This is a pretty interesting article:
(If it has already been posted I apologize)
Wild West Of Wall St.: OTCBB, The 'Other'
Side Of Town
By LYNNETTE KHALFANI
NEW YORK -- Every city has a part of town that's looked at as the other
side of the railroad tracks.
The "Other Side." It's rough and tumble. It's where rules are made and
broken. It's where only the tough survive. It's where you arrive with little and
sometimes leave with less.
Wall Street has its own "Other Side." It's called the Over-The-Counter
Bulletin Board.
It's a place with little regulation. It offers quotes on stocks of companies that
often have no track record. You've heard the stories of dead voters casting
ballots in elections? There have been cases of investors buying stocks of
Bulletin Board companies that no longer exist. The Bulletin Board is a corner
of the financial community where you find shell companies, that is companies
with no business operations but shares that trade anyway. It's an environment
where fraud and stock scams can breed.
"I would recommend that people stay away" from the Bulletin Board, says
Dale Bryant, head of the New York money management firm The Bryant
Group. He concedes that some investors have struck it rich by dabbling in the
tiny so-called microcap stocks that constitute the Bulletin Board. "But you
know what? New Jersey just had a $150 million Power Ball lottery, too," he
quips.
Staying away, however, is not what investors are doing.
During the first quarter of 2000, activity in Bulletin Board stocks - commonly
called "penny stocks" because many trade for less than $1 - skyrocketed
370% from year-ago levels to a record 69.1 billion shares traded. Monthly
volume peaked at 25 billion shares in March.
Through May, some 81.8 billion Bulletin Board shares had changed hands,
eclipsing the record 81.4 billion shares traded during all of 1999.
That so many buy and sell requests could be processed at all is remarkable
given that even a decade after its creation, the Bulletin Board, a quotation
service owned by the National Association of Securities Dealers, remains a
telephone-driven environment where orders are often filled manually. That's a
far cry from the sophisticated electronic network that links traders in the
NASD's Nasdaq Stock Market.
The frenzied activity is also extraordinary considering it comes at a time when
the number of Bulletin Board issuers stands at a five-year low. In 1995, there
were 5,450 Bulletin Board securities, and as recently as June 1999, some
6,667 stocks traded on the OTCBB.
Starting last July, however, securities regulators began kicking thousands of
companies off the Bulletin Board in a bid to increase transparency and reduce
fraud in the marketplace. As a result, there are currently only 3,943 securities
listed.
The removal of many Bulletin Board companies, for failing to meet a new rule
that requires financial disclosure, is part of a sweeping set of regulatory,
technological and personnel changes occurring in this vibrant, often colorful,
marketplace. These transformations promise to impact thousands of U.S.
companies that need to raise money, millions of individuals that invest in these
businesses, or could potentially do so, and hundreds of investment firms
nationwide that serve as middlemen between Wall Street and Main Street.
At the heart of the revolution in the OTCBB universe is a powerful and
paradoxical force: the Internet. Though the World Wide Web provides an
information-hungry public with vast amounts of data faster than ever,
increasingly it serves as a medium through which stock manipulators and other
con artists prey upon unsuspecting investors.
Take A Walk On The Wild Side
To understand what is happening in the OTCBB market, one need first
understand a bit about how it operates, who its key players are, and why, to
some observers, the Bulletin Board still represents the Wild West of Wall
Street.
To say that the OTC Bulletin Board has an image problem is an
understatement, though the industry's reputation has improved lately. A chief
complaint still lobbed at the industry is that it is not sufficiently policed. NASD
Regulation oversees the quotation activity and trade practices of Bulletin
Board market makers, or trading firms. But it has no say-so over issuers.
And consider this distinction: any business can be quoted on the Bulletin
Board, or its primary competition, the Pink Sheets, as long as it files an
updated financial report with the Securities and Exchange Commission or the
appropriate governing body.
By contrast, stocks get approved and are listed on the Nasdaq or the New
York Stock Exchange only after passing a number of financial hurdles,
including length of time in business, number of shares outstanding, revenues,
and number of shareholders.
No such standards exist for Bulletin Board companies.
Thus, to many market watchers, the Bulletin Board represents the worst of
the investment world: scant regulation, companies in speculative businesses,
little dissemination of financial information or business developments and thinly
traded stocks.
And on top of that, shareholders get no say in corporate governance issues,
like huge increases of shares outstanding, voting for directors or approving
acquisitions.
"Clearly the Bulletin Board system is not the best system possible," says
Junius Peake, finance professor and market researcher at the University of
Northern Colorado. He says regulators have failed to adequately monitor the
system, and so, "what they're essentially saying is that some investors are
second-class investors."
To address those criticisms, the NASD last July began purging the ranks of
Bulletin Board companies. As of this month, all Bulletin Board companies
must be current in their financial filings with the SEC or be dropped from the
Bulletin Board.
Amid the shakeout, three kinds of Bulletin Board companies have emerged.
The first group comprises emerging-growth companies that are too new and
lack the financial requirements to be listed on the Nasdaq. A second consists
of closely held businesses, especially regional banks and insurance firms, that
have too small a float to be Nasdaq stocks. Then there are companies in
bankruptcy proceedings.
Because they have a relatively small number of shares held by the public,
Bulletin Board companies typically have little or no analyst coverage. Access
to institutional investors is, consequently, virtually nil. The upshot: to be a
Bulletin Board company is often, rightly or wrongly, to get no respect.
The same might be true of the investment firms that trade Bulletin Board issues
- were it not that handling these and other over-the-counter stocks has
become a highly lucrative enterprise, one that is increasingly beckoning Wall
Street's most prestigious firms. Recently, Merrill Lynch & Co. agreed to buy
Herzog Heine Geduld Inc., one of the oldest and largest market makers in the
nation.
The biggest names in the over-the-counter Bulletin Board market don't deal
directly with individual investors. Instead, they act as "wholesalers," often
providing payment for order flow from other electronic brokerages that have
a retail customer base.
A decade ago, some of the most active investment firms in the Bulletin Board
marketplace were small outfits operating out of boiler rooms - little more than
rented spaces lined with phone banks and aggressive salesmen.
Today, many leading market makers in the OTCBB arena are better known,
more established, and often subsidiaries of publicly traded corporations.
The biggest in the business with nearly a third of the market is Knight
Securities, the brokerage arm of Knight Trading Group Inc. (NITE). Others
include Hill Thompson Magid, a unit of Tucker Anthony Sutro (TA) and
Schwab Capital Markets, formerly known as Mayer & Schweitzer, which
operates under parent company Charles Schwab & Co. (SCH).
And executives at all of these companies say business is booming.
"The Internet has made investing in OTCBB issues so much easier," says
Knight Chief Executive Kenneth Pasternak. "Most OTCBB investors are
looking for undiscovered value. They're trying to find the next undiscovered
Cisco, eBay or Microsoft."
"Hopefully people also realize," Pasternak adds, "that these are much riskier
investments."
-By Lynnette Khalfani, Dow Jones Newswires; 201-938-4381 |
