the jobs act and “tick sizes - the security traders...

© Grant Thornton LLP. and Weild & Co., LLC - May be used in whole or in part with attribution.

The JOBS Act and “Tick Sizes" STANY David Weild (212) 542-9979 [email protected] [email protected]


Notable contributions

2

• 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)

Subscribe to the Capital Markets Series at www.GrantThornton.com/subscribe

November 2008 November 2009 June 2010 October 2011 September 2012


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

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

NAS

DAQ

tick

siz

es

Perc

enta

ge o

f tot

al U

.S. I

POs

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.11991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10.21991: $0.03125 for NASDAQ stocks < $10.

A Order Handling RulesB Regulation ATSC DecimalizationD Sarbanes-Oxley ActE Regulation NMS

A B C D E

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

Transactions raising less than $50 million

Transactions raising at least $50 million

Tick size for stocks ≥ $101

"Bankable" spread or effective tick size

Tick size for stocks < $102


U.S. IPO volumes won't dramatically improve until aftermarket incentives are improved.

0

100

200

300

400

500

600

700

800

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Num

ber o

f U.S

. IPO

s

Price/share < $5.00 Deal size < $50 million Deal size ≥ $50 million

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData 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.

520 averageIPOs/year pre-bubble

539 averageIPOs/year bubble

128 averageIPOs/year post-bubble

Pre-bubble Bubble Post-bubbleA B C D E F G H I J

A Christie-Schultz study*B First online brokerageC New Order Handling RulesD Regulation ATSE Online brokerage surges

and stock bubble inflates;Gramm-Leach-Bliley Act

F Regulation FDG DecimalizationH Sarbanes-Oxley ActI Global Research Analyst

SettlementJ Regulation NMS


"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

Quote: Arthur Levitt, former chairman of the SEC


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

OECD CORPORATE GOVERNANCE WORKING PAPERS, NO.10

Making Stock Markets Work to Support Economic Growth Implications for Governments, Regulators, Stock Exchanges, Corporate Issuers and their Investors

[email protected] [email protected] (w) 212-542-9979

Presented at the OECD in Paris Last Week

mailto:[email protected]

mailto:[email protected]


Since peaking in 1997, U.S. listings have declined by over 44%

(100)

(50)

0

50

100

150

200

250

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Selected Global Exchange ListingsIndexed to 1997 (1997=0)

Sources: Weild & Co., World Federation of Exchanges and the global stock exchangesChina 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.

1 - China

2 - Singapore

3 - Hong Kong

4 - Australia

5 - Korea

6 - Tokyo

7 - Deutsche Börse

8 - Toronto

9 - London

10 - India

11 - United States

1

2

3

45

678910

11


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

Perc

enta

ge C

hang

e (1

999

vs. 2

010)

Tranche

Micro Cap: < $250 Million

Fundamentally-Oriented U.S. Institutional Equity Investors Change in Percentage of Equity Assets Invested by Market Cap from 1999 vs. 2010 (Inflation Adjusted)

Institutions of most sizes have cut allocations to sub $250 million market value companies

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.

Includes domestic corporate IPOs, excluding funds, LPs, SPACs, REITs and other trusts. Sources: Weild & Co., Grant Thornton LLP and Dealogic

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 non-

parallel shifts are more likely due to policy (including market structure) shifts.

Deal Size < $50 Million USD Deal Size ≥ $50 Million USD

#1

#9#10

#1 #1#2

#0#1#2#3#4#5#6#7#8#9

#10#11#12#13#14

1996-2000 Rank 2001-2005 Rank 2008-2012 Rank

United States

(8)

A. DivergenceB. Non-Parallel Shift

(8)


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

Higher tick size economics are important to small IPO production and are harming US markets

y = 24.7x + 2.6411R² = 0.5789

0

5

10

15

20

25

30

35

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Effic

ienc

y R

atio

for S

mal

l Dom

estic

IPO

s

Percentage of a Country’s Nano Cap Stocks that have Tick Sizes > 1% of Share Price

1. Australia2. Canada3. China4. France5. Germany6. Hong Kong7. India

8. Italy9. Japan10. Singapore11. South Korea12. United Kingdom13. United States

1

2

4

5

6

7

8

9

10

11

12

133

x = Percentage of a Country’s Nano Cap Stocks that have Tick Sizes > 1% of Share Pricey = Efficiency Ratio for Small Domestic IPOs (IPOs per $100 Billion USD of GDP


Issuers in most economies adjust tick economics by splitting share prices – This option doesn’t work in the US

Number of Companies

Stock Price per Share (USD)

Australia (USD)

Canada (USD)

China (USD)

France (USD)

Germany (USD)

Hong Kong (USD)

India (USD)

Italy (USD)

Japan (USD)

Singapore (USD)

South Korea (USD)

United Kingdom

(USD)

United States (USD)

Grand 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

Stock Price Conventions Vary Widely. Lower Stock Prices in Certain Markets are Permitting Higher Economic Incentives per Share, Leading to Higher Domestic IPO Efficiency.

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

the jobs act and “tick sizes - the security traders...

Documents