Commentary

Anne Plested
Traders Magazine Online News

Bottlenecks Ahead

Anne Plested, head of Fidessa's EU Regulation Change programme, has written a short blog arguing that although we should be thankful that ESMA have taken a pragmatic approach to moving things along, more bottlenecks could appear in the future.

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May 31, 2003

OTC The Rise of the Pink Sheets: Nasdaq is making more room for one big fish in a small pond.

By Peter Chapman

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  • OTC The Rise of the Pink Sheets: Nasdaq is making more room for one big fish in a small pond.

The OTC is turning pink. That's because the Pink Sheets may soon become the dominant trading venue in the over the counter market for stocks that do not trade on Nasdaq. And it's all because Nasdaq is planning to dramatically reduce its support for these OTC securities.

Under Nasdaq's plan, the OTCBB will disappear. That will leave the Pink Sheets in control of most of the 7,000 OTC securities bought and sold "over the counter."

Right now, the over-the-counter market is split between two trading venues - Nasdaq's OTCBB and the Pink Sheets. But next January, Nasdaq will launch a new market called BBX, which stands for Bulletin Board Market. The BBX will list the strongest companies on the OTCBB. Six months later Nasdaq plans to terminate the OTCBB.

The proposal is still pending approval by the Securities and Exchange Commission. But if it gets the green light, no more than 700 of the 3,200 OTCBB securities are expected to qualify for a listing on the BBX. The rest will shift to the Pink Sheets, a venue, which like the OTCBB, has many risky securities.

Some 7,000 securities are traded in the over-the-counter market. OTCBB quotes 3,200 of them. Pink Sheets quotes 3,900 exclusively. Pink Sheets could pick up another 2,500 to 3,000 if Nasdaq's proposal is approved. The BBX listing fees and stringent corporate governance standards will likely prevent the vast majority of OTCBB companies from making the cut.

Sleepy Company

The upheaval reflects both the disdain Nasdaq has for its often scandal-plagued sister market and the dramatic transformation of Pink Sheets - from a sleepy publishing company into a modern day electronic trading facility.

The Pink Sheets makes most of its money selling market data and charging market makers "position" fees for each security traded. It is eager to get its hands on 3,000 more securities.

"We would love to have them," said Cromwell Coulson, chief executive of Pink Sheets. "Our goal is to provide a competitive, transparent and efficient medium for market makers to make markets and brokers to transact in these securities."

If Nasdaq's BBX proposal is approved and thousands of OTCBB securities fail to make the cut, the event will mark Pink Sheets' second major windfall in four years.

Between 1999 and 2000, OTCBB de-listed about 3,000 of its then 6,500-name roster. The companies were unable or unwilling to meet new requirements to file reports with the SEC.

At that time, the mass de-listing caused the number of securities quoted on the Pink Sheets' then-new Electronic Quotation Service (EQS) to surge from about 1,000 to 4,000.

Had the EQS not existed, it is questionable whether the SEC would have allowed Nasdaq to de-list 3,000 companies. Prior to 1999, the Pink Sheets was just a pink-colored printout of securities prices and market maker telephone numbers that was distributed to dealers. This relative lack of transparency in over-the-counter prices is what led the SEC to pressure Nasdaq to establish an electronic quotation service. The OTCBB was launched in 1990.

The EQS is popular with traders and Pink Sheets quote data is carried by Nasdaq's Level 1 feed and the major market data vendors. Pink Sheets prices have achieved widespread visibility.