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For a long time, I have wanted to understand how the OTC markets (US) work on a deeper level. I have read through the information on otcmarkets.com but find it to be rather basic.

There are of course some clear differences between OTC markets and the exchanges (NASDAQ etc) such as listing requirements for the companies. But it seems to me that the differences in the trading mechanism in itself is not that big, especially because there is Level 2 and time and sales.

I'll try to put a few things into questions:

  1. OTC is often described by its lack of a central "exchange" mechanism making price discovery less exact. But the level 2 can only work to the extent that there is some degree of a central mechanism. So is level 2 simply showing those orders that broker-dealers choose to show in the system (OTC Link® ATS) instead of matching them directly and/or internally?

  2. If there are no paid market makers, as I understand there often is on the regular exchanges, why at all have the role of a broker-dealer/market maker? Couldn't it work by letting all orders go through the ATS? The broker would still be the institution guaranteeing on behalf of each person in the market. Why not let the system match all orders instead of having a human middleman?

  3. Is there any source - book or article - that you can recommend for looking deeper into the mechanisms of the market?

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  • What is a "paid market maker"? Stock exchanges do not pay market making firms for market making activities.
    – Flux
    Jul 4 '21 at 13:33
  • Apologies if I made a mistake in my question.
    – Simon
    Jul 4 '21 at 14:28

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