- Penny stocks are now the retail investor favorite as trading moves to off-venue markets or over-the-counter forums for trading in shares
- U.S. Securities and Exchange Commission is looking more closely as trading volume in these off-venue markets explodes, but pump-and-dump schemes will continue to be pervasive unless the liquidity taps should suddenly be turned off
GameStop (-7.21%) may no longer be front page news, but the retail investors that drove the video game retailer to dizzying heights, only to see it crashing back down again, are still very much on the prowl.
With far smaller market caps and lower levels of liquidity, retail investors are moving into penny stocks with a fervor that makes GameStop look like a mere opening act.
The shadowy and lightly regulated firms that trade on off-exchange venues run by firms like OTC Markets (think of them as the back alleys for weed versus your licensed grow shop) have seen an explosion in transactions with over 1 trillion shares changing hands.
In a world where a tweet from Elon Musk can send the market cap of a literal joke cryptocurrency Dogecoin soaring into the billions, it should come as no surprise that penny stocks are back in vogue.
But the mayhem in these off-market venues has attracted the scrutiny of the U.S. Securities and Exchange Commission (“SEC”), which last week suspended trading in SpectraScience, a firm that saw its shares surge some 633% before the halt.
Not bad for a company which hadn’t filed a report in years and whose phone number doesn’t even work.
The SEC action noted that “social media accounts may be engaged in a coordinated attempt to artificially influence” SpectraScience’s share price.
And SpectraScience (don’t even ask what their business model is, there is none), is hardly the only penny stock that has made it big in the Dogey world of retail trading, because on any given day, there are more than a dozen or so similar stocks being touted as the next GameStop.
Forget about your Bloomberg terminal, Stocktwits and Twitter (-2.93%), as well as other online chatrooms often presage a stock’s massive rally.
Before the SEC shutdown the party at SpectraScience, the firm saw 3.5 billion shares traded in a single day, or about 12 times the average in 2020.
The SEC suspended trading of SpectraScience last week due to what it described as “questions regarding the accuracy and adequacy of information about the company in the marketplace and potentially manipulative trading activity.”
In what is increasingly looking like the penny stock pump-and-dump schemes of the 1990s, some analysts are suggesting that the retail swell can continue to be a force, until traders start losing money that they don’t have.
But with massive amounts of liquidity sloshing through the financial system, both fiscal stimulus and loose monetary policy suggest that this sort of trading behavior still has legs to run.
With economies continuing to remain under lockdown and international borders unlikely to re-open any time soon, with some suggesting that given the current rate of coronavirus inoculation, it could take as long as another 7 years before things get back to normal, governments have no choice other than to keep printing money.