UK Companies Find New Opportunities on US OTC Markets

Introduction to OTC Markets

Persistent valuation discounts in the UK have prompted a wave of companies listed on the London Stock Exchange to explore new avenues for trading. A growing number of these firms are turning to the less mainstream Over-the-Counter (OTC) Markets in the United States. This stock exchange is primarily recognized for its “pink sheets,” a marketplace where speculative US stocks are bought and sold.

The Rise of Cross-Trading

More than 75% of the FTSE 100, alongside a similar proportion of the FTSE 250, are now cross-trading on OTC Markets, which operate under the name “Pink Limited.” This platform allows for direct stock trading of companies that aren’t listed on major exchanges. Additionally, OTC Markets provides a superior marketplace for established global stocks, including those from the FTSE 350, eager to reach US investors.

In recent months, notable UK companies have begun to register and trade on this exchange. For example, the London Stock Exchange Group joined OTC Markets in June, while Reckitt Benckiser commenced its cross-trading in July. Other firms, including Pinewood Technologies and Spectris, have also embraced this change during the current year.

The Driving Forces Behind Cross-Listing

Jason Paltrowitz, the executive vice-president at OTC Markets, has observed a steady growth in foreign listings over the last 10 to 15 years, particularly post-pandemic. The UK has played a pivotal role in this surge, driven by a belief that UK stocks are trading at a significant discount compared to their international counterparts. This discount has sparked interest from US investors looking to diversify their portfolios.

Why Are Discounts Attractive?

OTC Markets is witnessing increased engagement from investors for various reasons. Paltrowitz notes, “Europe has been trading at such a discount to the US for so long that US investors are now looking for other opportunities.” This shift has been magnified by the concentration of capital within the US economy, where the top ten stocks on the S&P 500 account for 40% of the index’s market capitalization, predominantly in the tech sector.

Growing Trading Volumes

The first three quarters of this year saw trading volumes in UK stocks on the OTC Markets platform soar to an impressive $56 billion—a 71% increase year-on-year. This rise illustrates the growing interest in UK equities and the benefits of cross-listing on the US exchange.

Advantages of Trading on OTC Markets

One notable benefit for foreign companies trading on OTC Markets is the ability to comply with their home market’s regulations and reporting standards, as long as related disclosures are timely and in English. This regulatory flexibility means that companies can maintain their home listings while gaining exposure to the US market, making the process significantly simpler than seeking a listing on larger exchanges like the New York Stock Exchange or Nasdaq.

Historical Context

Companies have effectively utilized this route to access US investors for years. For instance, Roche Holdings, a Swiss pharmaceuticals company, transitioned to OTC Market’s premium tier exchange after years on the regular OTC market. Similarly, Tate & Lyle and Adidas were among the initial clients when the platform was launched in 2007.

Recent Trends in Trading Activity

A significant portion of the recent trading activity on OTC Markets has focused on European defense companies, signifying a shift in investor interest. Additionally, oil and gas majors have benefited from this recent uptick in activity. Paltrowitz highlights that companies like Rheinmetall, a German defense group, have become some of the exchange’s most actively traded stocks.

The Influence of Retail Investors

Retail investors are playing an increasingly prominent role in OTC Markets, constituting a large segment of platform users. Paltrowitz notes a historical shift in how multinational corporations perceive US retail investors. “Twenty years ago, companies shied away from engaging with US retail,” he says. However, the landscape has drastically changed, as retail investors have evolved into a more knowledgeable and sophisticated demographic.

Conclusion

As UK-listed companies navigate persistent valuation discounts and capitalize on new trading opportunities, OTC Markets are proving to be an appealing avenue. With significant growth in trading volumes, an accommodating regulatory environment, and the increasing influence of retail investors, the future of cross-trading on this US exchange looks promising. For both UK firms and US investors, the marriage of these markets provides exciting possibilities for expansion and diversification.

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