Historic Leap in US Stocks: Over-the-Counter Trading Surpasses 50% for the First Time, Market Pricing Mechanism Faces a Major Test

According to Zhitong Finance APP, the largest public stock market in the world—the U.S. stock market—is undergoing a remarkable change: an increasing amount of trading activity is shifting from public markets to over-the-counter (OTC) trading. Data from Bloomberg shows that by January 2025, 51.8% of U.S. stock trading volume will be completed through OTC transactions, marking the first time in history that more than half of the trading volume occurs outside of exchanges. This percentage has reached a record high and has set a record for the fifth consecutive month, with OTC trading volume exceeding 50% for the third consecutive month.

The growth of OTC trading is primarily occurring within large financial institutions or on alternative platforms known as "dark pools." Anna Ziotis Kurzrok, head of market structure at Jefferies, noted in a report this month that this shift from public markets to OTC trading "seems to be developing into a long-term trend, and may even be permanent."

In fact, the rise of OTC trading has not happened overnight. For many years, OTC trading has been an important part of Wall Street, but public markets, such as the New York Stock Exchange and NASDAQ, have always dominated. This shift in dynamics is crucial for market pricing mechanisms, as quotes from public exchanges have long been the primary reference for most investors in pricing stocks.

Larry Tabb, head of market structure at Bloomberg Industry Research, stated that this transition is a continuation of a trend that has been developing for years, and if it continues, it could have profound implications for market operations.

He pointed out, "Theoretically, the more OTC trading there is, the fewer orders competing for the best prices in the public market, which could lead to a decrease in pricing efficiency both on and off the exchange."

To address this trend, the U.S. Securities and Exchange Commission (SEC) has taken several measures in recent years to try to pull more trading activity back to public markets through market structure reforms. However, of the four reform proposals put forward by the SEC, only two were ultimately approved, involving adjustments to stock pricing methods and the execution of on-exchange and off-exchange trades.

Nevertheless, the current threat to market efficiency remains relatively limited. In January, 48.2% of trades were still completed on public exchanges.

Kurzrok from Jefferies pointed out that the growth of OTC trading is related to the increased trading volume of stocks priced below $1, which are typically traded by retail investors and are often handled internally by market-making giants like Citadel Securities and Virtu Financial.

According to Jefferies' calculations, excluding these stocks priced below $1, the proportion of OTC trading remains below 40%. Therefore, Kurzrok believes that this shift from public markets to OTC trading "does not necessarily mean that stock trading conditions will worsen one day."

At the same time, the number of alternative trading systems (ATS) that provide alternative, anonymous trading methods is also increasing. These systems match buyers and sellers through different mechanisms without having to display expected prices on public exchanges or in automated auctions, thereby helping institutional investors avoid information leakage and price impact According to Bloomberg Industry Research analysis, the average daily trading volume of ATS in November was approximately 1.7 billion shares, the highest level since March 2020, representing a 36% increase compared to a year ago.

Joe Saluzzi of Themis Trading stated, "This new trading method is different. Large institutions seem to be gaining a better trading experience and more value through this approach."