What it is:
How it works (Example):
Off-board trades usually occur between two institutions or between an institution and a customer. For example, let's assume that Company XYZ and Company ABC are pension funds in California and Oregon, respectively. Company XYZ wants to sell 2,000,000 shares of McDonald’s (MCD) to Company ABC. However, the trade is so large that investors might regard the transaction as a sell signal on MCD, which could tank the stock and make further sales more difficult for the seller. Therefore, the two companies decide to do the trade off board.
Off-board trading usually occurs on the OTC market or directly between buyers and sellers. Off-board trades can also occur on a smaller regional exchange. "Dark pools" are increasingly used for off-board trading as well.
Off board can also refer to trades of 19c3 securities or stocks that were listed on an exchange after 1979. SEC Rule 19c3 allows stocks listed on any equity exchange after April 26, 1979, to trade off board.
Why it Matters:
Off-board trades provide anonymity as well as a way to avoid destabilizing the markets if a trade is particularly large. However, off-board trading is also controversial because it prevents all investors and market participants from knowing the true prices at which specific securities are valued in all arm's-length transactions.
Given that off-board trading constitutes 20% of all market volume, according to some sources, the controversy is bound to continue or increase with the popularity of off-board trading.