Many readers of The Washington Post, particularly those who have invested in the stocks of corporations that are traded in the over-the-counter market, got a surprise on the morning of Nov. 17.
About 380 stocks that previously were included in a daily Business & Finance section OTC national market list had been deleted. Another 660 stocks not listed earlier were added. And the overall table was expanded by more than 200 companies to a grand total of about 1,800--just half of all OTC stocks for which instant, electronic price quotations are available every business day.
While the table was accompanied by a story explaining the changes, the explanation did not help the many anguished investors and corporate executives whose favorite stock quotes suddenly had disappeared. The National Association of Securities Dealers, a Washington-based industry organization that acts as self-regulator and promoter of the OTC market, got thousands of inquiries. So did this and other newspapers.
NASD is involved in the drama because it established and operates a national, automated quotation system for the OTC market called NASDAQ. Depending on your viewpoint, and perhaps the composition of your stock portfolio, NASD is either the villain or hero.
At this writing, all the reviews are not in. There will be winners and losers, but they haven't yet been clearly identified. Still, investors, corporate executives and newspaper readers in general all have a stake in what's happening behind the scenes.
In effect, the NASD is attempting a bold move to improve overnight the stature of over-the-counter stocks in the increasingly complex financial markets. Among stock markets, OTC trading generally has been regarded as a third market behind the New York and American stock exchanges--the latter being a particular irritant for the NASD, since OTC trading volume on any given day is far greater than for the Amex. ut the New York Stock Exchange continues as the country's preeminent stock trading forum and the American exchange has become rather aggressive in recent years in building its own competitive status--partly by promoting the causes of small and developing enterprises in general, hoping for future listings on the Amex floor in New York.
The OTC market has been booming, too. Hundreds of companies have sold stock to the public for the first time in the last 18 months, and virtually all of them are traded initially in the OTC market. As of Nov. 1, there were 3,577 NASDAQ-quoted OTC issues, up more than 500 from the start of 1981. Overall share trading volume is up 25 percent this year to a level six times that of the Amex and two-thirds that of the NYSE.
Still, NASD officials had reasons to worry when they looked ahead. Many of the issues quoted in daily newspaper trading tables were so-called penny stocks of highly speculative businesses that had gone public recently; trading volume was tremendous and the dollars added up but an atmosphere of promoting speculation was created by making the business look more important than it was. Long-established, financially strong companies found their stocks no longer quoted in OTC newspaper tables because their shares were not traded as actively by investors with longer-term investing goals.
Although these bigger companies were listed in regional OTC market tables carried by local newspapers, they lacked national press exposure and were bunched together with very small or thinly traded local companies for which daily OTC quotes have not proved to be a reliable barometer. A number of the older companies moved their listing to the NYSE or Amex, and others studied such a move.
Meanwhile, there was a highly publicized failure of a securities firm that had specialized in speculative OTC stocks, John Muir & Co. And there has been growing competition for investors' dollars from the exploding stock options markets and in financial futures.
To meet these perceived or real threats to a vital OTC marketplace, the NASD moved very rapidly earlier this fall to overhaul the way it decides what companies get a national OTC listing status. It switched from dollar-volume emphasis to a variety of financial criteria similar to those of the American exchange.
"This step reflects the coming of age of the NASDAQ market . . . It will bring continuity to our national list and provide the public with a more uniform basis of comparison among the three major stock tables . . . NASDAQ companies with substantial publicly held shares, equity, earnings and market value will now receive the visibility they deserve," said NASD President Gordon Macklin.
Two alternative sets of financial criteria were established for the national OTC list, to replace the previous dollar volume requirements (which had necessitated re-rankings every six months and moving companies back and forth between the national and regional tables).
A company qualifies under the first alternative by having at least 350,000 publicly held shares, a market value of those shares of at least $2 million, a minimum bid price of $3 and annual profits of at least $300,000 in the previous fiscal year or two of the last three years.
Under the second alternative, a company qualifies with at least 800,000 publicly held shares, market value of shares of at least $8 million, net worth of at least $8 million and incorporation for at least four years.
In general, it was a sound move. Thanks to the new guidelines, the daily national OTC table now includes such big companies as Allied Van Lines, Hyatt International and Nissan Motor (all previously excluded) and such stocks of local interest as Allied Capital, Fair Lanes, Government Employees Financial and Government Services Savings and Loan (all previously listed in a separate regional table for The Post's business section).
Still, NASD may have won a skirmish but lost the war in its competitive battle with the Amex and NYSE because of strategy and tactics that were employed.
Central to NASD's drive to gain status are the nation's daily newspapers, about 75 of which now publish a national OTC table (compared with only a handful in the early 1970s), based on NASDAQ quotes provided to wire services for transmission to papers throughout the nation.
Many more newspapers carry either full or abbreviated NYSE and Amex tables, because these exchanges existed long before the over-the-counter market, and it always is difficult to find room in a newspaper for an additional table that takes several columns to display. OTC companies that move to the NYSE or Amex often cite the wider dissemination of their stock quotes on a daily basis as a major factor in the decision to seek exchange listings, to help build investor interest across the country.
But when Macklin and his associates decided this fall on new NASDAQ national listing criteria and an expanded daily list, they gave newspapers that publish such tables just 10 days' notice. In effect, newspapers had to decide in a matter of days to find space for an expanded OTC listing or drop the table altogether.
When asked about the hurried nature of their decision to reorganize national listings, NASD officials said matter-of-factly that newspapers could simply cut back on something else to accommodate their expanded list--and they suggested commodities tables, bonds and other investment instruments as candidates to be trimmed so more space could go to their table.
What NASD really accomplished was to exacerbate a severe problem in the newspaper industry, which has been faced with ever-increasing demands for space to display expanded trading in both the traditional markets and such young investment areas as options. Space devoted to business news generally, and to specific tables that reflect financial markets, has grown dramatically in recent years at major newspapers because of reader interest, but the expanded NASD table proved to be too much, too quickly.
At least three dailies in major cities had been planning to add a full NASD table to their papers, only to put those plans on the shelf when they found out about the expanded table. Other newspapers cut back on the OTC data they had provided in order to make room for listing 200 new issues. In those cities, at least, NASD had lost the war.