The Damage Little Ticks Can Do
SEC regulation moved the markets to penny increments for investors shortly after the turn of the millennium. And as you know, the narrow spreads that followed have lowered the explicit trading costs of the 100 largest U.S. companies, like BankAmerica and Citigtoup, if your order size is small. You also know that spreads in mid and smaller cap names have not narrowed, and that trading them has become more difficult than ever. Finally, you know that there has come to be a severely diminished Wall Street support and presence for trading in these mid and smaller cap names. Simply put, brokerage firms have not been able to compete with HFT firms in trading profitability, and have exited the market making business – with horrible consequence to the IPO market in America.
David Weild, former NASDAQ Vice Chairman and founder of Capital Markets Advisory Partners, points out a few facts for us to ponder in his op/ed in Crain’s New York just this past week:
– In 1986 there were 186 underwriters for the $58 million IPO of Microsoft. Facebook’s coming $5 billion IPO will likely have only 6 firms.
– Since decimalization was implemented our markets have produced only about 120 IPO’s/year.
– Since decimalization there has been a decrease of about 2,860 companies listing on US stock exchanges—a decrease of 260/year.
And we wonder why our economy is sluggish!
But all is not lost, David points out. Several initiatives have been undertaken in Washington DC, one of them being H.R. 3606 introduced late in 2011 by a group of 50 congressmen. This bill, the Reopening American Capital Markets to Emerging Growth Companies Act of 2011, attempts to make it easier and cheaper for small companies to go public, something we need desperately to happen. One of the portions of this bill includes the studying of increasing the minimum tick size for smaller capitalization companies. While the high freaks won’t necessarily like that, such a move could actually bring some profit margin back to that segment of the market for small brokers, and encourage real market making and capital commitment in the space.
Hey folks, while such a bill proposal is only a first step, and most bills never make it out of debate, we think we should all be encouraged. Perhaps someone is listening to all of our voices in DC after all.