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April 1, 2002

Bulletin Board Remodelling Risks and Benefits in New Exchange

By Tom Taulli

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  • Bulletin Board Remodelling Risks and Benefits in New Exchange

In with the new, but the old should be allowed to live on for a while longer.

That appears to be Nasdaq's philosophy as it goes about replacing the OTC Bulletin Board (OTCBB) with the Bulletin Board Exchange (BBX) early next year. In what some see as a risky way of implementing a new system, the old bulletin board will continue to operate for six months while the new one is beginning operations in January 2003.

As with any securities exchange, issuers on the BBX will need to meet minimum listing' requirements: 100 round-lot shareholders and 200,000 shares in the float.

There will also be corporate governance standards. Although, unlike Nasdaq SmallCap and National Market System stocks, a BBX listed company will not have to meet minimum financial requirements (such as for net tangible assets and net income).

Traditionally, a big problem with the OTCBB has been order imbalances. If volume surges - either to buy or sell - there may not be enough liquidity to handle the trades. A major reason for this is the technology infrastructure. But this will change with the BBX, because it will use a cutting-edge trading system, Nasdaq officials claim. The so-called automated delivery service (ADS) will allow for automated trades similar to the SelectNet system.

"No longer will traders need to use phones to place their transactions," said Wes McGrew, executive vice president at Nasdaq for alternative markets.

Moreover, the BBX will likely have the uptick rule. OTC stocks are vulnerable to heavy short selling, which can drive down the price of a thinly-traded stock. The uptick rule should help dampen this pressure on the BBX, trading pros say.

"If the proposal goes forward as advertised," said Tony Broy, CEO of market maker Hill Thompson Magid, "the BBX will be the leader in the OTC in terms of efficiency and transparency. This will mean smaller spreads, of course. But a pick-up in volume will mean more business for traders." However, Cromwell Coulson, the chief executive of Pink Sheets LLC, thinks there are risks with the new moves from Nasdaq.

"No question, Nasdaq has a tremendous brand," Coulson said. "Let's face it, Nasdaq will make more money trading Intel than the whole OTC marketplace. The big risk factor is tarnishing the Nasdaq brand. Having dancing girls works in Vegas, but not in Disneyland."

Market of Risk

Coulson considers the success of the Pink Sheets, which is another electronic service that trades OTC stocks, to be its clear message that it is a market of risk. "We do not hide the fact that there is incredible risk in our issuers," Coulson said. "Risk is certainly not bad. Still, if you create an illusion of quality, you can get in trouble."

Coulson uses Global Crossing as an example. This former high-flier telecom company is now in bankruptcy and its stock value is near worthless. "There are legitimate reasons to trade the stock," Coulson said. "Traders may need to take tax losses or cover shorts. But does Nasdaq want to get into this market?" Probably not. And this could actually be a boon to the Pink Sheets and other OTC marketplaces.