Pennies From Heaven

Major news sources have begun reporting what many investors have already discovered  – that volumes in “penny stocks” have exploded. While most of the media’s attention is focused upon highly capitalized household names, there is an entire investing ecosystem that is thriving with only a minimum of scrutiny. There are many worrisome signs surrounding OTC stocks, and it’s not just that the volume has exploded.

The SEC actually defines a penny stock primarily by what it is not (exact definition here), but its required disclosure broadly defines penny stocks as “low-priced shares of small companies” that “generally trade over-the-counter”. The over-the-counter market (OTC) is often called the “pink sheets” because brokers would historically look for the dealers in these stocks in books printed on pink pages. The name persists even though the quotes have long since been distributed electronically.

The table below is the publicly available data on OTC stocks, distributed by FINRA. I encourage you to open the link in a separate tab for greater readability.  Pay special attention to the columns entitled “Tot. Shares Vol.” and “Avg. Dollar Vol./Share ($)”:

FINRA Equity Trading Data for All OTC Stocks

Source: https://otce.finra.org/otce/marketStatistics

The statistics in those columns are quite revealing. The series that got the most attention is the Total Shares Volume. OTC share volumes are up about 22x – yes twenty-two times – over the past 12 months! Volumes went up over 3x in December and nearly doubled again by February. This staggering, exponential growth is what got the major media attention. I graphed the volumes in Excel to show how the solid pace of growth became truly extreme since November:

At the same time, the average price of a traded OTC share has plummeted steadily. The share price graph below is not nearly as dramatic as its counterpart above, but that is mainly because the price has become asymptotic to zero, as opposed to the parabolic rise in volume.

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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