Friday, January 28, 2011

Tough Enough to Wear Pink

Investors in micro-cap securities may be wondering whether there will be pricing implications in the brouhaha playing out between the stock quotation services. There is a seismic shift in securities quoted on the OTC Bulletin Board quotation system, bought by the broker dealer Rodman & Renshaw from the securities industry regulator FINRA in October 2010, to the Pink Quote electronic quotation system (formerly known a the Pink Sheets).

About a year ago, when FINRA still owned the OTC/BB it began imposing new participation fees on participating market makers. Market makers must pay $6.00 per position per month. Already under competitive and economic pressures, market makers have been abandoning the OTC/BB like so many rats from a sinking ship.

The new fees might have been met with nothing more than loud grumbling were it not for the availability of an alternative quotation platform. The old Pink Sheets begun by the National Quotation Service “back in the day” have been given a new coat of color. Now owned by Pink OTC Markets, Inc. (PINK: OTCQX) and renamed Pink Quote, the quotation services is divided into three tiers. The second tier called the OTCQB is set up for domestic U.S. companies that file financial reports with the SEC, bank or insurance regulators and a perfect alternative for cost conscious market makers..

Pink OTC was thought to be a strong contender to buy the OTC/BB when FINRA put it up for sale. Why bother to buy the system when the market makers will come over for free? Its OTCQB tier boasts 3,871 securities as of January 2011. This compares to the OTC/BB that have only 2,896 stocks at the end of December 2010, after losing 15% of its quoted securities during the year. Share volume and dollar volume at the OTCQB has also overtaken the OTC/BB.

Revenue and net income for Pink OTC was $7.1 million in the September 2010, increasing 14% compared to the same quarter the year before. Net income was $1.1 million, a 13% increase. For all the growth in the middle quotation tier, the primary drivers of the Pink OTC revenue were issuer services and market data licensing.

The data licensing segment is particularly sensitive for Pink OTC as it is being challenged in the market by the so-called FINRA QCF proposed rule that would allow FINRA create a quotation collection facility. Members of FINRA would be required to report OTC trades within thirty days to FINRA. FINRA’s QCF would be in direct competition with Pink OTC’s market data products. The proposed QCF has been in the works for some time and predates the sale of the OTC/BB to Rodman & Renshaw.

Many in the industry viewed FINRA’s proposal as a competitive counter measure as the former owner of the OTC/BB saw so many of its quotations migrate to the Pink OTC. Yet even after the sale of the OTC/BB the QCF proposal is still winding its way through the SEC rule making process. Comments were received through May 2010, most of which were in opposition to the proposed rule. The first to arrive at the SEC was a sharply worded letter form the president of Pink OTC Markets - not surprising from a company tough enough to wear pink.

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