Over-the-Counter Price Reform

The nation's lively, loosely organized over-the-counter market is the only showcase for the securities of many companies that do not want or do not rate listing on the New York or other big exchanges. As it is, the showcase has some built-in distortions. One of them, singled out by the Securities and Exchange Commission in its 1963 study, is that the "asked" prices of over-the-counter stocks as provided by dealers to the daily press are traditionally jacked up by a percentage -- usually around 2% but sometimes 5% -- that represents the dealers' profit.

In Big Board practice, actual stock prices are published, not including the fixed broker's commission. By contrast, an over-the-counter stock quoted at $40.50, including a 3% "retail markup," is actually worth $39.25. Because the buyer never knows the size of the hidden markup, the SEC said that the practice is deceptive and urged the National Association of Securities Dealers to publish true prices instead. The NASD objected, arguing that this practice would drastically cut profits and drive small dealers out of business.

Last week the NASD changed its mind and announced that true prices will be published for some 4,000 active over-the-counter stocks beginning next month. The switch was prompted by an 18-month experiment in which 1,300 stocks were quoted at wholesale prices on a test basis. Not only did the dealers survive the experience, but other unlisted companies clamored to get in on the program, realizing that accurate over-the-counter quotations help broaden investor interest.

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