From Traders Magazine, March 1999 issue
Lured by the benefits of using digital technology instead of paper for publishing its stock quotes and obviously eyeing more subscribers the National Quotation Bureau’s (NQB) Pink Sheets are being automated.
Beginning next month, the 3,000 companies traded on the Pink Sheets a subset of the non-Nasdaq over-the-counter market will have their share prices disseminated in real-time on traders’ computer screens.
NQB Chairman Cromwell Coulson said overall spending for the new system is $1 million. Random Walk in New York is building the technology backbone.
The upgrade, however, does not turn the Pink Sheets into a type of lower-tier Nasdaq.
Aside from real-time trade data, including the quantity of shares available and market makers’ telephone numbers, orders must still be negotiated between two market makers haggling on the telephone. The automated Pink Sheets will not have electronic order delivery and execution similar to Nasdaq.
Nonetheless, bringing the Pink Sheets into the digital age was on Coulson’s mind when he and a group of investors acquired the New York-based company from a hedge fund 18 months ago. Before that, the 86-year-old Pink Sheets were run, some say half-heartedly, by Commerce Clearing House.
“Putting the Pink Sheets online is a long overdue step,” said John Keefe, a New York-based securities-industry consultant. “Technologically, it sounds real simple to do it for a market out there on the margins.”
Currently, about $20 million to $50 million changes hands every day among investors trading U.S.-listed companies on the Pink Sheets, while another $400 million is transacted in Pink Sheet ADRs, or American Depository Receipts.
The stocks are typically micro-caps, although on the ADR side, in particular, they do include some big names, including Nestle’s, Siemens and Nintendo.
These companies will soon be joined by an estimated 2,000 to 3,500 more companies likely to be delisted from the automated OTC Bulletin Board as a result of new listing rules.
The bulletin board, run by the National Association of Securities Dealers, is home to 6,500 companies. But the number staying there could soon shrink dramatically.
The Securities and Exchange Commission recently approved an NASD regulation requiring all bulletin board-listed companies to file updated financial information with regulators.
Only about half of the bulletin-board companies do so. The other half are expected to delist and move to the Pink Sheets, which does not require regularly updated financial reporting.
The new rule is part of an SEC drive to stamp out micro-cap stock fraud. A related SEC rule, increasing the responsibilities of market makers trading stocks on the bulletin board and the Pink Sheets, requires them to review financial information for potential red flags. The rule, revised to exempt larger companies, is opposed by traders.
The new automated environment for Pink Sheet trading will replace the traditional pink-colored paper that carries regular, though clearly not real-time, information on OTC stocks.
Instead of a daily fax and weekly directory with the latest bid and asked prices, the upgraded service will publish the most current spreads via access providers such as Reuters, Bridge Information Services and Bloomberg. NQB’s fees for the terminals are based on volume discounts, on a sliding scale from $150 to $30 a terminal.
A vestige of the Pink Sheets will remain the monthly directory showing market makers’ most recent month-end bid and asked prices. “You could call the directory a sort of back-up service in case the computers crash,” Coulson quipped.
Right now, the NQB has some 800 subscribers, each paying $85 dollars monthly for the weekly publication and daily fax. Most trading desks subscribe to one copy of the Pink Sheets.
The switch to screen-based price dissemination could stimulate trading as well, since transparency attracts attention to stocks from institutional and retail investors. At least Coulson thinks so. “The real-time prices are worth more than a week-old book,” he said.
At the moment, the precise spreads on Pink Sheet stocks are not immediately known. “Now we’re helping to make the market more efficient and transparent,” Coulson said.
On the practical side, the effect of
computerized transparency will likely lead to narrower spreads on Pink Sheet stocks. Moreover, it will eliminate the minimum regulatory standard used by brokers for executing each customer’s order the
best of three competing market makers’ price quotes.
Tony Broy, president of Jersey City-based Hill, Thomson, Magid & Co., by several measures the largest Pink Sheet trading firm, said the automated service will also encourage more firms to trade Pink Sheet stocks. “That’s good for the industry,” he added.
Nonetheless, Keefe, the securities-
industry consultant, said that in the end, what matters most in the trading of Pink Sheet stocks is the fundamental value of each company.
Early in June, the NQB plans to launch a Java-based trader workstation. It will be available through a private Internet arrangement or via a network built by New York-based IXnet. The NQB has also contracted with another New York technology outfit, Javelin Technologies, for FIX compliance. “The market of the past is now using the technology of the future,” Coulson said.