Revisiting Buying Preferred Stocks on the OTC Grey Market

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June 4, 2014  10 am

We frequently get questions on buying preferred stocks at ‘wholesale’ prices, before they are listed on the NYSE or NASDAQ so we thought we should review the process once again for those that have missed that discussion in previously writings.

When preferred shares are registered the terms and conditions of the offering are negotiated with the underwriters and one of those negotiations is how much the underwriter will be compensated for distributing the shares.  For instance in the latest Public Storage preferred offering the underwriting discount was negotiated to be 78.75 cents/share.  Essentially this means the underwriter ‘pays’ $24.2125/share with the intention of re-selling the shares for $25/share.  In a perfect world they would sell all the shares for $25–but this isn’t how it really works.


After the registration is accepted by the SEC and becomes effective there is a delay prior to the listing of shares on the NYSE (or NASDAQ).  You will see in almost every prospectus or registration statement a clause that says “we intend to apply to have these shares listed on the NYSE under the symbol xxxxx.  If this application is approved, trading of the shares is expected to begin within 30 days” (or some such statement).  It almost always takes at least 3 days (to as much as 10 days) to be approved for listing and since time is money the underwriters are anxious to begin selling and they will apply to sell shares immediately on the OTC market–to the retail investor this is the ‘wholesale market’.

From this point on the shares are sold and it is pretty much a supply and demand situation—did the underwriters price the shares correctly?  How anxious is the retail investor to buy the issue?  The underwriters can gauge the appetite of the market for the shares at this point in time and sell the shares at whatever level they believe is correct.

What is the correct price to pay when buying in the OTC grey market?  There is no answer to this question.  The way we handle this is we do not jump in immediately–let hundreds of thousands of shares trade and note the pricing.  If we want the issue we would likely buy on the 2nd day and we would probably put an order in near the last price paid (although if there is a wide spread–say 20 cents we would put in an order mid-range and wait–adjust up or down as necessary).  Typically if we want an issue on the OTC market we have a belief that the shares will move a fair amount higher once they begin trading on the NYSE or NASDAQ, thus we are not going to quibble over a nickel–trying to save a nickel is a waste of time–a nickel is likely 1 week or 10 days worth of dividends.  Remember the OTC grey market is not a super automated system like the big exchanges and information on pricing and volumes is limited—the use of common sense is paramount.

NEVER put in a ‘market’ order for these shares.  In fact the systems I am familiar with do not allow a market order on the OTC market. You MUST use ‘limit’ orders.

There is NO GUARANTEE that shares will move higher when trading moves to the NYSE or NASDAQ–many times they do, but not always.



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