Another Cautionary Tale for a Gilded Age
SAN FRANCISCO -- Given how most Internet stocks react favorably to anything but absolutely
news, you'd think
Pacific Century CyberWorks
would have enjoyed a big leap Wednesday. The Hong Kong-based Internet incubator received generally favorable mentions in both
The New York Times
The Wall Street Journal
Well, maybe the stock soared and maybe it didn't. You'd have a hard time finding out either way until Thursday because, as of last week, real-time quotes are no longer being disseminated for Pacific Century CyberWorks.
"Market makers are able to get a quote, but they're the only ones," said one dumbfounded equity trader. "You have to call and ask. They stopped all the feeds."
The "they" in question is the
National Association of Securities Dealers
, which may have just unwittingly put individual traders at a disadvantage in Pacific Century CyberWorks trading. The parent of the
Nasdaq-Amex Market Group
mandates a one-day lag for foreign securities that trade over the counter. Previously, Pacific Century CyberWorks trading data were being disseminated in real time. That is, until Dec. 23, when Nasdaq "corrected the problem" so the stock would "agree with all other foreign OTC issues," according to a source at
-- one of four units within the NASD's
group -- who requested anonymity.
A spokeswoman for Mary Schapiro, president of NASD Regulation, declined to comment.
For the record, Pacific Century CyberWorks shares fell 12.3% to 17.1 Hong Kong dollars (about $2.20) in the company's home market Wednesday. This morning,
reported on rumors the
Stock Exchange of Hong Kong
may investigate alleged manipulation of the stock.
It is unclear what prompted the NASD to take action on Pacific Century CyberWorks. Perhaps it caught wind of the rumored investigation in Hong Kong. Or maybe it got tipped off to some of the "scalping" reportedly done by traders involved in the stock in this country.
According to one broker, who requested anonymity, market makers were pocketing the sometimes wide spread between bids made by U.S. investors and the prices they could obtain in Hong Kong, which were usually cheaper.
The broker's own internal compliance team discovered "our guys" were holding orders on Pacific Century in the U.S., and then buying the stock overnight in Hong Kong, often at lower levels. "Somebody was scalping somebody," he said.
The broker's firm -- a
retail institution I wish I could name -- recently laid down "special instructions" for trading Pacific Century CyberWorks, directives likely mimicked elsewhere on Wall Street. They dictate that all orders will be sent to Hong Kong overnight "unless
the broker request the order be executed here in the U.S.," according to a copy of the instructions obtained by the TaskMaster.
Executions in the U.S. will be subject to a minimum order size of 2,000 shares and must be "unsolicited" and will be completed on a "best efforts" basis, the instructions say, meaning whichever market maker has the best bid and offer will get the business.
Firms that make markets in Pacific Century include
Herzog Heine Geduld
. None was available to comment for this article.
I first wrote about Pacific Century on
Dec. 22, when more than 80 million shares traded amid chat board euphoria and a buzz among investors big and small, both sophisticated and un-. Several readers
castigated me for that piece, but the confusion that's ensued over the sudden disappearance of real-time quotes highlights the intended message of that first article. Once again (with feeling): In an era when some investors seem willing to throw money after just about anything based on even the most specious of recommendations, take a moment to think about what it is you're buying, and why.
While troubling, it's not shocking that "enterprising" traders would take advantage of anomalies in a foreign stock when they had the chance (that's like schoolkids misbehaving when faced with a dim-witted substitute). Although some, even many, investors have profited in Pacific Century CyberWorks shares, the goings-on in the stock behind the scenes provide another example of what can happen when you close your eyes and buy something on a whim and prayer.
I'm off until Monday. Here's wishing you and yours a safe, happy and profitable New Year.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at