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To Improve Profitability, Merrill Curtailing Trading of OTC Issues A Time to Buy Small-Cap Issues?

To Improve Profitability, Merrill Curtailing Trading of OTC Issues A Time to Buy Small-Cap Issues?

Merrill Lynch is trimming the number of Nasdaq stocks it trades by 75 percent—so that it can focus on the 2,400 biggest, most actively traded stocks, according to the company.

“That’s the perfect contrarian indicator,” says Aaron Edelheit, of Sabre Value Management, a hedge fund manager in Boca Raton, FL. “With fewer players, that means there will find more inefficiencies in that part of the market. That’s where I am making my money these days.”

For the year through September, the Sabre Value Fund is up 32.4 percent after fees, he says.

“Remember that during the bubble all of these firms were all over small stocks, trading in and out of them and hyping them to death. And that was the perfect time to sell.”

In addition, Merrill also said it is moving its Nasdaq trading unit to the firm’s New York headquarters from Jersey City. No brokers are affected, the firm says. Merrill bought the unit from Herzog Heine for nearly $1 billion in June 2000, when the Nasdaq traded for more than three times its current value.

Merrill has decided to stop trading OTC Bulletin Board, Pink Sheets stocks and other “small” Nasdaq stocks, according to sources. Quite simply it is not profitable to make a market in many thinly traded issues with such a dramatic drop in demand. Nasdaq is the worst performing U.S. index this year, down more than 40 percent.

A Merrill spokesperson declined to discuss the firm’s specific criteria for stocks to be dropped.

The market decline has “destroyed equity trading and underwriting,” and as a result, “our profits have declined, so we have to continue to cut costs,” a broker says familiar with the situation said.

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