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November 1, 2000

Automating the Microcap Markets: Pink Sheets and OTC Bulletin Board Plan Non-Manual Trading

By Peter Chapman

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  • Automating the Microcap Markets: Pink Sheets and OTC Bulletin Board Plan Non-Manual Trading
  • Page 2

The two distributors of automated stock quotes to over-the-counter traders are racing to be the first to debut an electronic trading system.

The development comes as surging volume on Nasdaq's OTC Bulletin Board, and on the New York-based Pink Sheets, had traders reeling earlier this year. Automated trading, they say, could help them process more trades faster. Dealers in the non-Nasdaq OTC market currently get their quotes from screens but trade by telephone.

Last month, the board of the National Association of Securities Dealers approved a proposal for an automated order delivery system for the Bulletin Board. NASD says the proposed system - which requires Securities and Exchange Commission approval - is a necessary response to a surge in the trading of Bulletin Board stocks in recent years.

The regulator says average daily share volume has exploded from 41 million shares in 1995 to 323 million shares in 1999. Patrick Campbell, the chief operating officer at Nasdaq, credits the surge to increased retail trading and efforts by the NASD and Nasdaq to protect investors from the fraud that is legion in the market.

"They're going to have to automate it [Bulletin Board]," said Frank Held, trading chief at the Jersey City-based micro-cap wholesaler Wm. V. Frankel. "Trying to get through to many of the market makers [in the first quarter] was a joke." Many overwhelmed dealers reportedly did not answer their phones in the tumultuous first quarter.

Pink Sheets LLC, the vendor of quotes of companies unable to meet the stricter requirements of the Bulletin Board, is responding to traders' cries as well. It plans to debut an instant message order routing facility in the first quarter of 2001. Under its plan, market makers of both Bulletin Board and Pink Sheets stocks - the two most active sectors of the 50,000-strong, non-

Nasdaq OTC market - will be able to e-mail their orders and bypass the telephone.

"We intend to take the phone process electronic," said Cromwell Coulson, chairman of Pink Sheets. "Right now we're in discussions with regulators as to how that might work."

Coulson's system is essentially a stripped-down version of Nasdaq's SelectNet order delivery mechanism. It incorporates SelectNet's "directed," but not its "broadcast," features. Dealers buying or selling stock will be able to contact a specific market maker, but not sweep the quotes of multiple dealers.

Some traders question how much use they would get out of it. They say the quality of the quotes on the Pink Sheets - which started electronic dissemination 12 months ago - is often dubious. Surveillance is lax so they don't trust the freshness nor the size quoted. They still make the requisite three phone calls to confirm the quotes. They say the technology is superfluous if they must phone anyway.

"It's extremely loose on the pinks," said a bulletin board trader. "Market makers are supposed to update their markets on a timely basis, but the regulators aren't watching. You don't really have a real-time requirement. It's there, but it's not there."