Not long ago, the over-the-counter (OTC) stock market was an Off Off Broadway play. Just a sideshow to the production at No. 11 Wall Street - the New York Stock Exchange (NYSE).
A company looking for prestige and prominence - not to mention liquidity - listed its stock on the Big Board. The OTC was considered a backwater market for minor companies and risky start-ups. The American Stock Exchange was a steppingstone between the two.
Today, in numbers of shares traded, the OTC is the second-largest stock market in the United States, and the NYSE is casting anxious glances over its shoulder.
''There's no longer any great advantage to being listed on the Big Board,'' says Perrin H. Long Jr., a financial analyst at Lipper Analytical Services in New York.
The National Association of Securities Dealers (NASD), the OTC trade organization, says 600 OTC companies that qualify for NYSE listing are staying put. The NYSE says the figure is 200.
''Let's be honest,'' says Mr. Long at Lipper. ''Ten or 12 years ago, there was considerable prestige to being listed on the Big Board. There was the perception that it would facilitate a (stock) sale. But with the introduction of high-tech into NASDAQ (National Association of Securities Dealers Automated Quotations) - there's just as much, if not more, liquidity on NASDAQ as on the Big Board.''
While the exchanges moved slowly, the OTC leaped into automation in 1971, and it hasn't looked back since. Under the guidance of the NASD, brokers and dealers across the US were linked electronically. Officials of the NASD are fond of evoking the image of a coast-to-coast, 3,000-mile-wide trading floor.
The 4,700-issue NASDAQ system now includes the National Market System, added in 1982. Dealers sit at computer terminals that provide up-to-the-minute price quotes and trading volume on more than 1,100 stocks, putting the OTC market on an equal footing with exchanges.
The OTC market, also known as the ''off-board'' or ''off-exchange,'' has been the primary market for banks, insurance companies, and new growth companies. Unlike the NYSE, where a company has one specialist on the exchange floor handling trades in that stock, the OTC has an average of eight dealers, known as marketmakers, scattered throughout the country and trading in a particular stock. Many companies believe the OTC's multiple marketmakers now offer as much liquidity (the ability to buy or sell a stock quickly) as the NYSE specialist. Or, as NASD president Gordon Macklin often says, ''Many wallets are better than one wallet.''
Automation has sped up transactions. Since 1974 the OTC stock trading volume has grown more than twice as fast as volume on the NYSE. On a few days last year , OTC volume surpassed the NYSE.
''Much of our volume growth has nothing to do with the skills of our organization, it comes from the internal growth of the (OTC) companies - MCI Communications, Intel Corporation, Apple Computer. As they've grown, activity in their stock has grown and their volume figures have gone up,'' Mr. Macklin said in a recent interview.
In riding such high-flying stocks, however, one is prone to the fate of Icarus. This year, high-tech stocks - of which the OTC has plenty - fell out of favor with investors. Thus, the OTC market has not performed as well as the NYSE as a whole.
But in this business overall market performance counts for little; new listings is the name of the game. Since 1974, the number of companies listed on the NASDAQ has surged 60 percent, to 4,084. Meanwhile, the American Stock Exchange list has shrunk by a third, to about 800 companies, and the NYSE membership has remained relatively static.
Mr. Macklin theorizes: ''There is a large, growing number of corporate executives that would rather cast their lot with the high-growth companies than tie in with the classic US Steel, Republic Steel companies.
''The dividing line seems to be at about 55 years of age. Those executives over 55 that grew up in the old environment - most of them are probably lost to us. But those under 55 that did it themselves ... have more identification with the younger companies and very often are inclined to our market.''
Price can play a part, too. It costs a maximum of $5,000 to join the OTC. The NYSE charges $30,000 to be listed.
Of course, the NYSE is not oblivious to the strides of the OTC. Last year it got the Securities and Exchange Commission to loosen listing standards so more companies could qualify for the NYSE. According to the exchange's own rules, General Motors, Hershey Foods, and Dow Jones should be delisted for issuing differing classes of stocks. They haven't been.
The Big Board is beefing up its marketing and sales staff, seeking to convert Amex- and OTC-listed companies. Last week, the NYSE took out a full-page ad in the Wall Street Journal touting the successful courtship of American International Group Inc. With assets of $11 billion-plus, the insurance firm was the largest company in the OTC market.
Paul Robitaille, an AIG spokesman, says the Big Board did a good job of selling itself. The company's reasons for the switch: prestige and a broader shareholder base. ''Certain state pension funds have laws that prevent them from buying stocks in the over-the-counter market. Some foreign companies have the same restrictions,'' says the AIG spokesman. One of NASD's ongoing battles is to repeal old laws enacted when the OTC was perceived as a riskier market.
This year the NYSE has recruited 68 new companies (60 were lost in mergers, bankruptcy, or delisting). With a net gain of 8, the NYSE now has 1,552 stocks. The OTC has had a net gain of 184 new companies this year.
Macklin cites ways the OTC will continue to attract listings and boost volume: ''First, we're waiting for a decision to expand the National Market System (from the 1,400-stock limit) to 2,000. In about six months we expect some judgment on OTC options trading. In December, you'll see the small-order executions system come on line. And then the system will be expanding (from 125 million shares per day) to 200 to 225 million.''
The NYSE and most regional exchanges have already automated small orders, and some exchanges have options. So in effect, the OTC is still playing catch-up. But if one traces a line over past years' growth and extends it forward, the OTC may eclipse NYSE volume by 1990, Mr. Macklin predicts. ''But then, we all grew up in finance and we know the dangers of carrying lines forward,'' he adds.