Banquet Table on Market Structure: Issuers Pull Up a Chair

In an April 2013 letter to the Commission, STA voiced its objection to the SEC’s Small Business Advisory recommendation to allow companies to choose their own tick size. While our letter recognized that the interests of issuers are closely aligned with those of their investors, our opposition was based on the premise that providing such an option would empower “executives to make decisions on matters on which they lack expertise.” While this basis was sound back then, it’s shelf-life is likely set to expire soon and thus will need to be revisited.

The Voice of the Issuer

The voice of the issuer on matters that impact the secondary trading of their company’s shares is relatively new. For the first time, an increasing number of companies are demonstrating a willingness to voice their opinions on market structure issues. While some question whether there are outside influences serving as the catalyst for this willingness, these companies are nonetheless entering the market structure debate in a fully transparent manner as opposed to using the cover of a trade association or lobbying group. As an industry we would be wise to view their actions as indicators of a desire to play a larger role in future debates.

Evolution of Buyside Influence

In the early 2000s, the buyside’s participation in market structure conversations was limited to a few brave souls whose opinions, absent available data, were based more on gut instincts and personal experiences. Over time, buyside firms came to realize that to transition from simply having a marginal voice in these ongoing debates, they would need more fully developed and informed opinions. The kind of opinions best obtained by gathering their own data, making a commitment towards understanding how our markets work and gleaning the various roles played by the key participants. The thought leaders among this group did not rely on any one entity for their data and demonstrated their commitment by engaging with the ecosystem of participants: brokers; trade associations; consultants; exchanges; clearing entities; legislators and regulators. Today, asset owners and managers step forward on a regular basis to defend their interests on issues they historically either shied away from completely or relied on brokers and trade associations to represent them.

As issuers step into the public domain to voice their opinions and defend their interests, they could benefit from understanding the buyside’s experiences as they transitioned from being spectators on market structure debates to being true influencers. Just as head traders on buyside desks did in the past, investor relations officers should do so today: gather your own data; commit to understanding the life cycle of an order to buy/sell shares in your company; and engage the entire spectrum of market participants in that chain: brokers; trade associations; consultants; exchanges; regulators and your investors.

As issuers step into the public domain to voice their opinions and defend their interests, they could benefit from understanding the buyside’s experiences as they transitioned from being spectators on market structure debates to being true influencers. Just as head traders on buyside desks did in the past, investor relations officers should do so today: gather your own data; commit to understanding the life cycle of an order to buy/sell shares in your company; and engage the entire spectrum of market participants in that chain: brokers; trade associations; consultants; exchanges; regulators and your investors. For many issuers and their IROs, engagement with participants on market structure issues has shifted in the past decade. Cuts in equity research budgets at the banks have resulted in less coverage and thus less interaction between research analysts and issuers. For asset managers, the rise of dual share class structures has diminished incentives for corporate boards to engage with traditional long-only shareholders. On the other side, exchanges have increased their interactions with issuers through the range of services they provide to them. Again, none of this is necessarily bad or good, it’s just different than it used to be. 

Capital Formation & Thinly Traded Securities

2019 continues to be on pace for a record-breaking year in both the number of companies going public (200+) and the amount of capital raised ($100 billion). Despite the positive karma created by this wave of IPOs, an uneasiness exists among some around how much different capital formation looks today versus 20 years ago. To be clear, we’re not saying it’s better or worse today, we’re just saying it’s different. We’ve seen the data: companies are going public later in their existence and do so only after reaching enough critical mass that they represent a needle-moving investment opportunity for asset managers, which is more difficult than ever given how much larger these firms are today.

{Relevant content: Capital Formation: Same as it ever was}

The Commission has expressed a strong desire to improve the ecosystem for companies considering a public path, and has presented meaningful ideas on doing so. Some of these ideas have included providing alternative market structures for thinly traded securities, or smaller companies who wish to go public sooner. The process of turning these ideas into action will require debate from the spectrum of interested parties, issuers being one. We are confident that if issuers learn from the buyside’s experiences when they do pull up a chair to defend their interests at the banquet table of market structure debate, they will do so with opinions that are well-vetted and well-informed, thus ensuring their voices are heard and their influence proportioned.