Tags: SEC | small-cap | venture | trade

Senate Banking Subcommittee Looks at Small-Cap Trading

By    |   Wednesday, 11 Mar 2015 07:30 AM

The Senate Banking Committee's Subcommittee on Securities, Insurance and Investment, chaired by Sen. Michael Crapo, R-Idaho, held a hearing March 10 titled "Venture Exchanges and Small-Cap Companies" to consider whether trading in the stocks of small companies would benefit from establishing this type of trading platform.

Witnesses represented the Securities and Exchange Commission (SEC); the two most prominent trading venues, the New York Stock Exchange and the Nasdaq; and Andreesen and Horowitz, a leading company that promotes small-cap stocks.

The only Senators who attended the relatively short hearing were Crapo and the ranking Democrat, Sen. Mark Warner, D-Va., and no ambitious proposals emerged from the discussion. Rather, both Senators and witnesses emphasized on improvements in trading and regulation that could be made within the current structure, perhaps without legislation, and Crapo stressed that he and Warner have a history of working together in a bipartisan fashion.

For this writer the main value of the hearing was to provide a window for investors to view a small-cap landscape that is studded with traps and pitfalls. As Warner, normally a fan of small-cap companies, noted, many highly valued tech stocks of the 1990s ended up going to zero.

The lead panelist was Stephen Luparello, director of the SEC's Division of Trading and Markets. The SEC is a very staff-driven agency, and the division chiefs exercise enormous autonomy in deciding which ideas should be brought before the Commission. Luparello stated that the SEC has already established a venture exchange called the BX, but it has never been launched because it has not attracted sufficient liquidity. He repeated this point when Warner asked whether the exchange is "a solution in search of a problem."

On behalf of the trading venues, Thomas Farley, president of the NYSE, called the data on the trading of small public companies "discouraging" as they are staying private longer before going public and not experiencing as much liquidity as mid-cap and larger companies when they do go public.

Nelson Griggs, executive vice president of listing services for the Nasdaq, suggested that reform within the existing structure is the preferable path, and he offered suggestions such as centralizing trading of small-cap stocks.

Scott Kupor, managing partner and COO of Andreesen Horowitz, reported that the time small-cap companies take to go public has lengthened from a former average of 6.6 years to current average of nine years. He contended that policymakers should care about this because there is a risk of developing a two-tiered market. Kupor called for the SEC to go forward with the pending tick-size pilot program. The idea is that if market makers can charge a higher spread for small-cap stocks than for others, they will be more interested in promoting the stocks and doing research, which is assumed to be beneficial to markets. Most interesting was Kupor's observation that the creation of a venture exchange could have the perverse effect of reducing the liquidity of small-cap stocks in private transactions conducted off the exchanges.

In conclusion, this writer would observe that the development of a two-tiered market should not be surprising or alarming in light of the greater risk associated with small-cap companies. The lengthening time for small companies to go public might reflect healthy caution in the wake of the bursting of the tech bubble. Investors should be wary of proposals that could foster another bubble and another episode of the financial crisis.

(Archived video and witness statements can be found here.)

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Robert-Feinberg
The Senate Banking Committee's Subcommittee on Securities, Insurance and Investment held a hearing titled "Venture Exchanges and Small-Cap Companies" to consider whether trading in the stocks of small companies would benefit from establishing this type of trading platform.
SEC, small-cap, venture, trade
576
2015-30-11
Wednesday, 11 Mar 2015 07:30 AM
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