New era of pink sheet market.
We forgot to ask MKGP yesterday, if they can provide attorney signed letter, it would bring them to a better category then
Quote Status: Unsolicited, which we have now.
BOSTON (MarketWatch) -- The skull and crossbones is both the sign of the pirate and the symbol for poison. Pirates are portrayed as being both dangerous and romantic, poison is deadly.
So when the Jolly Roger flies on certain stocks, there is little doubt that it will attract some investors just as much as it pushes others away. Moreover, like a surgeon general's warning on a pack of cigarettes, it may just be ignored.
But when it's the operators of the trading platform issuing the warning about stocks it services, it will be interesting to see whether investors take notice. And starting next month, Pink Sheets LLC -- the electronic trading platform that is the favorite venue for many stock manipulators -- will be issuing some warnings about stocks. One of those cautions will come in the form of the Jolly Roger.
"We're not a regulator and this is not a regulation, it's just a statement about the condition of the company," says Cromwell Coulson, chief executive officer for Pink Sheets. "It will take time for our categories and the buyer-beware flag to get out through the market data providers, but in time we think it will make a real difference in a lot of ways."
The flag system is part of a market-tiering process that Pink Sheets is creating for its stocks, a process not that dissimilar from changes Nasdaq made a while back in naming the various segments of its markets. The biggest difference comes in the warning labels.
In the old days, pink sheets were colored slips of paper you might find lying around a brokerage office floor; a small company that did not trade on the big exchanges or that fell off those markets because it no longer met regulatory standards was said to be trading "on pinks." By the late 1990s, the service was little more than an outdated phone-book style listing of over-the-counter stocks.
Today, the paper is gone, and Pink Sheets represents a centralized quotation service collecting and distributing market-maker quotes for securities traded in the over-the-counter market. Technically speaking, Pink Sheets LLC is not an exchange; that said, a majority of trades for OTC Bulletin Board stocks are made through the Pink Sheets system and the new Pink Sheets standard will apply to all stocks that use the modern-day version of trading on pinks.
There are more than 8,000 Pink Sheets companies today, and they run a wild gamut: fallen angels that are headed to zero, bankruptcy cases hoping for a rebound, international companies that are listed on a foreign exchange but don't want to go through the listing process for the big American exchanges, small start-up businesses that find the costs of Sarbanes-Oxley regulatory compliance excessive, inactive shell companies and virtually every company touted in a spam e-mail message.
Unlike the big exchanges, which have rigid standards for listing a stock, Pink Sheets does not. While there are companies giving financial guidance and providing audited financial statements, there are also those that provide virtually no information whatsoever.
Couple that potential lack of information with the prevalence of pump-and-dump touting and you've got the basis for the changes the system is undergoing.
The change started with the creation of a top tier of Pink Sheets stocks, called the OTCQX, which effectively is limited to quality companies with good disclosure, but that do not meet the listing requirements of a bigger exchange. There is also an International OTCQX.
Calling out the culprits
Beginning Aug. 1, the data feeds on Pink Sheets (and OTCQX) stocks will include a pink checkmark to tell investors that the company is current on its financial disclosures, either in filings at the Securities and Exchange Commission or with Pink Sheets itself.
Companies that have made those disclosures, but which have failed to keep them current -- meaning the information is six months old -- will be marked with a "Yield" traffic sign signifying "limited information."
And stocks where the information pipeline has run dry will be tagged with an old-fashion stop sign, noting that no information is available.
And then there's the Jolly Roger; the skull and crossbones will be an additional tag on any security deemed a "public interest concern," which is a nice way to say that the stock has been touted in a spam e-mail pump-and-dump campaign.
Coulson says the tag is likely to stick on a stock for six months, and will be applied whether management was somehow involved in the tout or was just the victim of some speculator trying to make a quick buck.
The idea is not just to protect investors, but to discourage the frauds. Once the Jolly Roger is in place, brokers can easily track the trading in the affected stocks, which will provide information on who is behind the touting, and which may make regulatory cases much easier to prosecute.
"Since the beginning of the stock markets, there have been promoters dumping overpriced stocks into the heart of the market," says Coulson. "This isn't going to stop it, but it will help brokers see what is happening, and will make it easier for regulators to file cases, which will discourage the bad guys."
Effectively, Pink Sheets has gone to a system like ancient maps, where the uncharted territories were marked with phrases like "Here there be monsters."
Says Coulson: "We can't call them monsters, but we hope this will make it clear that you really need to know what you are doing before you get involved in trading stocks that aren't giving information, that are part of a spam campaign or both."
Investors will love the change if it simply reduces their volume of junk e-mail. But it will be a lot more helpful if, at some point, investors decide that they don't want to have their investment portfolio poisoned by pirates, and they use the warning system to keep them away from the dark and murky corners of the stock world that only a few insiders truly understand.
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