- The Washington Times - Sunday, February 27, 2011

The New York Stock Exchange’s plan to merge with Deutsche Borse, while promising more efficiency for investors in global stocks, may hurt small U.S. enterprises that are finding it increasingly difficult to tap into the stock market so they can grow and create jobs.

The move accelerates a trend of stock exchanges becoming more focused on the profitable trading in stocks of big global corporations at the expense of smaller companies trying to tap the market for the first time with initial public offerings (IPOs), stock analysts say.

The trend, which started in the mid-1990s, resulted from a multitude of well-intentioned regulations and technical changes in the trading of stocks, as well as the decisions by major stock exchanges to go public and, more recently, to join forces with other global exchanges.

Research shows that these developments have been bad for small corporations hoping to attract investors and are hurting U.S. workers and the larger economy because fast-growing small enterprises typically are important sources of dynamic growth and millions of good jobs in the U.S.

According to Grant Thornton LLC, a Wall Street accounting firm, the dramatic drop in stock offerings by small corporations in the past decade may have cost the economy as many as 22 million jobs — even before the Great Recession eliminated more than 8 million positions across the economy.

“The inability of emerging growth companies to access U.S. public equity capital by completing IPOs less than $50 million inhibits job creation and hurts American entrepreneurs more than any other group,” said Pascal Levensohn, founder of Levensohn Venture Partners.

The New York Stock Exchange, the Nasdaq Stock Market and other U.S. exchanges have essentially lost their status as public “utilities” that once served budding enterprises as well as small investors, said David Weild, Grant Thornton consultant and former vice chairman of Nasdaq.

Today, the exchanges have become largely beholden to private stockholders as a result of going public themselves, he said.

Deutsche Borse’s planned takeover of the venerated New York exchange accelerates this trend by making the exchange even more focused on global markets and large companies, and less interested in the more marginally profitable business of helping smaller companies access the markets, he said.

“They are no longer the voice for American corporations” that the exchanges used to be in the halls of Congress and elsewhere, he said.

Under ownership of Deutsche Borse, the prestigious New York exchange “will speak more for European stockholders” than for U.S. companies, he said.

The turn away from the small stock issues that used to be the bread and butter of Wall Street firms has led to dramatic drops in the number of U.S. stock offerings as well as the total of U.S.-listed stocks.

The number of new public offerings averaged 530 a year at the peak in the 1990s, which also happened to be an era of rapid job growth associated with the proliferation of technology startup firms and the tech stock boom.

But that number plummeted by 75 percent to 126 per year in the past decade at the same time job growth slowed markedly and went into reverse during the recession.

According to estimates by Grant Thornton and Global Insight, an econometric firm, if the U.S. were still experiencing the rate of company births and job gains seen in 1997 — the height of the tech boom — the country would have 22 million more jobs today.

Even though public offerings made somewhat of a comeback last year with the debut of the new General Motors and a few other high-profile offerings, the growth rates of new issues is not high enough to offset the failures of some 360 public companies each year, according to Grant Thornton.

The result is that the universe of U.S. stocks is shrinking while the universe of stocks in fast-growing, developing countries such as China is exploding. The number of U.S.-listed stocks has dropped by 22 percent since 1991, despite two decades of economic growth.

By contrast, last year Chinese companies introduced 391 initial public offerings worth $89.5 billion, compared with 99 offerings in the U.S. worth $15.7 billion. Chinese companies have been so active in the new-issue market, in fact, that they accounted for a quarter of all new offerings on U.S. exchanges last year.

Joe Saluzzi of Themis Trading LLC said the trend is ominous for the U.S. economy and stock market.

“What is the role of the stock market? I had always learned from my educational and work experience that markets have an important role in free-market capitalism,” he said.

“When this role is being fulfilled, capital is raised and allocated for new wealth-creating industries, which grow, create jobs, create economic growth, and raise standards of living,” he said.

But today, the market is dominated by professional traders who make money on the high-frequency buying and selling of stocks that they may own for only nanoseconds at a time — a practice made possible by the near-complete computerization of stock trading.

These “high freaks,” as Mr. Saluzzi calls them, contributed to last year’s 1,000-point “flash crash” of the Dow Jones industrial average and have made the market so scary and bewildering for small investors that many ordinary people have simply bailed out of the market, he said.

The hostile place the market has become for many small investors and companies was largely the inadvertent result of what were generally thought as advances in stock trading, Mr. Weild said. They include online trading that debuted in the mid-1990s, the decimalization of stock prices a decade ago and strict new regulations aimed at improving disclosure for investors.

But the cumulative effect of these changes and the rapid globalization of the stock exchanges have produced an “extinction class event” for the classic small enterprises that always had been the backbone of the U.S. economy, he said.

Just as people grow from infants into adults, nearly every global corporation started out as what once were affectionately called “small stocks” in the heyday of the market, he said.

The computer chip giant Intel, for example, started out with a small market capitalization of $53 million, while Microsoft was valued at $525 million and Starbucks fetched $215 million in their initial forays onto the exchanges.

Today, those companies are worth billions of dollars and operate on a global stage where their stocks are sought by investors from Tokyo to Timbuktu.

While stock debuts valued at $10 million were common in the 1990s, today most companies do not even consider going public unless they can fetch $100 million or even as much as $500 million from investors. That means most must have name recognition that small companies in the past typically did not have before they accessed the market.

The stocks of even future giants such as Microsoft when they initially debuted were not very profitable for Wall Street firms because the stocks were unfamiliar to investors and had to be pushed hard by brokers and supported by costly research and underwritings funded by the brokerages.

Though Wall Street firms maintain their outreach to small companies seeking to go public today, most are no longer interested in making much of an effort to support small stocks because the big profits sought by shareholders lie elsewhere in the burgeoning derivatives markets for global corporate stocks, Mr. Weild said.

“The U.S. stock market will continue to shrink” unless this trend is reversed, he said, adding that after meeting with legislators on Capitol Hill last month he concluded that many seemed to be just waking up to the problem.

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