Exchanges court Chinese IPO’s at the expense of US market structure

It seems like the growth area for US stock exchanges when it comes to IPO’s will not be from American companies but from Chinese companies. According to a NY Times article, :

The New York Stock Exchange and the Nasdaq, where the number of I.P.O.’s withered last year from hundreds a decade ago, also are stepping up plans to lure even more Chinese listings to the United States from exchanges in Hong Kong and Shanghai.

But are US exchanges loosening their listing standards just to bring in some revenue that they have lost from the lack of US listings:

That has elicited concern from some analysts who say it could allow lower-quality companies to go public. Critics have long warned about unknowns that already come with investing in Chinese companies: insider trading scandals, the lack of transparency, poor regulatory oversight, volatile prices and a lack of clarity on shareholder rights.

The N.Y.S.E. lowered the financial requirement — actually we prefer to say making it more flexible,” said Michael Yang, the chief representative in China for the New York Stock Exchange Euronext.

So, are the public for-profit US exchanges putting investors at risk with these questionable listings because they need to satisfy their OWN shareholders?  Rather than lower standards, maybe the exchanges should address one of the real reasons why the US is suffering from an IPO drought – market structure.

According to a recent Grant Thornton report, , market structure is causing the drought of US listings:

Market Structure is at Fault – a market-structure-caused crisis, the roots of which date back at least to 1997. The erosion in the U.S. IPO market can be seen as the perfect storm of unintended consequences from the cumulative effects of uncoordinated regulatory changes and inevitable technology advances — all of which stripped away the economic model that once supported investors and small cap companies with capital commitment, sales support and high quality research.

The U.S. exchanges have even made the market structure problem even worse lately.  Again, to satisfy their shareholders, they have ramped up their high frequency trading strategy.  They are building new data centers to attract more HFT’s and have even allowed HFT’s to take over the role of specialist (now called DMM). 

If we have all learned one lesson from  recent market events, its that the quest for short term profits at the expense of long term risk  is usually not a good tradeoff.