Once upon a time, there were three kingdoms in the world of finance. The most famous was also the most snobbish and wealthy, and its people were well-known all over the world. Its king was the New York Stock Exchange (NYSE), and the king ruled his people with pride.
Every brokerage firm had a stock ticker so they could tell their clients about trades in NYSE-listed stocks.
The second kingdom wasn't as successful as the first. It had fewer subjects and its people were much poorer than those in the first kingdom. Its king was called AMEX (American Stock Exchange). They might be in the lower middle class.
Now, the third kingdom was the biggest of them all. Its people ranged from middle class to very poor. OTC was in charge of this kingdom (Over The Counter Market). Some people in OTC always wanted to move to NYSE or Amex to get away from the bad reputation that came with living in OTC.
Some of the stocks that used to be traded in the Pink Sheets are well-known today, like EDS and many new IPOs. There were also stocks that traded for a fraction of a penny.
If you wanted to know the price of an OTC stock, you would call your broker, who would look in the pink sheets to see who the market makers were. He would then call a market maker and ask the person who answered the phone for a quote. The person who answered the phone would then get the price from a blackboard in the front of the room and give it to the broker who made the inquiry. This would take some time.
Market makers had a quote boy at the front of the trading room who changed the price on the blackboard every time a trader yelled a different price. This market was good for 100 shares.
In those days, you could buy something from one market maker at one price and then sell it to another market maker at a higher price. This was possible because the first market maker didn't know what the market was like unless he made a phone call. So the price of a stock always seemed to be different.
The NASDAQ, or NASD Automatic Quotation System, came along like a knight in shining armour. It let brokers see the price on their computers and gave them the average market price, not the best price, but it was a huge step forward.
These NASDAQ machines didn't give live quotes. To see the latest quote, you had to keep pressing the enter key.
And in the end, all of the better stocks were slowly added to the NASDAQ systems, leaving the pink sheet for the less well-known and less profitable companies. And again, the NASD decided to make the pink sheets even less known by making the OTC Bulletin Board.
At first, the OTC Bulletin Board didn't ask for much information from the issuer. Over time, though, they started asking for more information, and now they have to have audited financials and report.
All of this meant that the only market that didn't require the issuer to share its financial reports was the pink market.
But on February 15, 2005, there was a little bit of light in the pinks. On that day, a new policy went into effect. This policy says that issuers of newly traded securities must give the investing public enough current information.
This is only needed for companies whose securities are quoted on the pink sheets without being asked to do so, but which have never been listed on an exchange or quoted on the OTCBB.
If an issuer is quoted without being asked, this means that, according to SEC Rule 15c2-11, the NASD has not given a market maker permission to quote the security. Instead, a broker uses an exception to the rule to show a quote that represents a customer order that was not asked for. With this exception, securities of new issuers have been traded without the investing public knowing about it. In October 2004, Pink Sheets changed their rules so that brokers could enter unsolicited quotes for a new security that had never been listed on an exchange or quoted on the OTCBB. This was done to fix the problem. They now say that before a broker puts an unsolicited quote for such a security in the Pink Sheets, he or she must make sure that the issuer has put enough current information on the Pink Sheets website. The policy on disclosure has been a good attempt to make the basic information that investors who trade on public markets need more clear.
Pink Sheets is now making this rule apply to companies that were quoted before without being asked. If the companies didn't give the required information by February 15, 2005, they had to take down their website quotes.
This new policy is a big step forward for the Pink Sheets, and they should be praised for it. However, I think that all companies should be required to give full information.
If a company can't tell investors about its finances and business updates for any reason, it shouldn't be allowed to trade on any public market.
Stock manipulators use these companies that don't tell anyone anything about themselves to scam investors. Even though the Pink Sheets have taken this huge step, they still need to get rid of all non-disclosing companies from the public market.
I'm not sure if the Pink Sheets have the power to do that, but the SEC does, and the SEC is in charge of keeping investors safe.
Let's congratulate the Pink Sheet for changing its policy and hope that it will continue to raise its standards. As a direct result of this policy, Genesis Corporate Advisors is changing its policy of not bringing any company public to the Pink Sheets.
We will start looking at candidates for the Pink Sheets right away, but The OTC Bulletin Board is still our top choice because we want as much transparency as possible.
To have a healthy, stable market, you need willing investors who have access to up-to-date, correct information.
Visit http://www.genesiscorporateadvisors.com for more information.
