Deregulation and the Declining Competitiveness of US Stockmarkets
By J. Robert Brown
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The Economist reported on a study by Grant Thornton about a decline in US securities markets. The Study, A Wake-up Call for America, is here.
It seems that as the number of listed companies decline, replacements are few and far between. The lack of replacements comes from an IPO market that has yet to revive in any significant matter. The reasons for the decline? Not SOX, as much as some would like to believe.
Instead, the problem can be traced to deregulation that encouraged "high-frequency" trading that largely ignores smaller public companies. As the Economist described:
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.
And, in the end, what does Grant Thornton recommend? More, not less, regulation.
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.
