OTC Stocks - HUGE gains?

Question

I'm a relatively new investor working with a virtual trading platform for the time-being.

In my day to day activities, I have noticed the following four interesting OTC stocks:

RLSPY GEAPO GEAPP BCBAY

All of them have incredibly large gains and losses every other day or so (with exception to BCBAY which seems to follow a different pattern). Incredibly large as in they go from $1017 to $108k overnight. Now, I realise that this is fantastic in a virtual trading platform where there is always a buyer, but in the real world, I would never try my luck with these. They have a trading volume of around 10 or fewer. It isn't a glitch in the platform I'm using, either. Go on Yahoo! or whatever you use. It's really happening.

I would like to know what causes these massive changes to occur, why it's possible, and if this behavior is normal, why isn't everyone throwing everything they've got into them?

I've done research and I can't seem to find much info. There are only a few QA sites and forums offering explanations like "they're just garbage stay away." I wasn't planning on going near these in the real world, but I would like to understand what is going on.

Answer 1

Changing my answer based on clarification in comments.

It appears that some of the securities you mentioned, including GEAPP, are traded on what is colloquially known as the Grey Market. Grey Sheets, and also known as the "Gray Market" is another category of OTC stocks that is completely separate from Pink Sheets and the OTCBB.

From investopedia
The grey market is an over-the-counter market where dealers may execute orders for preferred customers as well as provide support for a new issue before it is actually issued. This activity allows underwriters and the issuer to determine demand and price the securities accordingly before the IPO.

Some additional information on this type of stocks. (Source)

Unlike other financial markets...

• No recent bid or ask quotes are available because no market makers share data or quote such stocks. There is no quoting system available to record and settle trades.

• All Grey sheet trading is moderated by a broker and done between consenting individuals at a price they agree on. The only documentation that can be publicly found regarding the trades is when the last trade took place.

• No SEC registration and little SEC regulation. Regulation of Grey Sheet stocks takes place mainly on a state level. Unlike Pink Sheets, these stocks have no SEC registration to possess a stock symbol or to possess shares or trade shares of that stock.

• Such penny stocks, similar to Pink Sheets, are not required to file SEC (Securities and Exchange Commission) financial and business reports.

• These stocks may not be solicited or advertised to the public unless a certain number of shares are qualified to be traded publicly under 504 of Regulation D.

• Extremely Illiquid. Gray sheet trading is infrequent, and for good reason... Difficult to trade, not advertised, difficult to follow the price, the least regulation possible, hard to find any information on the stock, very small market cap, little history, and most such stocks do not yet offer public shares.

• The lack of information (bids, history, financial reports) alone causes most investors to be very skeptical of Gray Sheets and avoid them altogether.

• Gray Sheets are commonly associated with Initial public offering (IPO) stocks or start up companies or spin-off companies, even though not all are IPO's, start-ups or spin-offs.

• Grey Sheets is also Home to delisted stocks from other markets. Some stocks on this financial market were once traded on the NASDAQ, OTCBB, or the Pink Sheets but ran into serious misfortune - usually financial - and thus failed to meet the minimum requirements of the registered SEC filings and/or stock exchange regulations for a financial market. Such stocks were delisted or removed and may begin trading on the Grey Sheets.

So to answer your question, I think the cause of the wild swings is that:

1. These stocks are traded on what amounts to the Wild-west of markets.
2. Technicals on these stocks is likely to be highly unreliable and at best dubious.
3. Most likely people aren't getting in on this action because it is an exclusive club that can invite whomever they want to play.

Great question, BTW.