U.S. trading of international equities such as Nestle, Heineken and Roche, historically done over the counter via the so-called pink sheets, is now nearly fully electronic with a level of automation that’s similar to the domestic stock market.

“A lot of the trading we do is interacting with robots,” said Jacob Rappaport, head of equity capital markets at INTL FCStone Financial, which in 2015 was the biggest market maker for international securities traded over the counter.

“A lot of people aren’t aware that ours is a negotiated market,” Rappaport told Markets Media in a Jan. 22 interview. “Years ago it was literally pink sheets of paper passed around the floor, but now it’s a negotiated electronic market. We deal with other market makers, and market makers interacting with each other is what moves prices.” 

Liquidity of international securities traded OTC has improved as more foreign companies list, and also as the market moves further away from the negative image associated with ‘pink sheet’ trading.

Once international issues list on the OTC market, they must trade on alternative trading systems that are regulated by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.

INTL FCStone began helping companies list on the ATS in 2011 and is responsible for listing 192 foreign securities and American Depositary Receipts, or approximately 45% of all new listings on the OTC market last year.

Although technology plays a key role in improving the efficiency of the OTC market, Rappaport does not discount the importance of the human touch in trading as well as the use of a firm’s balance sheet.

“You can have the best robots in the world, but when they do not work properly, they crash,” he said. “You have to have a human brain behind it. Robots can’t tell you what decision to make when you are pricing a block and taking a risk, or whether you should hold a three-day volume of a security.”

When the firm provides a synthetic price providing a synthetic price to a trade’s counter-party, INTL FCStone uses its own fund capital to complete a trade and takes on the trade’s risk until the security’s home market opens.

“If an investment company decides that it want to buy 50,000 shares of Nintendo at 2 pm, but the Japanese market doesn’t open until 8 pm, we’ll take the risk for six hours,” said Rappaport. “With the Volcker Rule, taking on risk isn’t something widely done in the market right now.”

Featured image by Bakhtiarzein/Dollar Photo Club