Bit Brother, a Chinese tea retailer that has branched out into cryptocurrency mining, is an unlikely candidate to top the trading leader boards in the vast US stock market.
But for the past two months an average of 572mn shares in the lossmaking firm, whose market value is less than $2mn, have changed hands each day. That is more than any of the biggest names in corporate America including Tesla, the $565bn behemoth whose stock is often frenetically traded.
Bit Brother, which changed its name from Urban Tea in 2021 as it expanded into “blockchain-based” services, is emblematic of a trading boom taking place in some of the market’s cheapest shares. Activity in so-called “penny stocks”, whose shares are worth less than $1 each, rose to nearly 20 per cent of overall stock market volumes in December and was still 14 per cent in January, up from around 6 per cent in prior years, according to Cboe Global Markets.
Much of the activity has been driven by retail traders who got hooked on the stock market during the 2021 meme stock craze, when buying by small investors sent retailer GameStop skyrocketing.
But this time it is trading volumes, rather than share prices, that are soaring. That is due not only to the greater number of retail investors trading the stocks, but also to the growing popularity of sometimes-controversial equity fundraisings that can flood the market with new shares. The bloated share counts push up trading volumes but can weigh heavily on stock prices, particularly for lossmaking groups.
“Retail tends to like these low-price stocks because they think that ‘Hey, if it only goes up a penny [then] I’ve doubled my money’,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. “More than likely they buy it and it continues to go down. It’s a very dicey game.”
Heavily-dilutive fundraisings, and the resulting share price falls, have helped swell the number of US-listed companies trading below $1 to 517 as of Thursday’s close, according to S&P Global Market Intelligence data, compared with 77 a year ago. Almost one-third of the stocks currently in this bracket have seen their share count rise by at least 50 per cent over the past year.
The result is a very different market environment from the meme stock craze of three years ago, when some retail investors made huge gains from soaring share prices as hedge fund short sellers were squeezed out of their positions.
“The retail investor just sees that ‘Oh, you got $40mn of funding and you’re going to be able to increase product lines, and better revenues mean the company fundamentals will go up’,” said Mark Basile, a lawyer at The Basile Law Firm, who has used New York state usury laws to void several small-company financing deals.
“The next thing you know the company is putting out good news, but the price keeps going down, and the volume of the shares being traded goes up,” he added.
In December Bit Brother sold $12mn of shares and warrants, which give holders the right to buy additional shares. If the warrants were fully exercised, the whole deal would more than double its outstanding stock count, which before the fundraising had already swelled 80 per cent in a year.
Another heavily-traded company that until recently was a penny stock is Mullen Automotive. The California-based lossmaking electric vehicle maker topped the monthly trading leaderboard five times in 2023, even as its shares plummeted 99 per cent. That came after a series of share-based fundraisings that pushed Mullen’s share count to 50 times the level of a year earlier.
While, in value terms, trading in stocks worth less than a dollar is dwarfed by turnover of large-cap shares, the activity has nevertheless caught the attention of major exchanges and traders. Unlike other large financial centres, US trading charges and metrics such as market share are often measured by the number, not value, of the shares traded.
In January, Bit Brother was pipped to the top of the volume leaderboard by Phunware — ticker symbol PHUN — a mobile software developer known for having worked on Donald Trump’s unsuccessful 2020 presidential campaign. It was worth $15mn until trading rocketed mid-month and its shares more than tripled.
On Wednesday the firm announced a $10mn capital raise through selling 40mn discounted shares. On Thursday, its shares rose 10 per cent to 37 cents, reversing a wobble following the fundraising news.
Some retail investors were undeterred: “FEAR NOT #phunarmy this is the insiders and institutions trying wash out us retail investors hold strong and I’m adding on these dips,” said one poster in the stock’s Reddit forum, adding “All for PHUN and PHUN for all.”
“We’re grateful to our retail shareholder base who helped us achieve terrific volume and brought more publicity to our company,” Mike Snavely, chief executive of Phunware, told the Financial Times. Mullen and Bit Brother did not respond to a request for comment.
In their hunt for financing, many tiny firms have also turned to convertible debt deals — under which they borrow from a lender who has the option of being repaid in cash or new shares.
The deals typically allow the lender to convert into shares at a time of their choosing and at a set discount to the market price. That lets them turn a quick profit by dumping their new shares, often in waves, further driving down the share price.
“That’s the death spiral,” said Basile. “The funders are buying stock directly from the company and then they’re selling that stock in the market. The people who are buying it are retail traders.”
Tumbling stock prices mean many companies risk falling foul of restrictions imposed by major exchanges, which can remove stocks if they trade below $1 for too long. This has led a number to undertake reverse stock splits, in which, say, 100 existing shares are swapped for one new share.
While this mechanically boosts the share price, such moves can be perceived by shareholders as a sign of weakness and the effects may only be temporary.
Bit Brother undertook a 1,000-for-1 split in January, removing it from the penny stock club. Since then its shares have more than halved to just under $3. Last year, Mullen Automotive conducted three reverse splits. Its shares closed on Friday at $6.97, down around 50 per cent this year.
While the NYSE hosts some penny stocks, Nasdaq’s practice of accepting smaller and less-established companies means it is home to the vast majority. That has led to criticism it has allowed unsuitable stocks to remain on the exchange in order to retain listing fees and trading revenues.
“Our rules — like any other exchange — are approved by the SEC and provide companies with specified criteria and procedures to maintain compliance,” said a Nasdaq spokesperson. “These are designed to protect investors, ensure our market operates with optimal liquidity and transparency, and allow capital formation.”
Last week Bit Brother disclosed it had received a delisting notice from Nasdaq due to the exchange’s concerns about the inclusion of warrants with cashless exercise provisions in two recent fundraisings. A hearing is scheduled for later this month.