Morty Weiss was trading Polaroid and Xerox stock back in 1946. In those days, Polaroid was marketing a windshield system that cut down glare, and Xerox was not really Xerox, but only a gleam in the eye of the original company, Haloid. Like every other trader dealing over-the-counter in unlisted stocks, Weiss sat around waiting for his phone to ring. At the other end of the line would be a broker, most likely from some distant city, inquiring as to how much Weiss would pay for 100 shares, and how much he'd sell 100 for. There was no ticker tape then -- and there still isn't. But recent changes in the O-T-C market reporting system are leading to a third tape in addition to the NYSE's and ASE's. The third tape, in turn, may become part of a single all-inclusive reporting system.
These changes, which began in 1979 and intensify this month, will make the O-T-C a more efficient place to shop for stocks, claims Weiss, who is now the first paid president of the National Security Traders Assn., which represents, among others, the 440 market-makers of the NASDAQ system. So promising is the NASDAQ O-T-C's future, Weiss adds, that though some 1,800 stocks are eligible for the NYSE, they have elected to stay in the NASDAQ O-T-C market instead.
What happens on March 1 is that 50 prominent O-T-C issues (among them Tandem, Tampax, MCI, Subaru, Pabst, Hoover, and Intel) will be subject to real-time reporting. The effect will be more or less like a minitape, with the last trades of these stocks appearing on retrieval quote screens just like their listed brethren on the exchanges. And if all goes well, 600 more O-T-C stocks will go into last-trade reporting beginning next August. In addition, the Securities and Exchange Commission will continue testing its experimental combination of O-T-C market-making with specialist market-making. This unique market includes certain O-T-C stocks that moved over to the NYSE or the ASE after April 26, 1979. Both the exchange specialists and the NASDAQ market-makers are trading them. The SEC regulation bringing this about, Rule 19c-3, was intended to provide the public with an even closer market than was previously available. There are now about 90 active 19c-3 stocks being traded in competition.
The upshot of these doings is to further enhance trading on the Computer Assisted Execution System. In it, the markets of eligible NASDAQ stocks and 19c-3 listed stocks will be automatically sampled. On video displays the public will see the current markets in montage fashion and their orders will be executed in the automated mode. Order clerks at brokerage houses will see each market-maker, and the trade can be locked in with the best market by computer, rather than over the telephone as it is now. At each end, terminals will print out hard copy for buyer and seller.
Under the computer's cold eye and the heated competition that the automatic, no-nonsense SEC set-up will engender, the O-T-C will come of age, and the public will be better served than ever before, Weiss says.
With these changes, the O-T-C will be ready to enter New York Stock Exchange society. But even before all the changes are effected, O-T-C's progress up to now ought to reassure even conservative investors. Indeed, in 1981, the NASDAQ Composite Index of over-the-counter stocks outperformed all other major indexes. In a down year, it was off only 3.2%, while the NYSE Index was off 8.6%; the DJI, down 9.2%; S&P 500, off 9.7%; and the Amex Market Value, down 8.1%.Since 1975, the NASDAQ Composite Average has more than tripled; in the same period, the Dow Jones Industrials was up only 42%.
Over-the-counter market-making has improved considerably. Before the coming of automated quotes (NASDAQ) in 1971, the difference between the bid and ask prices -- the "spread" -- could be as much as a point or two. A stock bid at 5 could carry a 6 1/2 asking price. So large a spread not only ruled out in-and-out trading -- a mostly professional activity that helps stabilize securities markets -- but placed a public investor at a severe disadvantage as well. If, for example, a public (or "retail") investor paid the asking price of $6.50, he was, like the buyer of a new car, instantly behind, since he could sell his new acquisition only at the bid of $5.
"The O-T-C is the oldest, largest, and most diverse market in the nation," Weiss boasts. Other impressive statistics he cites include the fact that the O-T-C actively trades twice as many common stocks as the NYSE and the ASE combined. Inactively, some 30,000 additional stocks may be bought or sold there. For each NASDAQ-traded company, Weiss says, there is an average of better than seven market-makers. And the best market for each of these securities is fed into 70,000 desk-top retrieval units in the United States and abroad. Anyone who uses such systems nowadays is aware that often bid/offer spreads are only an eighth of a point even among higher-priced issues.
Before automation, the O-T-C was a network of men like Morty Weiss, spread out randomly across the country like cows across a Vermont field. A retail customer for an unlisted stock would be at their mercy. A market-maker could time a bid simply by not representing retail limit orders in his quotes. For example, if there was an order to buy 100 shares at a limit of 5 1/4, the trader might still keep his announced bid at 5. Then, when a market order to sell came his way, he'd execute that order at 5 and immediately sell the shares at 5 1/4, earning himself an effortless, riskless $25. And no one would be the wiser.
Not that a public investor can't still get clipped in the O-T-C market, or for that matter on the NYSE or Amex. But now it's highly unlikely. The O-T-C has rapidly become a solid, serious citizen, determined to match the NYSE stride for stride. Rapidly on their way out are the days of the "pink" sheets, which each morning freshly reported the closing bids and offers of each market-maker, together with the market-maker's phone number. To test a market, a retail broker had to get on the phone and call up each one separately. The retail customer couldn't listen in on the order-room conversations that took place pre-NASDAQ, but in fact most brokers didn't have the time or patience to keep dialing for dollars; they usually accepted the better of the first two they tried.
An O-T-C market-maker performs the same function as a specialist on the NYSE or Amex -- but not in the same manner. A specialist on those exchanges is solely responsible for controlling a stock's market. There is virtually no competition for making the best bid-and-asked on the listed exchanges. Specialists operate only under the strictures of trading rules -- which happen to be fair enough, as these things go.
The O-T-C market, however, thrives on competition, and Morty Weiss would have it no other way. "We've always believed in competition to give more effective pricing," he says. "Monopoly doesn't do this. I like to see one brokerage firm pitting its capital against the other." In response to the challenge -- and the potential for commissions -- an active O-T-C stock may attract a dozen or more market-makers, each striving to gain business by making a tighter market.
Curiously, in 1981 only the Industrials component of the NASDAQ Composite was down. Its other five parts -- Banks, Insurance, Other Finance, Transportation, and Utilities -- posted gains for the year. And despite the popularity of high-tech companies and the torrid pace of "hot" technology issues in the initial public offerings market, none of NASDAQ's best gainers in 1981 was a high-tech situation. According to the National Association of Securities Dealers, the largest increments in common stocks belonged to Morgan's Restaurants of Canton, Ohio, up 386%; Mylan Laboratories Inc., a pharmaceuticals company in Pittsburgh, ahead by 309%; Capitol International Airways, charter carriers based in Smyrna, Tenn., up 260%; Bank of the Commonwealth of Detroit, 250%; and Lynden Transport Inc. of Seattle, a land and water freight hauler, 232%.
The computerized NASDAQ system has helped refine O-T-C trading by providing instant quotes to customers of the best available bid and the best available offer. Morty Weiss is predicting that someday there might be just one all-inclusive electronic market. But automatons are not going to take over completely, he adds reassuringly. "You'll always need the human mind."
Exactly what role that human mind will play is hard to foresee, however, unless it's to buy when it should be selling or sell when it should be buying -- just like in the good old days.
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