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By JASON BOOTH

Staff Reporter

The Internet already allows investors to buy financial products ranging from certificates of deposit to mutual funds with a click of a mouse button.

Now a couple of Los Angeles companies are attempting to set up “virtual stock markets” where investors can buy and sell penny stocks with little or no involvement by a stockbroker.

Due to fees charged by brokers and Nasdaq market makers, it is often too expensive to efficiently trade micro-cap stocks on existing markets.

By eliminating these middle men, the people behind the envisioned virtual markets hope to create a cheaper, more efficient vehicle for trading micro-caps, which in turn might help those companies graduate to the conventional markets.

“Our goal is to become a Triple-A farm team for the stock exchanges,” said Clay Womack, chairman of Santa Monica-based Direct Stock Market, which plans to have its virtual market up and running by the end of the year.

Already in operation is People’s Stock Network, also based in Santa Monica.

Established in late January by former film producer Steven Kern, PSN is essentially a bulletin board where buyers and sellers of penny stocks can contact each other and work out trades.

PSN has already received a “no action” letter from the Securities and Exchange Commission, which means that as long as PSN operates within the parameters set out under the letter, the SEC will not intervene.

Only 12 companies are listed on PSN’s bulletin board so far. Each firm pays between $1,000 and $2,500 per year. There is currently no charge for the roughly 3,000 investors registered to use the service, though Kern said a fee might be imposed if trading volume increases.

For now, volume remains almost nonexistent. In fact, last week there was not a single buy or sell notice posted for any of the listed companies. Kern said only about 25 trades have been transacted since the system was launched at the end of January.

He attributed the thin trading to a lack of marketing. “It is so novel. You could say I’m like a missionary. I have to educate the public,” he said.

Investors who decide to trade on the PSN must themselves complete most of the back-office paperwork normally handled by stockbrokers. Once a buyer and seller contact each other on the bulletin board they can negotiate a transaction price via e-mail, phone or in person. Having agreed to a price, the two parties then download a buy-sell agreement and print out a hard copy. The seller then signs and notarizes his stock certificate and sends it to the buyer.

Unlike PSN, Direct Stock Market plans to involve the services of a broker and thus would be more expensive to use.

As envisioned, a Direct Stock Market transaction would involve a buyer and seller being matched on the bulletin board, and the agreed-to deal would be electronically forwarded to a broker who would close the transaction. Womack estimated that transactions on his site would cost investors an average of $30 to $35 per trade.

Bob Colby, spokesman for the Securities and Exchange Commission, said that as long as the new virtual markets remain small and refrain from engaging in salesmanship for their member companies, the SEC is willing to let them develop largely unregulated.

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