In New York, there’s Broadway, off Broadway, and off-off Broadway. A similar hierarchy exists in the modern equity market, and it’s in the third category of way-off-exchange trading where today’s retail speculator is really going to work.
While there have been many examples of volume explosions in low-priced NYSE and Nasdaq stocks in the last few months, a whole other ecosystem of speculation exists outside the regulatory reach of these venues — and lately it’s been booming. Out past the broker-operated venues where Robinhood trades get executed, it’s lightly regulated quotation systems run by firms like OTC Markets, where more than 1 trillion shares in some of the riskiest companies changed hands last month.
In a world where all it takes for a company to go crazy is a celebrity tout or quasi-mention by Elon Musk tweets, it should be no surprise that penny stocks are back in vogue. Waves of buying are being fueled by newbie day-traders who have driven volume throughout the pandemic era, a group that has long shown a propensity for microcap stocks with very low price tags.
“When you see all this stuff coming out and all these people talking about penny stocks and pushing them higher, it’s got to make you wonder, where is the top? Is it too frothy? Is there too much exuberance out there?” said Ryan Nauman, market strategist at Informa Financial Intelligence’s Zephyr. “That’s my concern — the fear of missing out is driving stock prices.”
Examples of the enthusiasm on over-the-counter venues abound. On Wednesday almost 4 billion shares of Healthier Choices Management Corp., a $21 million company that trades for $0.0002 per share, changed hands. Electrical appliance company Service Team Inc., valued at $2.7 million with a stock price of $0.0003, saw 2 billion shares move. For comparison, fewer than 90 million shares of Apple moved, while volume on Tesla didn’t surpass 35 million.
Last year mom and pop dabbled in so-called reopening stocks like airlines and cruises, bought shares of bankrupt companies and poured into the option market. This is just their latest venture: stocks with prices so low and financial documentation so sparse that they don’t trade on classic stock exchanges. While it takes far less money to move such stocks, fascination with them is the latest iteration of day-trader exuberance, a trend many Wall Street veterans worry about.
“We’re seeing massive — record, even — activity in the most speculative vehicles that are allowed in the U.S.,” Sundial Capital Research President Jason Goepfert wrote to clients Wednesday. “Markets have proven time and again that when confidence is this high, we’re going to get spanked. It may take awhile, but it happens.”
Last month, low priced stocks that don’t trade on classic exchanges — often (confusingly) called “over-the-counter” securities — saw more than 1 trillion shares change hands, Finra data show. That’s the first time in a decade such activity happened off exchange, and for comparison, amounts to almost 50 times the volume traded among securities in the Nasdaq Composite Index, according to Sundial Capital Research.
Even among Nasdaq and NYSE-listed shares, the most actively traded stocks on Wednesday were again the tiniest companies. Take Castor Maritime Inc., a dry bulk shipping firm currently valued at 37 cents a share. It saw 499 million shares traded. Or Zomedica, where volume hit 488 million shares after almost reaching the billion mark a day earlier and surpassing it Monday.
Cromwell Coulson, the president of OTC Markets, says there’s a simple explanation for all the buying.
“It’s clearly a bull market,” he said. “I would be very careful. We’re definitely in a market where my cleaning lady is asking me ‘Do I like solar companies?’ Because she bought a solar company that’s a NASDAQ stock through Robinhood. And it’s tripled.”
Few firms illustrate the manic advance of penny-stocks better than Signal Advance Inc., a small medical firm in Texas that soared after Elon Musk urged in a tweet for his followers to “use Signal,” a messaging app . After an 885% rally in the middle of Monday’s trading session, Signal Advance briefly became a nearly billion-dollar firm, just hours after its market-cap was roughly $7 million. Shares closed above $38 on Monday after trading below $1 for most of the past six years.
Scott Knapp, chief market strategist of CUNA Mutual Group, says he sees plenty of hints that markets are exuberant, pointing to a hot IPO market, the emergence of SPACs, and Bitcoin’s rampage. Now, add to that the runup in shares of small public companies.
“On the list of the exuberance story is what’s happening in the micro-capitalization tiers,” Knapp said. “As it stands right now, markets are on performance enhancing drugs, in the form of expectations for more stimulus.”