Big Changes in Trading Small Stocks

As small-stock investing comes back into vogue, big changes are in store for the way the smallest of the small stocks trade.

The changes may have a dramatic effect on many young Southern California companies and their stockholders. In some cases, buying and selling those stocks will become easier. In other cases, trading such stocks may suddenly become an exercise in frustration--especially if the stock price is under $1.

In sheer number, the smallest U.S. stocks dwarf the big stocks. Consider: About 1,700 companies trade on the New York Stock Exchange, and about 850 trade on the American Stock Exchange. Another 4,900 trade on the nationwide electronic system operated by the National Assn. of Securities Dealers (NASD)--the over-the-counter market.

The smallest of the small stocks, however, number upwards of 30,000. The only national listing of those stocks' prices is in a daily compilation known as the "pink sheets," for the color of the paper on which they're printed. The pink sheets are published by the National Quotation Bureau, a firm based in Jersey City, N.J.

But starting today, the NASD inaugurates a pilot project--the Bulletin Board--that will begin making pink-sheet stock prices available electronically to brokers nationwide, for the first time. The goal is to make trading in the stocks far more visible--which could significantly improve the prices that both buyers and sellers get.

Pink-sheet-listed companies are all over the Southland. Many are tiny companies, such as Los Angeles-based Altius Corp., a metal cabinet maker that had revenue of $1.3 million last year. Others are established firms whose shares are closely held by relatively few shareholders--such as First American Bank of Rosemead, a $160-million-asset bank whose 2.1 million shares are owned by just 800 shareholders.

A lot of pink-sheet stocks are junky outfits that don't make much money. Even so, the stocks sometimes present intriguing investment possibilities--or at least interesting speculations.

But dealing in that market has long been a game only for people who enjoy haggling at Middle Eastern rug bazaars. To buy or sell a particular pink-sheet stock, you first have to locate a brokerage that trades the issue, as listed in the pink sheets. Then the haggling begins over price--your bid, versus what the sellers are asking.

If you're lucky, two or three competing brokerages may make a market in the stock. The game is to find the best deal among them, in what often amounts to a war of nerves over phone lines.

For a broker trying to strike a deal for a client in a pink-sheet stock, the inherent danger is that "you have no idea what your competition is doing" with the stock, notes Larry Butler, senior vice president at Newport Securities in Costa Mesa. Because pink-sheet quotes can be days old, "You can end up buying or selling way off from where the market (price) is," Butler says.

That's no small risk in a market where, because of the chunk the dealer takes, the gulf between a stock's bid and asked prices often is as wide as the Panama Canal. Take the Bank of Newport, for example. Its stock currently is quoted in the pink sheets at $1.75 bid, $2.25 asked. If you bought at $2.25, your shares would immediately be worth 22% less, if $1.75 is indeed the latest bid.

By haggling, "a broker who knows what he's doing can save a client a tremendous amount of money," Butler said.

Now, the new electronic Bulletin Board should enhance brokers' ability to negotiate the best price in small stocks. The system will allow traders nationwide to update prices on their pink-sheet stocks instantaneously, so that all brokers see the data on their computer screens, said William Broka, NASD's business-development chief.

Traders won't be required to say their Bulletin Board prices are set in stone, so there will still be a bazaar atmosphere in the stocks. Even so, NASD hopes that by letting the sun shine on pink-sheet stock prices, the market will become much more efficient--in theory, leading to fairer prices.

Most Southland brokerages that make markets in pink-sheet stocks say they are likely to join the Bulletin Board system, if gradually. "I think anytime you get more information out there, it's healthy for the market," said James Alexander, who heads L.A.-based J. Alexander Securities, which trades in more than 400 pink-sheet stocks.

At the same time that the NASD is being praised for the Bulletin Board, however, the association is being slammed for another proposed change: removal of all stocks trading for less than $1 from among the 4,900 NASDAQ stocks.

NASDAQ is the NASD's "automated quotation" system, which in 1971 did for big over-the-counter stocks what the Bulletin Board will do now for the smallest stocks. The NASDAQ system, however, is far more sophisticated than the Bulletin Board. NASDAQ allows stocks to be traded automatically via computer nationwide, guaranteeing the best price available at any moment.

Earlier this year, the NASD proposed tightening its listing standards for NASDAQ, to weed out many smaller companies deemed too speculative. Among other things, the NASD wants to delist any stock that trades for less than $1. Such companies would be thrown back to the pink sheet/Bulletin Board realm, probably in 1991.

There are hundreds of such stocks now on NASDAQ, including scores in Southern California, particularly among Orange County's emerging growth firms. Many of the firms, and the brokers who trade the stocks, are crying foul. "I don't think it's fair," said Larry Rice, over-the-counter trading chief at Wedbush Morgan Securities. "I'm hopeful the Securities and Exchange Commission will take a hard second look at this."

The companies fear that if they lose their NASDAQ status, many investors will avoid the stocks as too dangerous, hurting the firms' ability to raise capital. The stocks will immediately lose visibility, because they'll be dropped from NASDAQ newspaper listings. What's more, many big brokers are reluctant or unwilling to trade stocks that aren't included in the NASDAQ system.

Yet many of the under-$1 companies, such as Santa Ana-based Micro General, say they meet all other NASD listing standards, including minimum asset and capital requirements. To delist them simply because their stocks have fallen below $1 makes no sense, the companies argue.

"It's taken us a long time to build up the (NASDAQ) following that we have," said George O'Leary, president of Micro General, a $6.5-million (annual revenue) firm that builds electronic weighing devices for mail rooms. "We certainly would not want to be delisted."

One option such penny-stocks have is to do a "reverse stock split" to boost the share price--giving one new share for each 10 now held, for example. But many brokers say the companies shouldn't be forced to undertake that expense.

Might the NASD change its mind? President Joseph Hardiman, at the association's Washington headquarters, says the NASD will "certainly consider" the deluge of comments received on the under-$1 proposal. "It really isn't our intention to deprive these companies or shareholders of a viable public market for their stocks," he said.

Much depends on the SEC: Brokers say it is the SEC's drive to protect investors from low-priced stock scams that is ultimately behind the NASD's delisting proposals.

IN THE PINK Some Southland companies whose stocks now trade only on the so-called pink sheets, daily listings of little-traded issues.

Yearend '89 Recent Stock bid/ask bid/ask Altius Corp. $3-$4 $3-$4 Bank of Newport 2-2.50 1.75-2.25 Extek Microsystems 3-4 5-6 First Am. Bank/Rosemead 9.75-10.75 11-12 Geophysical Systems 0.25-0.63 0.13-0.50 Highland Fed. Savings 16-17.50 13-15 Pagers Plus no offers 0.75-1.50 United Leisure 0.50-1.50 0.88-1.38

Source: Crowell Weedon,

Thomas Green/San Diego Securities

HEADED FOR THE PINK? These area companies now trade on the electronic NASDAQ system, but could see their shares delisted later this year because they don't meet a proposed new $1 price cutoff for NASDAQ stocks.

High and low bid Thurs. Stock for year bid Creative Computer $0.19-$0.03 $0.13 Disease Detection 0.28-0.03 0.06 Irvine Sensors 0.47-0.09 0.28 Luther Medical 0.88-0.44 0.59 Micro General 0.63-0.31 0.41 Pacer Technology 0.88-0.31 0.69 Radiant Technology 1.13-0.63 0.63 Stars to Go 0.63-0.03 0.06 Techniclone 2.94-0.50 0.53 Xtramedics 0.66-0.06 0.06

Stock prices are rounded to nearest penny.

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