my recent Pink Sheet experience

what the Pink Sheets are

I’ve written about the Pink Sheets before, in much greater detail than here.

Basically they’re an electronic marketplace for trading equities not registered with the SEC.  Some are stocks of foreign issuers and the Pink Sheets is the main place they’re traded.  Others are domestic.  Some of the latter are small, illiquid and haven’t filed financials (if they have any) with the SEC.  This second group, and the rough-and-tumble trading that sometimes occurs with both, are the source of the Pink Sheets’ shady reputation.

In the pre-computer days, quotes for such stocks were delivered to traders in daily lists printed on long strips of pink paper.  That was to distinguish them from quotes for bonds of similar ilk, which were printed on blue paper.  Hence the name.

anyway, what happened–

About an hour before the close in Hong Kong last Wednesday, the Macau casino regulator issued its report of the total amount lost by gamblers in SAR in January.  The figure was a surprisingly weak +7%, year-on-year.  The Macau casino stocks sold off immediately, and were down at the close by about 10% from their pre-announcement levels.  At the New York open, WYNN and LVS sold off  by more than 5% as well.

As the New York morning progressed, reports began to circulate that the Macau market had actually been strong–that the apparently weakness was caused solely by the timing of the Lunar New Year.  The US stocks rallied.

During the afternoon, I checked the Pink Sheet quote for Sands China (SCHYY).  I noted that average daily volume is US$1.6 million vs. US$145 million for HK:  1928 in Hong Kong.  More important, the stock hadn’t budged an inch; it was still stuck at the Hong Kong close.   Weird.

So I bought 150 shares.  Yes, it was a risky thing to do.  It took maybe ten minutes for my (puny) limit order to be filled, another warning sign.  But I was curious.

The Macau gambling stocks rose on Thursday in Hong Kong by around 10%.

SCHYY mirrored the Hong Kong close.  I sold as fast as I could.

The following day, Friday, the Macau gambling stocks were flat to down in Hong Kong.

here’s the interesting part:

SCHYY opened down 3%, at $76.53, on 21, 952 shares.

After that one trade, the market became 200 shares bid at $74.29, 300 shares offered at $76.29.

In other words, liquidity dried up completely.

The stock traded about 10,000 shares during the rest of the day, at what the chart shows as prices below $75.

Monday, the stock traded only 6,866 shares, or about $500,000 worth of stock, all day.

what you should notice

–no mutual fund or pension plan portfolio manager is going to buy SCHYY.  It’s just too illiquid.  So there’s going to be no buying support for the stock from this quarter.  (Let’s say an average position size for one of these professionals is $10 million and that they thought they could be a a quarter of the daily volume without anyone figuring out they were in the market (fat chance).  Even if so, it would take a month+ to buy or liquidate.)

–after the big (for SCHYY) opening trade, market makers widened the bid-asked spread to almost 3% and pushed the market down.  They also committed themselves to only trading a tiny amount of stock at the price they showed–meaning the market would sink further if more stock followed the next trade.

All this is designed to signal they’re only willing to take more stock on their books at a heavily discounted price–that is, to stop the selling.  As the rest of the day showed, this tactic was successful.

–in most cases, the best course of action for a seller who thinks he must get out of the stock for some fundamental reason is to accept the discounted price and be the first out the door.  Yes, selling will be ugly.  But that’s better than having the market 10% lower, with you having sold nothing.

Welcome to the Pink Sheets!!

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