There is currently a debate concerning the development of a system to execute BB trades electronically. Here is another interesting article that discusses it (I have bolded the portion that talks about it):
June 27, 2000
Dow Jones Newswires
Wild West Of Wall St.: The OTCBB's Movers
And Shakers
By LYNNETTE KHALFANI
NEW YORK -- In cyberspace, he's known simply as "rugdoc." But every
day, legions of investors seek his counsel about which way the financial
markets are headed and which stocks they should buy.
This sought-after guru isn't a suspender-clad investment banker, superstar
broker or stock market analyst. Rather, he owns a carpet and homecleaning
business in Naperville, Ill.
You've probably never heard of rugdoc, unless you follow stocks that are
quoted on the Over-The-Counter Bulletin Board.
Rugdoc spends much of his time - and makes most of his money - investing in
small-company stocks, then generating buzz for them on the Internet.
It's a lucrative enterprise, one that has 30-year-old rugdoc, who declined to
have his real name published, already thinking about retiring soon. "I'm not
rich,' he says. "But I'm definitely comfortable. In my best week ever, I made
$90,000."
Rugdoc ranks among a select group of individuals that possess enormous
clout in the OTCBB world, an arena characterized by penny stocks,
extreme volatility, and businesses that don't qualify to be listed on a major
exchange, such as the Nasdaq Stock Market.
In addition to rugdoc, four other individuals have tremendous sway over the
Bulletin Board universe. One is a securities regulator; two others hold the
reins at investment firms that, together, control nearly 50% of the volume in
small-cap stocks; and another is a scrappy competitor to the Bulletin Board
looking to cash in on some of the sweeping changes in the business.
As individuals, these five people are as diverse as the jobs they perform. But
interviews with them and others suggest that what unites these individuals is
their intense dedication to - and their vocal opinions about - the unpredictable,
sometimes wacky world of low-priced stocks.
The Internet Buzz
The explosion this year in Bulletin Board trading has been driven by the
information superhighway. Investors hungry for stock tips now flock to web
sites such as Silicon Investor (www.siliconinvestor.com) and Raging Bull
(www.ragingbull.com). And new OTCBB forums are constantly being
created, such as the OTC Network News (www.otcnn.com), which launched
in mid-May and Dimgroup (www.dimgroup.com), slated to debut June 26.
"The Internet is a stock touter's dream," says Clark Yingst, market analyst in
the equity trading division of Prudential Securities Inc. "It gives you
instantaneous access to a world of investors."
In some ways, what rugdoc does is similar to other stock promoters on the
Internet. He creates and hosts web sites about companies he's interested in.
He sponsors weekly shareholder discussions over the Internet and speaks
with shareholders online or over the phone, disseminating information he has
gathered from his research and company visits.
But here's where rugdoc says he's different: he doesn't receive a nickel from
any of the companies he writes about, as do some stock promoters.
Rugdoc points to what he has done with ActFit.com (ACTFF), an
Internet-based health and fitness company as an example.
"I have almost 40 people in this stock," he says. And he estimates that the
120 shareholders that have joined the ActFit.com message club he created on
Yahoo have about $4 million to $5 million invested in the company.
"You can actually create a wave so large that it moves. It'll move a market.
It's a big snowball," he says. The stock has traded between 30 cents and
$2.12 over the past 52-weeks. It recently traded around 32 cents.
Rugdoc also knows that the snowball can easily melt.
"People can lose their shirts at the drop of a dime," he says, adding: "You
can't fall in love with these stocks. If you do, you're going to get burned."
Policing The Beat
Adena Friedman is the most powerful woman in the OTCBB world.
Friedman, who heads up the National Association of Securities Dealers'
Bulletin Board operations in Washington D.C., has the final say on which
companies are eligible to be quoted on the Bulletin Board.
As of this month, a new NASD rule requires that all Bulletin Board issuers file
financial reports with the Securities and Exchange Commission or the
appropriate governing body. Before, such basic information as a company's
earnings report could be next to impossible for an investor to obtain.
"We really are focusing these days on investor protection," says Friedman.
So far, the agency has reviewed 5,004 companies; of those nearly 60% have
been kicked off the OTCBB. The new eligibility rule "has made it much easier
for investors to get information on Bulletin Board companies and make better
investment decisions," says Friedman.
The NASD also recently won approval from the SEC to halt trading in
OTCBB securities under certain conditions. For instance, if a stock is quoted
on the Bulletin Board and also listed on a foreign exchange and regulators in
another country suspend trading in the issue, then NASD officials can
simultaneously halt trading in the U.S.
King Of The OTCBB Road
Knight Securities is the big gorilla in the OTCBB market.
The Jersey City, N.J., unit of Knight Trading Co. (NITE) executes more than
30% of the trades in the OTCBB market, according to Autex/Blockdata. It
makes a market in more than 7,100 OTCBB and Pink Sheets companies.
Knight has become a powerhouse in this market in just five years. And many
say that's because Knight's chief executive, Kenneth Pasternak, recognized
early on how much the online investing trend would transform the brokerage
business.
Knight's success "is largely due to new account growth at online brokers,"
says Cathy Boucher, an analyst with Putnam Lovell de Guardiola & Thornton.
According to Boucher, Knight's three biggest customers are Ameritrade, TD
Waterhouse and E-Trade.
"In effect, they've all routed, or outsourced, their trading business to Knight,"
Boucher says.
Pasternak rose through the trading ranks before moving into the executive
suite. His acute eye for trends in the trading business can perhaps be
explained by the fact he still dabbles in stocks himself on a regular basis.
While OTCBB trading volumes have declined this quarter from their
first-quarter peak, Pasternak says there are "always themes flowing through
the market."
What's hot right now, he says, are companies focused on broadband
technologies and "anything wireless."
Pushing For Reforms
Not long ago, OTCBB companies weren't the only ones often deemed risky
and speculative. A number of disreputable market makers, like A.R. Baron
and Hanover Sterling which were shut down by regulators, employed abusive
sales practices.
But that rough-and-tumble image is changing. More representative of the
industry now is Leonard Mayer and his firm.
Mayer runs Jersey City, N.J., Schwab Capital Markets, formerly called
Mayer & Schweitzer, a firm he founded 31 years ago. In addition, he leads
the group on OTCBB issues at the Securities Industry Association, Wall
Street's trade group. More importantly, he also heads the National
Association of Securities Dealers' OTC Bulletin Board advisory committee.
Mayer is unflinching about things in the industry he doesn't like, such as the
phasing out of companies from the Bulletin Board if they've not reported
financial information to the SEC.
"Regulators think that eliminating non-reporting companies from the Bulletin
Board will somehow benefit investors," he says. "But if they're trying to stop
fraud, all they're doing is moving it further underground to another venue." He
also doesn't believe that fraud by issuers in the OTCBB arena is rampant.
"That's a myth .... They're not all out to scam little old ladies."
Mayer has been active in getting the NASD's Bulletin Board advisory
committee to push for what he calls some much-needed changes. At the
committee's urging, the NASD recently proposed to the SEC that the
OTCBB be governed by a "two-quote rule." Currently, market makers in
non-Nasdaq securities have to get three quotes and record them before
trading a stock. The new rule would reduce the quotes to two, cutting the time
traders spend getting bid and ask prices.
Also, the committee recently suggested the NASD build a system that allows market makers to electronically communicate bid and ask information rather than having to do so over the phone.
Mayer, however, doesn't support building a trading system like SOES, which allows for automatic execution of Nasdaq securities; the illiquid nature of the Bulletin Board doesn't permit that, he says. "Automatic execution without
liquidity is a sure way to lose money."
Pink Sheets In The Pink
The OTCBB isn't the only home of very tiny companies. A competing
quotation service is called the Pink Sheets, and it, too, has recently become a
money-making niche of Wall Street. Founded in 1911, the Pink Sheets got its
name because the price quotes for the stocks were once published on pink
paper sheets.
When Cromwell Coulson, a former OTC market maker, bought the Pink
Sheets in May 1997, colleagues had words of warning.
"People told me I'd be out of business in no time," recalls Coulson, 33,
chairman of Pink Sheets LLC in New York.
But through technology enhancements, capital infusions and good fortune, he
transformed the once-moribund Pink Sheets into a new marketplace and a
true rival to the OTCBB.
Colleagues describe Coulson as a market-savvy salesman. But blind luck
clearly also accounts for some of his success at the Pink Sheets. When he
took over the company, the NASD hadn't yet begun its campaign to phase
out the Bulletin Board's non-reporting companies.
Approximately 4,800 securities trade on the Pink Sheets, and Coulson says
about half of them are former OTCBB companies that got kicked off that
medium by regulators.
"More financial disclosure is good," says Coulson. "But you always need a
place for the things that fall through the cracks."
"This is not a place where you buy things blindly," he adds. "This is a place
where things can go wrong. I tell people, 'This is a risky area. Watch
yourself.' There's great opportunity. But there's also great risk."
-By Lynnette Khalfani, Dow Jones Newswires; 201-938-4381
(Michael Rapoport contributed to this story.) |
