As IPOs Rise, Where Will Shares Trade?
As initial public offerings rebound, the issue of thin trading has arisen. Currently there are 13 exchanges and more than 40 off-exchange markets, such as “dark pools.” According to a background briefing in The Economist, dark pools “allow institutional investors … to take or dispose of sizeable positions in a company’s shares without suffering adverse price movements as they carry out the trade.” Regardless of the benefits of dark pools and other off-exchange markets, such a fragmented marketplace can exacerbate the problem of thin liquidity, particularly for small-cap stocks. This, in turn, can make it harder for companies to raise capital or even to entice top talent with stock-option grants, says governance expert Adam Epstein, quoted in a recent article in The Wall Street Journal.
The issue of thin trading definitely has the SEC’s attention. An April 10 research paper from the SEC’s Division of Trading and Markets explored “liquidity demographics and market quality” for thinly traded stocks on the National Market System, which hosts 8,500 stocks. Also on April 10, SEC Chair Jay Clayton proposed in a speech that small-cap companies could restrict their trading to the exchange where they are listed. The SEC also hosted a Roundtable on April 23 to delve into the issue.
Citing statistics from Renaissance Capital, a recent article in The Washington Post declared that “the first quarter of 2018 was the best for IPOs since 2015.” Could the marketplace be even better if trading were more concentrated? Time may tell.