Transcript
Speaker: Welcome back to Vantage. This season, along with the fund managers investing ideas, we thought we'd also take a look at market structures. And so it's slightly different this time, but I am delighted to have ah Jonathan Dixon over from OTC. Jonathan, before we get into it perhaps you could just give us a picture of what OTC Markets is and the role you play there. Yeah, thanks for having me, Neil. So um very simply, OTC Markets is the largest stock market in the United States for non-US equities.
Speaker: um Across the market, we trade over about 12,000 securities, both mainly international but also domestic. um My role is I'm head of EMEA, so I work with issuers, advisors about educating around US access, how to sort of compliantly, cost-efficiently access the US.
Speaker: Okay. I'd love to learn a little bit more about the US. I mean, we all know it's a big market. You operate there. Give us a picture of what it is. What what is the size of the market? What kind of investors? you know How do you go about working in the US market? Yeah, no, it's good point. I think outside of, generally speaking, the the depth of capital and the amount of liquidity available in the US, there is other parts which are more unknown. So everyone knows the likes of BlackRock, Fidelity, Wellington and what have you. But then if you go sort of outside of that into the third and fourth tier institutions, the family offices, high net worth, and retail is a very powerful mover in the US as well.
Speaker: I think that's a part that people don't often think about. You know, when you're doing a roadshow, you're going to New York, Chicago, LA, San Francisco, Boston. But in the US, you'll tend to find fund managers spread out all over the place. Here, you're typically going to London or Edinburgh, um but over there, you know, Salt Lake City, the plate like ah places like Denver, which you probably wouldn't be, you may stop through. So the the availability of capital is there in abundance.
Speaker: Getting access to it's another thing, but it is definitely much more spread out than people would no probably normally think. Okay, and um we we produce ah quarterly with OTC Markets Reflections, and ah you know that's been going since as the start of this year.
Speaker: One of the reasons i was sort of keen to sort of do it is to take effectively a macro view of what was happening in Europe ah from an equity strategy perspective and sort of play it back into the sort of US audience and sort of pick up on it.
Speaker: But the the interest for me was also to play on the trading data because I think you get quite interesting signals and sometimes quite unusual signals yeah about investor behavior. the The key theme we've seen over the year is one of diversification. so I think theres you've got this polarized market where there is this AI bet.
Speaker: There's also concern that that bit, it may not pay off. And so people are going for value, going for high quality and going and typically that's bringing them into, you know, non-US names. um When you're looking at the OTC sort of trading data, what are the sort of key highlights that that sort of you think about and that you think actually people don't understand what's what's going on? Yeah, that's a good point. And yes, you think about the S&P, it's highly concentrated. And then you look over here and we think about valuation gaps.
Speaker: There's been a recognition from US investors of that, I think. We have seen a decoupling in our market out of US equities into international equities. And just to give you Some stats around that. So if you think about our market in Q2 this year, we did about $217 billion dollars of US volume, um vast majority going overseas and out of the US. And that's actually up 37% on Q2 last year. So it's a significant recognition of what could be done outside of the US.
Speaker: I think US investors are conscious of the point that the concentration the S&P, we see in London with the valuations and the amount of M&A activity as well. um But that is definitely a driver. So the statistics in its own right count for that. i think the other part is that the volume generally is up. just It's not just the the percentage increase, but the volume in the markets is up.
Speaker: Last year, we were just shy of a trillion dollars in volume. I think this year we we may go through a trillion dollars in volume. So the activity is higher, but it is definitely going overseas. Okay, and when you dig into that volume, is it you know small cap names or is it you know big cap names? I know ah you know some a lot of people might be surprised at some of the names that do trade on OTT. Where is that volume? Where is it concentrated? Yeah, so to your point, you know we have um So, excuse me, at the higher end of our market, we have the likes of Roche, Adidas, Heineken. We recently had, um so we've had Siemens Energy join this year, JD Sports join this year, Tesco's earlier this year.
Speaker: Last year, the London Stock Exchange Group itself actually joined our market. OTCQX are top tier. um But yes, it's ah it's a nice window into the US for those issuers to be able to have a, again, a cost efficient, compliant light touch way of getting access to the US.
Speaker: um But then right down at the other end, we have venture markets and we have a lot of small cap and micro and nano caps that want to take that first step into the US. That's the key point, I think, is where you see the American investors who have you know, for one of a better reason, they do have more money as a general liquid market, but they have a higher risk appetite as well, where they will look at small cap securities outside of the US and where it might be, let's say it's an AI play to your point, that AI valuation over here may be significantly less than over there. And they're just trying to free fill that gap.
Speaker: Yeah, okay. um We talked about, so a lot of people will be surprised about the sort of larger US, larger companies on OTC. um And I think one of the benefits that I've certainly heard is that, you know, you're not fragmenting volumes of the domestic market. That flow is effectively coming back to the domestic market, which I suspect is what encouraged the London Stock Exchange ah to to go that route.
Speaker: What other sort of yeah you know common myths or misunderstandings do you come across about OTC? And and perhaps you you can set the record straight on those here.
Speaker: Yeah, I think the first one is that we expect liquidity. So the difference is we're we're not New York or NASDAQ. We're New York or NASDAQ and it's not a dual listing. Should you do a dual listing? Yes, absolutely. You are splitting that liquidity. And for the most part, generally because of the volumes in the US, that tends to flow to the In our market, we have both all level one ADRs, so 70% of ADRs, globally, American depository seats trade with us.
Speaker: ah But we also have the foreign ordinary share. So that is actually the local share in the primary market. that is dollarized with the US quote. So it allows those US investors to trade into that. And again, a lot of that flow will come back to the primary market. So it will print back here.
Speaker: For that US investor, let's say it's retail, looks and feels like they're trading in New York or NASDAQ security priced in US dollars. But again, that flow comes back here. So I think that's the first part, which is that you are splitting liquidity. you You are really not. um The second piece to it is the actual regulation around it So, if you think about if you're joining New York or NASDAQ, for example, you are registering with the SEC, you are complying with Sarbanes-Oxley, you're reconciling to US GAAP.
Speaker: So, you're duplicative in your reporting, but there's also a lot of cost associated with it. With OCC, less so because you are simply leveraging your home market disclosure under an SEC exemption to have that US dollar quote. so there There are all these sort of the risk piece. Absolutely. If you are doing a dual listing, you are on the radar of the SEC because you're going to be registered.
Speaker: um But with this, you're just leveraging your primary market. I think that's the key thing. So you're not splitting liquidity and you're not putting yourself under much more additional risk. Okay, so it's ah it's a a light touch, easy way effectively of accessing and encouraging US interest in in your stock for so for a non-US security. And I think you've you've touched on some of the sort of advantages of it. So it is, you know, you're you're not going for dual reporting, not under the sort of SEC register, you you're not fragmenting domestic um liquidity. Is there anything else ah for an issuer who's sort of contemplating
Speaker: doing a US dual listing, you know what what anything else that stands out for the OTC? I think that the the key part here is should have a plan. If you're if you're a UK, European, or any sort of issue outside of the US, I think you have to have an investor relations strategy for a start. We've had a relationship a bit half a decade with Edison as an example.
Speaker: where if you're going to the US, you're likely going to be ah a smaller player in a massive pond and you have to get the attention because you're, to my earlier point, you're not issuing shares, you're not registering with the SEC, you're not having an IPO, you're not having a liquidity event.
Speaker: So you have to have a strategy to be able to generate what's going to happen in the US. um But there are some companies which just resonate with US investors and it will just go, it will work. um But for the most part, you need to have a ah plan to be ah to be fully tradable and fully accessed in the US. Yeah, so your translation of that is don't just get a ticker and expect it to work, right? So you have to have an IR ah strategy around it.
Speaker: Are there any companies that you want to highlight that do it well? I think there's there's several companies which have done it this year and have done it well. um Again, we run the gambit from right at the top with the bigot bigger companies which just have a US strategy.
Speaker: Again, Roche has a full team in New York that are looking after their IR. And they just they just kind of move through the motions because they know how to do it and it's it's done well. I think and when you come down to the the small level, we had XL Technologies out of Paris that joined last year um in the drone business, military drone business.
Speaker: Their share register quickly went quite US-centric. They had an IR plan um and they've just been taken out by a bigger player in France. So that worked for them. yeah um In the UK, we have several companies that we that we work with together with the US.
Speaker: um And I think just constantly just touching that point of have a plan, have a strategy, um don't go in blind. um And I think that that works well. Okay. So anyone who wants to learn a little bit more about the OTC um or or understand more about you know the US market, what where would you direct them? Is it your website? Is it yourself? Who who should they speak to? Yeah, you can get our details on our on our website. We have a a team in London that we have had for about eight years now.
Speaker: um I just got back from Hong Kong last week. We've opened an office there because we're seeing interest from um APAC investors, for example, in European equities priced in US dollars. um So we have a team in APAC as well, head offices in New York. But yeah, for for any European issuers, we're here in London.
Speaker: Okay, perfect, Jonathan. And I should give a shout out to the the quarterly piece we put out, Reflections. It comes out every quarter. The next edition is probably going to be out in early October. Do take a look at it. I think it gives you a great perspective on the market, the trading volumes on OTC.
Speaker: Jonathan, thank you very much for joining Vantage. Thank you, Neil.
