Amex’s ECM Tries TLC for Small Issues
If you believe that most individual investors are just lambs waiting to be slaughtered, the American Stock Exchange has built a beautiful new butcher shop.
But if you give the average investor a little more credit--and you don’t mind the concept of competition in the securities business--then the Amex’s new market for small stocks may not seem so menacing.
With a lot of hoopla, the Amex on Wednesday opened its Emerging Company Marketplace, or ECM. Shares of 22 small firms began trading on the ECM, adjacent to the Amex trading floor in New York.
Most of the 22 stocks used to be traded on the NASDAQ over-the-counter market, the nationwide network of electronically linked brokerages. Now, a designated Amex trader is responsible for making a market in each stock. That is, the trader must be willing to buy or sell the shares at any time and quote a ready price.
The Amex says that its goal with ECM is to raise the visibility of promising young companies, whose shares may now languish, virtually unnoticed, among the thousands of thinly traded stocks in the NASDAQ electronic network.
Critics say ECM is a disaster waiting to happen to unwary investors. They say the Amex, the Pacific Stock Exchange and other markets now bent on promoting small-company stocks are in a “race to the bottom,” giving recognition and publicity to highly speculative companies that have little chance for success.
The attacks on ECM are correct on one count: The ECM companies are highly speculative. They include firms such as Woodland Hills-based American Pacific Mint, a bullion dealer that earned all of 1 cent a share last year. Also on the ECM now is Camarillo-based Advanced Photonix, a company working on “large area avalanche photoiodide technology.” Not exactly coffee-klatch talk.
What the critics are assuming, however, is that because they are traded on ECM, investors will view these firms as significantly less speculative than if they were left on NASDAQ.
Certainly, an Amex listing may lend an air of greater legitimacy to a company. But does an ECM company suddenly become the next Apple Computer just by virtue of its ECM listing? Nope. Will Wall Street brokerages suddenly rush to write research reports on these stocks? Doubtful.
L. Keith Mullins, a small-stock specialist at brokerage Smith Barney, Harris Upham & Co. in New York and member of the Amex screening committee for ECM candidates, asked rhetorically: “Have we created an opportunity for investors to hurt themselves? I don’t think that (potential) is there, any more than what it was before,” when the ECM stocks were traded on NASDAQ.
It is clear why Amex created ECM: It wants more trading business. It’s also clear what is in this for the companies: Any additional recognition they can pick up among investors cannot hurt.
The Securities and Exchange Commission, which is on a virtual crusade this year to give money-starved small companies greater access to capital markets, approved ECM because it believes the potential benefits of higher visibility outweigh the risks of abuse.
Said SEC Commissioner Richard Y. Roberts: “I started out on this in the same place” as the critics, worrying that fraudulent companies would somehow use ECM to circumvent regulatory oversight. But note, Roberts said, that while a listing on the regular Amex market automatically allows a stock to be sold in any state, the ECM companies don’t get that right.
That restriction won over many state securities regulators, who have had more than their fill of small-stock scams over the years. “They (ECM companies) will still have to come through here” for approval, said Deborah Bortner, assistant securities administrator in Washington state.
The important question is, what is in this for investors? Agreed, ECM can’t make these stocks any less risky. But greater competition with NASDAQ for small-stock listings should lead to a fairer market for buyers and sellers of these stocks.
Consider the case of American Pacific Mint. Its chairman, L. S. Smith, doesn’t make excuses for his company’s struggles in recent years, which left its stock trading at $2.25 a share on NASDAQ at the end of 1991. The firm wholesales gold bullion and jewelry to mom-and-pop jewelry stores nationwide. It also owns a single jewelry store in Dallas.
The company has pared money-losing operations since the late 1980s and went from a loss of $123,235 on sales of $45.5 million in 1990 to a $29,406 profit on sales of $15.6 million last year.
Smith believes that the ECM screening committee OK’d his stock for listing because “we’ve become profitable, (but) no one seemed to be paying attention.” The company plans to open a second store, in Houston.
When it was still trading on the NASDAQ market, brokerages quoted American Pacific at $3 bid, $4.25 asked, Smith contends. So it cost $4.25 a share to buy, but if you tried to sell the stock back to the brokerage immediately, you’d be offered just $3 a share. Such wide brokerage price “spreads” are not unusual in small NASDAQ stocks, and they can be a severe deterrent to trading.
In its first day of trading on the ECM, the shares closed at $3--the price to anyone buying or selling. To Smith, that’s a pretty good illustration that, at least in the case of his stock, the ECM offered a more efficient market for his 1,000 shareholders than the far-flung dealers in the NASDAQ market.
The debate over which is the better stock trading system--a network of dealers (NASDAQ), or a single market-maker paid to keep an orderly market in a stock (an exchange)--will go on forever. Both have advantages and perils. It is a simple fact, though, that the smallest NASDAQ stocks suffer the widest price spreads and often would benefit most from a single market maker’s constant (if monopolistic) attention. Until now, the exchanges were uninterested in such stocks.
ECM, Smith said, is about competition. And when was that ever a bad thing?
The Price of a Listing
In the competition to list more stocks, major markets are dropping the price of admission--the minimum number of shareholders, number of shares outstanding and/or stock price that a company must have to join a market. Here are current standards on the American Stock Exchange’s Emerging Company Market (ECM) and on the NASDAQ market, and proposed new standards on the Pacific Stock Exchange.
Amex PSE ECM NASDAQ proposal Shareholders 300 300 250 No. of shares 250,000 100,000 200,000 Market value $2.5m $1m $1m Stock price $1 $3 $5
Source: Markets listed
