What is good for cutting-edge traders may be bad for the market as a whole
America is plagued by a “Great Depression” in the number of listed firms that stretches back over a decade.
The slide in listings began in the mid-1990s, at around the time that America saw an array of regulatory changes designed to advance high-speed, low-cost trading, such as the introduction of online brokerages and new order-handling rules. An accidental victim of this technological revolution, the report says, was the ecosystem that helped bring small firms to market and then nourished them once there. “It’s a bargain-basement market today,” says David Weild, a co-author of the report. “You get what you pay for, and that’s nothing but trade execution.”
The “high-frequency” traders who have come to dominate stockmarkets with their computer-driven strategies pay less attention to small firms, preferring to jump in and out of larger, more liquid shares. Institutional investors, wary of being stuck in an illiquid part of the market, are increasingly following them.
Another factor is the near-evaporation of research on small firms, which has been undone by the rise of passive index investing and by rules that banned the use of investment-banking revenues to subsidise analysts. With less funding to go around, analysts are increasingly concentrating on large, frequently traded shares ...
More is needed to stop the precipitous listings decline, argues Grant Thornton. It proposes a twofold solution: the establishment of a new market segment without automated trade execution but with fixed trading commissions, some of which would be used to fund research; and looser rules governing institutional investment in pre-IPO companies. Such upheaval would be controversial. But something dramatic may be needed if America wants to retain its stockmarket hegemony.