Ten days have passed now since the Facebook IPO debacle and the street is still pointing fingers at each other. The underwriter is blaming NASDAQ, retail brokers are blaming the underwriters, NASDAQ is still in denial and the retail investor is once again the victim. Some will say that Joe Retail should have done his homework and checked the numbers before coughing up his hard earned dollars for a chance at making some money in the Wall Street casino. But Joe Retail was so happy to get in at the IPO price and figured IPO’s, especially one this big, normally don’t break issue price. Well, too bad for retail that this IPO broke issue price and too bad for all of us that the retail investor has once again been burned.
You have heard us say it before and we’ll say it again, the markets are broken. The traditional Wall Street model of investment banking, research and sales and trading has been replaced by short term, no obligation scalpers who don’t care about the health of Wall Street or our economy. They care only about flipping the same baseball card a million times a day and shaving a few pennies in the process.
What happened? How did the IPO model get so screwed up? We are fortunate to have a chapter in our upcoming book “Broken Markets” titled “Killing the Stock Market That Laid The Golden Eggs” written by David Wield and Edward Kim. Dave and Ed are experts in capital markets and have laid the blame on the lack of IPOs at the foot step of our current equity market structure. Their written reports have detailed out the lack of IPO’s over the past decade and how these translate into lost jobs. They were instrumental in getting the SEC to analyze tick sizes as part of the JOBS Act (Title 1, Section 106) that was just signed into law:
(6) TICK SIZE.—
‘‘(A) STUDY AND REPORT.—The Commission shall conduct a study examining the transition to trading and quoting securities in one penny increments, also known as decimalization. The study shall examine the impact that decimalization has had on the number of initial public offerings since its implementation relative to the period before its implementation. The study shall also examine the impact that this change has had on liquidity for small and middle capitalization company securities and whether there is sufficient economic incentive to support trading operations in these securities in penny increments. Not later than 90 days after the date of enactment of this paragraph, the Commission shall submit to Congress a report on the findings of the study.
‘‘(B) DESIGNATION.—If the Commission determines that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01, the Commission may, by rule not later than 180 days after the date of enactment of this paragraph, designate a minimum increment for the securities of emerging growth companies that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue.’’
After the Facebook debacle, we need to now not only repair the secondary equities trading market but also the IPO market. One solution, as David Weild and Ed Kim, have recommended is to widen spreads in small to mid-cap issues to incent real market makers to provide real liquidity again to the market. These incentives would not come without a cost. The cost would be that market makers would have real obligations to provide an orderly market. The SEC is now studying the tick size issue and has 90 days from the passing of the JOBS Act to submit a report to Congress with their findings. That means by July 5th, the SEC will be submitting a report to Congress on the effect of increasing tick sizes. We hope they do not get influenced by the “we shrink spreads” HFT lobby.
The Facebook IPO mess is the straw that broke the camel’s back. It’s time for change in our equity market. It’s time for real liquidity providers to stand up against the HFT hostage takers and take back their market.