades were done over the phone.

Mr. Coulson, a former stock trader who sometimes dealt in pink-sheets companies, took over the company in 1997 and overhauled it, developing electronic-trading functions and pitching the platform as a steppingstone for companies aspiring to list on a major stock exchange.

Trading on the platform is generally the domain of big brokerages and trading houses, such as KCG Holdings Inc., KCG -0.40% Canaccord Genuity Group Inc. CF.T -1.13%and Jane Street Markets LLC.

OTC Markets doesn't have listing requirements like Nasdaq or the New York Stock Exchange, which require quarterly filings with regulators or the maintenance of certain minimum share prices or trading volumes. But the company encourages companies that trade on its platform to divulge financial and governance information. OTC Markets now segments its companies into different tiers.

The top tier, OTCQX, includes companies that make regular disclosures and are sponsored by a third-party adviser, while the OTCPink tier features "all types of companies that are there by reasons of default, distress or design."

—Alexandra Scaggs contributed to this article.

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