The JOBS Act and Tick Sizes" STANY David Weild (212) 542-9979 david.weild@us.gt.com david.weild@weildco.com
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 www.grantthornton.com/subscribe 2
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)
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. 1 1991: $0.125 for NASDAQ stocks $10; 1997: $0.0625 for NASDAQ stocks $10. 2 1991: $0.03125 for NASDAQ stocks < $10. $0.00 Tick size for stocks < $10 2
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 700 520 average IPOs/year pre-bubble 539 average IPOs/year bubble 128 average IPOs/year post-bubble Number of U.S. IPOs 600 500 400 300 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 200 100 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 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.
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
Presented at the OECD in Paris Last Week OECD CORPORATE GOVERNANCE WORKING PAPERS, NO.10 Making Stock Markets Work to Support Economic Growth david.weild@weildco.com david.weild@us.gt.com (w) 212-542-9979 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, www.oecd.org/daf/corporateaffairs/wp
Since peaking in 1997, U.S. listings have declined by over 44% 250 200 Selected Global Exchange Listings Indexed to 1997 (1997=0) 1 1 - China 2 - Singapore 150 2 3 3 - Hong Kong 4 - Australia 100 50 0 4 5 6 7 8 9 10 5 - Korea 6 - Tokyo 7 - Deutsche Börse 8 - Toronto 9 - London (50) 11 10 - India 11 - United States (100) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 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. 2012.
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. 2010 (Inflation Adjusted) 25% Micro Cap: < $250 Million 20% 15% Percentage Change (1999 vs. 2010) 10% 5% 0% -5% -10% -15% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Tranche Sources: Weild & Co., Grant Thornton LLP, FactSet and the U.S. Department of Labor
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 1996-2000 Rank 2001-2005 Rank 2008-2012 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
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 35 2 30 10 Efficiency Ratio for Small Domestic IPOs 25 20 15 10 11 7 y = 24.7x + 2.6411 R² = 0.5789 1. 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 5 12 4 9 3 13 8 5 0 0% 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 2012. Estimate used for 2012 GDP. Sources: Weild & Co., Grant Thornton LLP, Dealogic, Capital IQ, FactSet, the World Bank and The World Factbook 6 1
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. < $0.10 691 1,085 23 8 45 462 563 6 4 224 2 282 3 3,398 B. $0.10 to $0.50 420 762 109 22 48 457 1,066 34 32 268 45 274 44 3,581 C. $0.50+ to $1.00 105 177 564 18 30 134 427 28 109 59 92 121 97 1,961 D. $1.00+ to $2.50 107 181 1,328 61 94 87 468 43 508 38 352 190 334 3,791 E. $2.50+ to $5.00 78 130 411 84 82 39 249 30 725 16 389 162 424 2,819 F. $5.00+ to $10.00 41 123 89 110 91 11 154 29 763 5 295 124 551 2,386 G. $10.00+ to $25.00 35 131 15 125 142 11 87 29 668 1 307 105 1,039 2,695 H. > $25.00 15 101 1 221 163 1 45 15 601 3 252 46 1,310 2,774 Grand Total 1,492 2,690 2,540 649 695 1,202 3,059 214 3,410 614 1,734 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
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