Penny stock craze at boiling point with SEC eyeing social media

GameStop mania is off the front page, but the spirit that fed it still rules many corners of the market. Penny stocks are an area where sentiment remains boiling hot, earning the scrutiny of federal regulators.

Way-off-exchange venues, where lightly regulated companies have repeatedly been drawn into social media-fueled trading vortexes, saw more than 1 trillion shares change hands in December for the first time in a decade. It happened again in January. This month, daily volume is tracking 64% above those levels, a pace that could push the monthly total toward 2 trillion.

The mayhem has caught the eye of the SEC, which last week suspended trading in SpectraScience — a firm that had surged 633% in 2021 to just over two-tenths of a cent before the halt. The SEC’s order noted that while the company hadn’t filed reports in years and its phone number doesn’t work, “social media accounts may be engaged in a coordinated attempt to artificially influence” its share price.

“Regulatory halts in some of these stocks that are traded over-the-counter, which is the case for a lot of these penny stocks, isn’t entirely unusual or unheard of,” said Shawn Cruz, senior market strategist at TD Ameritrade. “The SEC is now looking at that because they’re questioning what’s driving some of the behavior.”

SpectraScience is just one penny stock that vaulted from obscurity to viral sensation this year. In 2021, on any given day, there have been a dozen or more similar stories. Oftentimes, chatter on social media sites like Stocktwits and Twitter and other online chatrooms presages takeoff. It’s happening as retail traders equipped with zero commissions at brokers have swelled to 23% of stock trading volume, up from 20% last year, according to Bloomberg Intelligence.

So far this month, an average of 99 billion shares in companies that don’t trade on classic exchanges — often called “over-the-counter” securities — have changed hands each day. Should that pace continue, February would see total penny stock trading volume of roughly 1.9 trillion, data compiled by Bloomberg Intelligence show.

Sundial Capital Research called the pickup “a speculative surge like no other,” in a recent research report, noting that “over-the-counter activity has continued to rocket higher in recent weeks.”

In the case of SpectraScience, volume surpassed 3.5 billion shares on a single day in late January as the stock surged 167%. Over the last month, an average of more than 500 million shares changed hands each day, about 12 times what was normal in 2020. The SEC suspended trading on Feb. 10 due to “questions regarding the accuracy and adequacy of information about the company in the marketplace and potentially manipulative trading activity,” the suspension order says.

To some, it’s hard not to note the similarity to the penny-stock crazes of the past, when schemes like “pump-and-dump” were the rage.

“It is very markedly similar to what we saw in 1999 with these day traders and novice investors coming in and treating the market as a get-rich-quick type of scheme, and of course that didn’t end too well 20 years ago,” said Marc Odo, client portfolio manager at Swan Global Investments. “As long as people don’t lose too much, they can continue to be a force — it’s only when people start losing more than they can afford that they’re going to start exiting the market.”

--With assistance from Claire Ballentine.