OTC BB TO CHANGE ??
===========ARTICLE (great read)======================
On the Street Cleaning Up the Bulletin Board
By Matthew Goldsetin
October 26, 2000
EARLIER THIS YEAR, during those halcyon days when the Nasdaq Composite was
hovering at the 5000 mark, one of the hottest stock markets was - believe
it or not - the OTC Bulletin Board. Trading in obscure "penny stocks" got
so feverish that for a time more shares changed hands each day on the
Bulletin Board than were traded on the esteemed New York Stock Exchange.
And in the midst of all this frenzied stock trading by millions of
investors, the antiquated system for handling Bulletin Board trades almost
came to a screeching halt. That's because most of the behind-the-scenes
activity on the Bulletin Board still involves traders executing orders
over the telephone rather than communicating with computers - as is done
on the Nasdaq Stock Market.
Having to rely on a system that's the stock-trading equivalent of the old
Pony Express, market-maker firms and small brokerages found they simply
didn't have enough people to staff the phones during the deluge. The
result: Many trades never got executed, or some got completed at prices
far different from the quotes investors saw on their computer screens.
Angry investors cried foul and complained to regulators. Meanwhile,
conspiracy theorists began spinning some far-fetched tales on online
message boards about evil market makers and trading firms secretly
manipulating the prices of Bulletin Board stocks.
"We got a lot of calls from investors saying, 'I was putting in a market
order to buy for 60 cents and it got executed at $1.20,'" says Adena
Friedman, a vice president at Nasdaq, which oversees the Bulletin Board in
conjunction with the National Association of Securities Dealers, Nasdaq's
parent company. "There really was no one to blame. The volume was just so
heavy. The phones were flooded."
The big sell-off in technology stocks this spring had at least one
salutary effect - it eliminated, at least temporarily, most of those
trading problems by dampening the investing public's appetite for risky
penny stocks. But in an attempt to bring the Bulletin Board into the 21st
century before the next wave of investor speculation swamps the markets,
the NASD wants to develop a computer network for trading Bulletin Board
stocks. On Oct. 12, it announced plans for a new system that'll enable
trading firms to quickly process buy-and-sell orders in pretty much the
same manner as they do on the Nasdaq.
The plan to automate Bulletin Board trading must be approved by the
Securities and Exchange Commission. But most market watchers expect that
will happen. Lee Korins, president of the Security Traders Association, a
group that represents brokerages and trading firms, says he "can think of
no reason why anyone would be against it." Lisa Ulshafer, a founder of an
online investment club for penny stocks, says the members of her Copper
Club Investments view the proposal as a "step in the right direction."
Actually, the proposal is just the latest in a series of steps taken by
the NASD to polish the image of the Bulletin Board, which historically has
been something of a market backwater and a breeding ground for stock
scams. For a long time, it wasn't uncommon to find stocks of bankrupt or
defunct companies still trading on the Bulletin Board. But just over a
year ago, the NASD began cleaning house, bouncing from the market
thousands of companies that failed to file annual reports with the SEC.
Pennies From Heaven? * Data through Sept 30 Source: Nasdaq
Today, there are 3,578 stocks trading on the Bulletin Board - nearly 3,000
fewer stocks than at this time last year. But even though the Bulletin
Board is much smaller now, it's more popular than ever with ordinary
investors - in particular those who trade online. While trading in
Bulletin Board stocks is down substantially in the latter half of this
year, the 5.12 billion shares traded this September was 12% higher than
the number traded the same time last year. And the longer-term boom in
Bulletin Board trading is striking: In 1995, total trading volume on the
Bulletin Board was just 10 billion shares. During just the first nine
months of this year, it was 100.5 billion shares.
In recognition that small investors - rightly or wrongly - are putting
more of their money into Bulletin Board stocks, the NASD appears bent on
moving forward with even more reforms. In a speech this month at the
Security Traders Association annual convention, Mary Schapiro, president
of NASD Regulation, noted that growing "investor interest demands market
structure and regulatory attention." One of the things regulators are
considering is converting the Bulletin Board into a "listed" market - just
like the Nasdaq and NYSE. In a listed market, companies must comply with a
series of requirements before their stocks are permitted to trade. Some of
these include maintaining a minimum stock price, issuing periodic reports
to shareholders and appointing a designated number of independent
corporate directors. Regulators also would have greater authority to halt
trading in a Bulletin Board stock and investigate trading irregularities.
There's certainly plenty of room for improvement in the operations of the
Bulletin Board. The explosion in trading there has occurred in something
of an information vacuum. Besides the scanty disclosure requirements that
pertain to these stocks, the financial media spends little time on penny
stocks - except to report on scams - and many Wall Street analysts won't
follow a stock that trades below $5. The main sources of information for
penny-stock investors often tend to be online message boards and so-called
pay-for-hire newsletters, television shows and Web sites, which are
usually nothing more than stock-touting operations.
Still, for many investors, the Bulletin Board offers a seemingly cheap way
to enter the market. Investors think they're potentially getting more bang
for their buck when they buy 100 shares of a $1 stock rather than spending
$100 to buy a single share of some big technology stock. "For a lot of
people who don't have a lot of money, it's a way to move up faster," says
Ulshafer. "It's almost got a gambling fever to it. It's risky, but the
payoffs are huge."
Regulators may not be able to stop investors from putting money into risky
penny stocks that many of them know little about. But it's certainly about
time that the NASD flash its tin badge around this Wild Wild West of the
markets.
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