Will the Great "Pink Sheets Makeover" Work?

I doubt the average person has any idea what the Pinks Sheets are, much less anything about its reputation. But the average investor probably has very few positive things to say about this over-the-counter stalwart.

It’s the “Wild West” of investing…

You can’t find anything on the Pinks that isn’t a sub-penny or shell company…

Stock promoters and scam artists – and their helpless victims – are the only forms of life inhabiting the Pink Sheets…

However, the Pink Sheets landscape is changing dramatically. And these changes could mean a more investor-friendly environment is finally making its way to the once-murky waters of bulletin boards. In fact, you might already be relying on the Pink Sheets for all of your over-the-counter trades – even if you’ve never put your money in a Pink Sheets stock before.

I’ll explain how it all works in a minute. First, it’s important to see how the Pinks have evolved into a major player in the listing game.

The Pink Sheets put its plan into motion back in 2007 when it began to differentiate between transparent, reporting companies and the shell companies that make up the Pink’s notorious grey market. Most of these newly listed OTCQX stocks were larger, foreign firms looking for a foothold in the US markets. Even multi-billion dollar firms such as Adidas and Wall Mart of Mexico count themselves as members of the OTCQX.

The Pink Sheets boasts that the OTCQX is the “premier tier of the US over-the-counter market… Investor-focused companies use the quality controlled OTCQX listing platform to offer investors transparent trading, superior information and easy access through their regulated US broker-dealers.”

And it’s not just foreign firms that are populating the Pink’s transparent listings. Since its 2007 inception, the program has expanded to include multiple market tiers designed to help traders and investors know exactly what they’re getting into when they throw their money at a Pink’s listing.

The OTCQB was the next step. This is the latest market tier for transparent, reporting, fully up-to-date listings. A public relations push has accompanied the OTCQB launch. The Pink’s domain has changed to “otcmarkets.com.” Front-and-center on the page is a link to the market tiers, along with clear designations and descriptions for even the speculative and grey market securities.

It would appear the PR blitz and OTCQB launch are part of the Pink’s plan for OTC listing dominance. That’s the important part: the Pink Sheets is not an exchange – it’s a listing service, competing with the OTCBB, which is run by the Financial Industry Regulatory Authority (FINRA).

Despite its less-than-stellar reputation, the Pink’s are winning the technology race. Market makers have turned to the Pink’s quotation system in droves. In fact, more than 80% of all market maker quotes in OTC stocks are now published on the Pink’s platform, with just 20% on the OTCBB. So if you’re buying an OTC stock, chances are the Pink’s system is the one pulling the lever.

I can’t say how quickly the Pink Sheet’s reputation will change, if at all. But the listing service is positioning itself to turn the OTCBB into a thing of the past. That in itself is reason enough to pay close attention…


Greg Guenthner
for The Daily Reckoning

The Daily Reckoning