By Lou Pastina, Managing Member, Global Markets Advisory Group
SIFMA, the Securities Industry and Financial Markets Association, publishes a quarterly look at the US Equity Market that is filled to the brim with statistics and other interesting insights. I am going to guess that most people don’t read it, and probably most people in the industry don’t either, except for those research types. That’s probably a mistake. This is one of the most fascinating reports that get issued and is free to the public. In fact, I think every Finance student in America should be made to review this report. It’s that good.
When I was at the NYSE the team I loved to listen to most was our Research Department. They collected all sorts of facts and figures and could chart long-term trends for the Exchange and the industry. Some of the trends haven’t changed much since I left the NYSE seven years ago, like the continuing decline in Listed Issues on Exchanges, or the increase in Off-Board trading. These two trends have been going on for several decades now, and there appear to be no easy answers on how to address them, or whether it matters or not. The new Chair of the Securities and Exchange Commission has questioned whether the increase in Off-Board trading has hurt the ability to price equities fairly and accurately and wants to research that question. Like so many before him he will run into a roster of participants, all with their own vested interests to protect, and will face an uphill battle. For people who want to follow the debate, and be able to critically analyze the competing positions, having public access to high-quality data like the SIFMA report is a good start.
So too with the question about the decline in Listed Companies. With regulation and compliance at the top of every private company’s list, they hold off as long as they can before cashing in and going public, in many cases denying the public the opportunity to profit from the company’s rapid rise in value.
The SIFMA report has some eye-catching stats to ponder, such as the percentage of world’s market capitalization. Given the rhetoric that we see every day in the media, you would think that China caught up to the US and passed us by years ago. But the SIFMA research report documents that the United States equity market is by far the largest in the world, almost 3.5 times its nearest rival. And by the way, the nearest rival isn’t even China, it’s the EU! To be fair, the EU is only .1 percent ahead of China at 11.3% vs 11.2%. But add them together and they still aren’t near the US’s 39.1% share of the worlds market capitalization. In addition to being well ahead of the competition, it looks like we were averaging nearly a 36% over the last decade and have popped up to 39.1% this year. So maybe reports of the US’s demise are greatly exaggerated.
Year to year comparisons are hard due to the pandemic, with last year being so dismal, but some of the numbers support what some industry leaders were saying last year, that 2021 was going to be strong. Take, for instance, the number of IPOs on a year-to-date basis: in 2020 there were 62 IPOS versus 215 in 2021 (so far!). That’s pretty impressive. So is the total capital raised: $24.2 billion vs $ 85.9 billion. Compare that with Private Equity deals, however, and you can start to see why companies aren’t going public. PE deals in 2020 totaled $282 billion versus $348 billion in 2021, both of which dwarf the public market. Average daily trading volume is an intriguing statistic to look at too. Often driven by extreme volatility, it doesn’t tell you much about direction, but the composition is interesting, as 44.4% of all trading was executed off-Board. In addition, ETF volume as a percentage of overall volume decreased from 20.6% in 2020 to 13.6% in 2021. This means more of the executed volume was in straight equities than in aggregated funds.
The hot issue lately, of course, has been SPACS (Special Purpose Acquisition Companies), which raise public capital and then have a two-year window to go hunting for companies to take public via a reverse merger. For the full year 2020 there were 248 SPACS issued; however, on a year-to-date basis in 2021 there have already been 360! The trend line isn’t clear, though, since things have recently cooled off due to increased regulatory saber-rattling in Washington.
While there is a hot market in SPACS, the number of Listed Companies has continued to decline from 6,274 in 2000 to only 4,147 in 2021. Despite that, market capitalization has grown remarkedly high. So, fewer companies, each worth a lot more. But despite best efforts to increase the number of Listed Companies, there will always be an Enron that comes along and sparks a new wave of regulation for companies to comply with and force entrepreneurs to wait longer.
Perhaps the most remarkable statistic to me is the number of places to trade in the United States. The report lists 55 of them! Sixteen Exchanges, twelve of which are owned by three groups and four of which are independent Exchanges. Joining the Exchanges are 32 Alternative Trading Systems and 7 Over-the-Counter markets. Interestingly, given the plethora of trading venues, there is still a duopoly when it comes to Listings, with the NYSE and Nasdaq splitting the difference, despite the Long-Term Stock Exchange’s best intentions. Duopolies notwithstanding, it certainly is a complex world we live in, but perhaps it is a safer one with so much redundancy built into the infrastructure. It does make it expensive however to connect to all those places to find the best price.
One other bonus: the last several pages of the report are dedicated to defining terms that are used in the industry. And here SIFMA does every Finance student a public service by laying out in simple terms what all the jargon is that gets thrown around on CNBC.
So, if you haven’t signed up for this report, try it, you just might like it!
Lou Pastina was a 31-year veteran of the New York Stock Exchange and was the manager of the Exchange’s Hybrid Market implementation plan in response to Reg NMS. He spent the next seven years as Executive Vice President managing the NYSE’s transition to electronic trading before retiring in 2015. Contributing to this article were GMAG members Jim Buckley, Dan Labovitz and Charles Dolan.
