Growing Criticism of Nasdaq Occurs Amid Penny Stock Trading Frenzy

Thu Feb 22 2024
Jim Andrews (505 articles)
Growing Criticism of Nasdaq Occurs Amid Penny Stock Trading Frenzy

Nasdaq proudly claims to be the stock market that several illustrious and prosperous companies throughout the globe use. Bit Brother is also based out of this location.

Before shifting its focus to cryptocurrencies in 2021, the Chinese company sold tea items. Accounting for the three reverse stock splits it has executed, its shares have plummeted by more than 99% since the beginning of 2020.

Not much was made of Bit Brother until the end of December, when, for no apparent reason, its trading volume spiked to billions of shares each day. On December 27, Bit Brother’s volume reached 3.5 billion shares, constituting 28% of the total shares traded on the U.S. stock market. The value of the trades was minimal because the stock was trading at around a cent per share. Bit Brother successfully maintained its Nasdaq listing by re-establishing its stock price above $1 on January 10th, thanks to an extraordinary 1,000-for-1 reverse split.

The occurrence of large spikes in trading volume for stocks with low share prices is becoming more commonplace. Individuals who use zero-commission trading platforms to buy equities that trend on social media are the ones driving these frenzy markets.

Day traders can easily make huge wagers on these stocks because of how cheap they trade. After that, the stocks’ huge volumes start to generate attention when they show up on lists of highly traded equities, which other investors use as a guide.

Nasdaq, the listing exchange for the majority of smaller public businesses, is being blamed by an increasing number of market veterans who claim something is wrong.

If a company’s share price stays below $1 for a long time, they will be delisted according to Nasdaq regulations. The time before delisting, however, can be more than a year. Bit Brother is only one of many companies that has been known to perform reverse splits in an effort to remain listed.

Themis Trading partner Joe Saluzzi observed, “These sub-dollar, high-volume stocks make a mockery of our stock market.” The brokerage is located in New Jersey. The Nasdaq primary listing market should tighten their requirements and shorten the delisting process, according to the author.

Since Nasdaq generates revenue from company listings and runs a regulatory arm that delists businesses for rule violations, critics like Saluzzi argue that the exchange has a conflict of interest.

“In order to protect the integrity of our markets, our regulatory functions at Nasdaq operate independently of Nasdaq’s business units,” added a representative from the exchange.

A company’s listing on an exchange is like a stamp of approval. Customers of major brokerages can typically trade stocks registered on Nasdaq or the New York Stock Exchange, but they are often not allowed to trade on the over-the-counter market, which is like a purgatory for companies that are delisted.

Shortly after the Bit Brother panic subsided, Phunware, a software company that had created an app for Trump’s 2020 re-election campaign, saw volumes surge. After Trump’s victory in the 2024 Republican caucuses in Iowa, the stock of Phunware more than quadrupled to 42 cents on January 16th. On that same day, 1.6 billion shares of the company’s stock changed hands, making up 12% of the overall market volume.

For the last 12 months, the price of a share of Phunware has remained below $1. If a reverse split is required to meet Nasdaq listing requirements, the company will do so, according to a spokesman.

Many companies that went public during the period of historically low loan rates—often through mergers with special-purpose acquisition companies, or SPACs—have since suffered, leading to a surge in the number of stocks trading for less than $1. Dow Jones Market Data reports that as of Thursday, 493 equities, most of which were listed on Nasdaq, closed below $1. As of the beginning of 2021, just around twelve stocks were selling for less than $1 per share.

Ovi Montemayor, a managing director at Charles Schwab, stated, “Historically, these companies would have been delisted and gone to the OTC market.”

More and more corporations are resorting to reverse splits in an effort to increase their share price over $1. S&P Global Market Intelligence reports that in 2023, 495 equities listed on exchanges had a reverse split. The previous year’s total was 288; this year’s total was the highest in the 20 years that S&P has tracked this information. The purpose of a reverse split is to artificially increase the value of a single share by exchanging many shares for a single share.

Some brokers have been irritated by the sudden surge of reverse splits. A 25-for-1 reverse split was granted and performed the next day by a small pharmaceutical business named Cosmos Health in December 2022. Because of the delay in notifying customers of the separation, Robinhood Markets suffered a processing error and reported a loss of $57 million. Schwab was one of several brokers hit hard by the ripple effects of Cosmos Health’s reverse split, according to sources familiar with the situation.

According to those in the know, following the disaster, Robinhood and Schwab were among the companies who met with Nasdaq multiple times to request that the exchange better handle reverse splits. A regulation change was made by Nasdaq late last year that mandates corporations to publicly announce reverse splits at least two working days prior to their effective date.

According to market professionals, the overall market volume is skewed when there are large spikes in sub-$1 stocks. U.S. stock market volume is determined by the total number of shares traded, not their value, which differs from many other countries. Consequently, market volume data is inflated when inexpensive stocks such as Bit Brother exchange over a billion shares every day.

“Notional volume and share volume are kind of growing apart,” commented Anna Kurzrok, head of market structure at Jefferies. Volume and value exchanged can differ greatly on any particular day.

A request for comment was not responded to by Bit Brother. “Infinite blockchain make future simpler.” That’s the grammatically flawed greeting that greets visitors to its website.

The delisting of the corporation from Nasdaq may be imminent. Nasdaq has stated its intention to delist Bit Brother due to “public interest concerns” over two of the business’s recent share offerings, as the company revealed this month. At a hearing next week, the business will likely challenge the ruling. Bit Brother will maintain its Nasdaq listing until then.

Jim Andrews

Jim Andrews

Jim Andrews is Desk Correspondent for Global Stock, Currencies, Commodities & Bonds Market . He has been reporting about Global Markets for last 5+ years. He is based in New York