Bulletin Board trading volume is up 3 times compared to last year:
March 6, 2000
Small U.S. Stocks
Small Stocks Get Smaller
As Investors Count Pennies
By TERZAH EWING
Staff Reporter of THE WALL STREET JOURNAL
Stock-market momentum riders, no longer content with risking their last
dollar, have started risking their last penny. On penny stocks, that is.
Internet initial public offerings and hot tech stocks are no longer the market's
biggest gambles. Trading volumes have leapt in the mostly opaque, fitfully
traded shares on the OTC Bulletin Board and in the Pink Sheets.
These are the market's riskiest corners -- the last
vestiges of the old "over-the-counter" market that
preceded today's Nasdaq Stock Market --
because there is less information on the
companies involved. The requirements to be included in these OTC venues
are much less stringent than for Nasdaq-listed or exchange-listed stocks,
though the Bulletin Board recently made financial-reporting requirements for
its companies stricter. This arena can also, at times, be a breeding ground for
fraudulent trading activities.
Daily trading volume on the Bulletin Board so far this year is averaging 1.07 billion shares. Last year, the average daily volume was just 323.1 million shares; in 1998 it was just 123.3 million shares. Some stock dealers specializing in penny stocks say they have had to hire more traders recently to deal with the volume.
Anecdotal evidence from traders suggests trading is up a similar amount on
the Pink Sheets, for which there are no official volume data available.
'Insane' Popularity
The popularity of tiny shares is "insane," says Cromwell Coulson, chairman of
National Quotation Bureau LLC, which has owned the Pink Sheets since
1911. "What you find in a bull market is as it goes along people want to have
things that are highly speculative."
But despite penny stocks' new-found
popularity, the risks of the small and
thinly traded issues haven't diminished.
For one thing, the shares tend to be
illiquid -- that is, it can be hard to find a
buyer if you want to be a seller, or vice
versa. That makes it easy to lose money
fast if you can't unload a stock whose
price starts falling.
That said, the Pink Sheets market is a
mixed bag: It is home not only to stocks
that are too small for Nasdaq, or that
have simply fallen as far as they can go
(Boston Chicken Inc. stock is now
quoted in the Pink Sheets, for example,) but also some large, established
companies, mainly foreign, that simply don't trade actively.
Officials at big Wall Street firms cast a dubious eye on the penny-stock
sector. "It's almost a sure-fire formula to lose money," says Keith Mullins,
growth-stocks analyst at Salomon Smith Barney. "You can probably count on
one hand the number of them that have done well for investors."
Indeed, just last week the Securities and Exchange Commission filed a
complaint charging that a group of law students reaped $345,000 in one
month through a scheme to tout low-priced stocks through a Web-based tip
sheet and on message boards, then sell them as others ran them up. The
defendants all settled the case, without admitting or denying the allegations
('Boiler Room' in a Dorm? How Founders of FastTrades Reaped Speedy
Profits, March 3).
The Bulletin Board is owned by Nasdaq's parent, the National Association of
Securities Dealers. Tiny stocks are usually on either the Bulletin Board or Pink
Sheets, not both. Around 2,000 Bulletin Board stocks that were unable to
meet the NASD's new reporting requirements have moved to the Pink
Sheets.
Increasing Complaints
As trading volumes and phone calls to over-the-counter trading desks have
ballooned, the NASD has been dealing with customer complaints about
difficulty getting through to dealers, known as market-makers. It issued a
memo in mid-February warning Bulletin Board firms they have a duty to
answer the phone when customers call. Neither the Bulletin Board nor the
Pink Sheets are completely computerized, so the market-makers still have to
trade the stocks over the phone.
The phone problem may ring a bell for investors. Nasdaq itself had such
problems with unanswered phones during the 1987 stock-market crash, back
when Nasdaq was less-computerized and was still commonly known as the
OTC market.
Many of the stocks enjoying the jumps in volume are literally valued at
pennies a share, though penny stocks can be valued at as much $2 each by
some definitions and a handful have recently soared well beyond penny-stock
status.
This year's volume jump is particularly noteworthy because volume in the little
Bulletin Board stocks had already been rising in recent years. Volume surged
687% in the four years ended with 1999. In contrast, average daily volume on
Nasdaq, home of the hottest of the hot technology stocks and IPOs, was up
only half that much in the four years ended in 1999. Bulletin Board volume
rose only 7.55% in the four years ended in 1994.
As more investors have sought profits in the latest hot initial public stock
offerings, the real risk-hounds have found the IPO field too crowded and the
shares too scarce. Ditto for other Nasdaq tech stocks.
'A Lot More Action'
"I was into IPOs pretty heavily," says Dave Gullotto, a 35-year-old former
General Electric employee who now day trades full-time from his home in
Berne, N.Y. "But it got to the point where sitting there all day for nothing got
boring. Bulletin Board [stocks] seemed to be fun, and lately there's a lot more
action there."
Mr. Gullotto says he has made between $10,000 and $12,000 in the six
months he has been trading penny stocks heavily.
To get an idea of what he's playing in, consider the stock chart of a Bulletin
Board company called American Diversified Group Inc., a Hickory, N.C.,
pharmaceuticals and vitamins company that also recently acquired a closely
held telecommunications company. One of Mr. Gullotto's favorites, the stock
now trades at around 63 cents a share. Sounds like a pittance but the returns
are outsize on a percentage basis: It's up more than 1,800% from its Dec. 31
close of 3.3 cents.
Other examples abound, and as with the larger market, most of them are
technology or biotechnology stocks. On Oct. 20, SmartServ Online Inc., a
Stamford, Conn., Bulletin Board-listed Internet company, closed at $1.125,
near where it had languished for months. But it caught the eye of momentum
players, who as of Friday had driven the shares up to $148. That makes for
an almost incomprehensible return of about 12,789%. SmartServ has applied
to list on Nasdaq's National Market.
"There are a lot of stocks making it from pennies to dollars," says Nicholas
Ponzio, president of Hill, Thompson, Magid & Co., a market maker in
Bulletin Board and Pink Sheet stocks.
Adds Buzzy Geduld, president and CEO of Herzog, Heine, Geduld Inc., a
major Nasdaq-stock dealer, which also is involved in penny stocks, "It's
pure speculation. If it smells of tech, if it smells of the Internet, people want it."
Mr. Ponzio says his firm has hired at least a dozen new traders in the past few
months and is "adding more every day." Mr. Geduld tells a similar tale.
A final word of caution, from Mr. Gullotto: He remembers seeing one stock
(which he didn't buy) go up 7,500% in one day on volume of just 200 shares;
he believes someone was deliberately buying to drive up the price before
selling out. "It seems like anybody can set up a penny [Web] site" and start
dispensing advice, he says. "There are a lot of 'pump and dumps' out there."
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