Ed Knight, general counsel and executive vice president at Nasdaq OMX, testified before the Senate Banking Committee in December during a hearing on the status of capital formation and job creation. Knight argued that the marketplace was overly fragmented and that exchanges needed government help in supporting the trading of small company stocks.
>>On the need for government help
We should also deal with structural issues that make our public markets less attractive today. We ask for your help in reshaping the rules driving the public markets so that investors and entrepreneurs will continue to view the U.S. capital markets as the most efficient and best regulated markets in the world. The United States used to be the market of choice for global IPOs. From 1995 to 2010, listings on U.S. exchanges shrank from 8,000 to 5,000, while listings on non-U.S. exchanges grew from 23,000 to 40,000.
>>On the "problem" of fragmentation
Today’s U.S. markets are increasingly fragmented and volatile. Liquidity in U.S. stocks is dispersed across 13 exchanges, over 40 other registered execution venues, and uncounted other trading facilities. The declining cost of launching and operating electronic order crossing systems has led to a proliferation of decentralized pools of liquidity that compete by offering their owners and customers reductions in fees, obligations, transparency and order interaction. The unintended consequences of the market fragmentation has been a lack of liquidity and price discovery in listed securities outside the top few hundred names and a disturbing absence of market attention paid to small growth companies by all market participants, including exchanges.
>>On the amount of off-board trading
Today nearly one-third of public company stocks trade 40 percent to 50 percent of their volume away from the exchanges. In the past 3 years the percentage of U.S. market share traded in systems that do not publicly post their bids and offers rose from 20 percent to over 30 percent. Many retail and core investor orders are executed away from the primary exchanges.
>>On limiting trading in small cap stocks
We believe that steps should be taken to limit the fragmentation of trading in these smaller companies. The Securities and Exchange Commission should allow public companies to opt out of a fragmented market. Companies should be able to choose the manner in which their shares trade, particularly for smaller companies in the period following an IPO when an efficient and liquid market is still developing. The most prevalent listed company concern we hear about equity market structure relates to volatility. It is time for the SEC to consider allowing certain IPO companies, especially smaller companies using the public market to fuel growth, for a period of up to a year, to choose the market structure they feel would best introduce their stock to the marketplace. Empower these IPO companies to restrict the fragmentation that occurs in their stock and causes volatility and limit their trading to a well-regulated, transparent market unless off-exchange trading delivers real price improvement.
>>On "paid-for-market-making"
The SEC should allow companies to pay for market quality by allowing the exchanges to establish programs to reward broker-dealers for committing capital to a stock and meeting rigorous market-quality benchmarks established by the exchange. This has worked in our Nordic markets.
>>On Nasdaq’s new small stock marketplace
The BX Venture Market will provide a well-regulated listing alternative for companies that otherwise would transfer to, or remain on, the largely unregulated Pink Sheets or OTCBB, where there are no listing requirements, no public interest review, limited liquidity, and limited transparency, or list on junior tiers of non-US markets.
