The U.S. Securities and Exchange Commission shouldn’t encourage the creation of a separate stock exchange for small public companies, the head of NYSE Euronext told an SEC advisory committee today.
NYSE Chief Executive Officer Duncan L. Niederauer, in a presentation to the panel, underscored an effort by three large U.S. exchanges to limit the dispersion of trading beyond their venues. The CEOs of NYSE, Nasdaq OMX Group Inc. and Bats Global Markets Inc. met with SEC officials last month about policy changes that would restrict off-exchange trading in venues such as dark pools.
“We believe we’ve presented data that would suggest the more opaque the markets get, the wider the spread gets,” Niederauer told the SEC’s Advisory Committee on Small and Emerging Companies. “We think that it’s particularly an issue for these more thinly traded stocks.”
The SEC advisory committee recommended on Feb. 1 the creation of a separate exchange to promote trading in shares of public companies with market values of less than $250 million. The exchange would loosen regulations and encourage more businesses to go public, the committee recommended. Participation could be restricted to accredited investors, who have annual income greater than $200,000 and net worth higher than $1 million excluding home value.
The advisory committee is pushing the plan amid concern that computerized trading and regulations approved over the past decade have discouraged smaller companies from going public.
The number of initial public offerings by small U.S. businesses has fallen to 54 in 2012, or 31% of all IPOs, from 110 in 2004, or 37%, according to data Niederauer presented today. The country needs more emerging-company IPOs to improve job growth, Niederauer said.
Data presented today by William R. Hambrecht showed the number of IPOs that raised less than $25 million dropped from 9 in 2001 to 1 in 2012.
Nasdaq CEO Robert Greifeld told the committee that its goals could be addressed by allowing companies to provide incentive payments to market makers and to restrict trading in the stock to the exchange where they are listed.
The fragmented nature of U.S. equity markets, where stocks trade on 14 exchanges and about 40 dark pools, inhibits trading in small stocks, Greifeld said.
“There should be a market-maker support pilot program,” Greifeld said. “They could provide economic support for more aggressive trading and quoting in their stocks.”
U.S. regulators have already approved Nasdaq Stock Market’s request to allow the sponsors of some exchange-traded funds to offer payments to market makers. The Securities and Exchange Commission’s decision loosened a ban on the compensation that has been in place since 1997.
Greifeld said an exclusive relationship between an “emerging growth company” and one exchange would allow the market maker to increase trading in the stock. The 2012 Jumpstart Our Business Startups Act defined an emerging growth company as one with less than $1 billion in annual revenue.
The SEC would have to approve what Nasdaq called its “liquidity concentration program.” Greifeld said he wasn’t sure if Nasdaq would petition the SEC to propose a regulation allowing it.
“We are not going to instantaneously create a deep and liquid market, but it will certainly be an easier path to get there,” Greifeld told the committee.
Greifeld, who met privately with new SEC chairman Mary Jo White today, said the proposal isn’t part of the effort to limit trading that happens away from exchanges.
The NYSE, the second-largest U.S. stock exchange, supports a separate committee recommendation to encourage trading of small stocks by increasing the minimum quoting increment, Niederauer said. That increment, known as tick size, was reduced from sixteenths of a dollar to one penny in 2001, which reduced profits for market makers and reduced their willingness to buy and sell less liquid stocks, Niederauer said.
The SEC is studying how to structure a pilot program to test wider tick sizes for small public companies. Such a program should include 300 to 500 companies and should last at least two years, Niederauer said.
“You have support for this not only from the issuer community, but also from from the trading and exchange community,” Niederauer said.