Alexander Osipovich reports in The Wall Street Journal that market veterans believe something is broken on the NASDAQ exchange, with wild trading happening in penny stocks like Bit Brother. Osipovich writes:
It has become increasingly common for stocks with a low share price to experience huge bursts of trading volume. Fueling these frenzies are individual investors who use zero-commission trading tools to pile into stocks that get buzz on social media.
When such stocks trade for pennies a share, it is easy for day traders to place enormous bets on them. Then the high volumes themselves become a source of buzz, with the stocks appearing on leaderboards of heavily traded stocks where other investors take their cues.
A growing number of market veterans say something is broken—and they point the finger at Nasdaq, the listing exchange for most smaller public companies.
Nasdaq rules require companies to be delisted if their share price falls below $1 for an extended period of time. But the grace period before delisting can last more than a year. And some companies, like Bit Brother, repeatedly do reverse splits to stay listed.
“These sub-dollar, high-volume stocks make a mockery of our stock market,” said Joe Saluzzi, a partner at New Jersey-based brokerage Themis Trading. “The primary listing market, in most cases Nasdaq, needs to tighten up their standards and reduce the amount of time needed for a delisting.”
Critics such as Saluzzi say Nasdaq faces a conflict of interest: The exchange makes money by listing companies, while running a regulatory arm that delists companies when they don’t follow the rules.
“At Nasdaq, our regulatory functions operate independently of Nasdaq’s business units to safeguard the integrity of our markets,” a spokesman for the exchange said.
Being listed on an exchange is effectively a seal of approval for a company. Major brokerages generally allow customers to trade any stock listed on Nasdaq or the New York Stock Exchange, while restricting access to the over-the-counter market, a sort of purgatory where companies land after they get delisted.
Action Line: Investors beware. Not everything on an exchange is necessarily on the up and up. And making speculative bets is not really investing. When you want to talk about investing for the long term, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
E.J. Smith - Your Survival Guy
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