The JOBS Act and Tick Sizes"

Transcription

1 The JOBS Act and Tick Sizes" STANY David Weild (212)

2 Notable contributions The debate on "Decimalization" (We drove this with a number of allies) The JOBS Act (Our studies gave rise to it) Nasdaq "Market Intelligence Desk" (We created it) Classes of stock offerings designed to avoid "Information leakage" (We pioneered this in the 1990s) November 2008 November 2009 June 2010 October 2011 September 2012 Subscribe to the Capital Markets Series at 2

3 What captured the attention of the House Subcommittee on Capital Markets? Loss of the Small IPO Decline in US Listings Of our many studies, two slides were selected by the House Subcommittee on Capital Markets for display and discussion on the flat-panel screens in the Capitol hearing room. (see next two slides)

4 Loss of the small IPO coincides with shift from quote-based to electronic-order based markets Tick size changes on the NASDAQ Stock Market overlaid on the drop in the number of small IPOs Percentage of total U.S. IPOs 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Quote-driven market (pre-reg. ATS) Effective tick size > minimum tick size Electronic order book market (post-reg. ATS) Effective tick size collapsed to minimum tick size A Order Handling Rules B Regulation ATS C Decimalization D Sarbanes-Oxley Act E Regulation NMS $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 NASDAQ tick sizes Transactions raising at least $50 million Transactions raising less than $50 million "Bankable" spread or effective tick size Tick size for stocks $10 1 0% '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 A B C D E Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic Data includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs : $0.125 for NASDAQ stocks $10; 1997: $ for NASDAQ stocks $ : $ for NASDAQ stocks < $10. $0.00 Tick size for stocks < $10 2

5 U.S. IPO volumes won't dramatically improve until aftermarket incentives are improved. 800 Price/share < $5.00 Deal size < $50 million Deal size $50 million average IPOs/year pre-bubble 539 average IPOs/year bubble 128 average IPOs/year post-bubble Number of U.S. IPOs A Christie-Schultz study* B First online brokerage C New Order Handling Rules D Regulation ATS E Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act F Regulation FD G Decimalization H Sarbanes-Oxley Act I Global Research Analyst Settlement J Regulation NMS '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 A B C D E F G H I J Pre-bubble Bubble Post-bubble Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic Data includes corporate IPOs as of December 31, 2011, excluding funds, REITs, SPACs and LPs *Christie, William G., and Schultz, Paul H., Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes? Journal of Finance, Vol. 49, No. 5, 1994.

6 Quote: Arthur Levitt, former chairman of the SEC "The irony of all this is that the change in Order Handling Rules [in 1997] that were instituted under my watch at the [SEC] has resulted in the proliferation of markets, technologies and automation that brought about the flash crash and yesterday's [Knight Securities] events. I think public confidence is severely shaken by things of this kind." Bloomberg Surveillance with Ken Pruitt and Tom Keen August 2, 2012

7 Presented at the OECD in Paris Last Week OECD CORPORATE GOVERNANCE WORKING PAPERS, NO.10 Making Stock Markets Work to Support Economic Growth (w) Implications for Governments, Regulators, Stock Exchanges, Corporate Issuers and their Investors Weild, D., E. Kim and L. Newport (2013), Making Stock Markets Work to Support Economic Growth, OECD Corporate Governance Working Papers, No.10,

8 Since peaking in 1997, U.S. listings have declined by over 44% Selected Global Exchange Listings Indexed to 1997 (1997=0) China 2 - Singapore Hong Kong 4 - Australia Korea 6 - Tokyo 7 - Deutsche Börse 8 - Toronto 9 - London (50) India 11 - United States (100) Sources: Weild & Co., World Federation of Exchanges and the global stock exchanges China includes Shanghai S.E. + Shenzhen S.E. India includes National S.E. + Bombay S.E. Based on the number of listed companies at year-end, excluding funds, as of Dec

9 Institutions of most sizes have cut allocations to sub $250 million market value companies Fundamentally-Oriented U.S. Institutional Equity Investors Change in Percentage of Equity Assets Invested by Market Cap from 1999 vs (Inflation Adjusted) 25% Micro Cap: < $250 Million 20% 15% Percentage Change (1999 vs. 2010) 10% 5% 0% -5% -10% -15% Tranche Sources: Weild & Co., Grant Thornton LLP, FactSet and the U.S. Department of Labor

10 The U.S. is the world s largest economy and should have the largest small IPO market. It fell off a cliff. #0 #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 Deal Size < $50 Million USD United States Deal Size $50 Million USD Rank Rank Rank #1 #1 #2 A. Divergence B. Non-Parallel Shift #9 (8) #10 (8) Key: A. Convergence vs. Divergence: When policies and/or market structure equally favor (or disfavor) small and large IPOs, relative country rank will be similar (i.e., "convergence") for both the small and large IPO segments. B. Parallel vs. Non-Parallel Shifts: Parallel shifts are generally driven by market and economic factors, while nonparallel shifts are more likely due to policy (including market structure) shifts. Includes domestic corporate IPOs, excluding funds, LPs, SPACs, REITs and other trusts. Sources: Weild & Co., Grant Thornton LLP and Dealogic

11 Higher tick size economics are important to small IPO production and are harming US markets x = Percentage of a Country s Nano Cap Stocks that have Tick Sizes > 1% of Share Price y = Efficiency Ratio for Small Domestic IPOs (IPOs per $100 Billion USD of GDP Efficiency Ratio for Small Domestic IPOs y = 24.7x R² = Australia 2. Canada 3. China 4. France 5. Germany 6. Hong Kong 7. India 8. Italy 9. Japan 10. Singapore 11. South Korea 12. United Kingdom 13. United States % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of a Country s Nano Cap Stocks that have Tick Sizes > 1% of Share Price Includes primary listings and common stock/depository receipts only for companies under $100 million USD in market value, excludes trusts and funds. Includes domestic corporate IPOs with a deal value less than $50 million USD from 2008 to 2012, excluding funds, LPs, SPACs, REITs and other trusts. Average annual gross domestic product (GDP) from 2008 to Estimate used for 2012 GDP. Sources: Weild & Co., Grant Thornton LLP, Dealogic, Capital IQ, FactSet, the World Bank and The World Factbook 6 1

12 Issuers in most economies adjust tick economics by splitting share prices This option doesn t work in the US Stock Price Conventions Vary Widely. Lower Stock Prices in Certain Markets are Permitting Higher Economic Incentives per Share, Leading to Higher Domestic IPO Efficiency. Number of Companies Hong Kong (USD) South Korea (USD) United Kingdom (USD) United States (USD) Stock Price per Australia Canada China France Germany India Italy Japan Singapore Grand Share (USD) (USD) (USD) (USD) (USD) (USD) (USD) (USD) (USD) (USD) Total A. < $ , ,398 B. $0.10 to $ , ,581 C. $0.50+ to $ ,961 D. $1.00+ to $ , ,791 E. $2.50+ to $ ,819 F. $5.00+ to $ ,386 G. $ to $ ,039 2,695 H. > $ ,310 2,774 Grand Total 1,492 2,690 2, ,202 3, , ,734 1,304 3,802 23,405 Primary listings and common stock/depository receipts only, excludes trusts and funds. Sources: Weild & Co., Grant Thornton LLP, Dealogic, Capital IQ, FactSet, the World Bank and The World Factbook

13 Summary Low-transaction costs and computer-based trading may increase: Short-termism Information mining Decline in fundamental analysis/stock picking Decline in direct stock ownership (intermediation) Inefficiencies in capital allocation Job loss (Drag on economic growth) Systemic and systematic risk