After a lengthy deliberation, and with very little fanfare, a 20-person panel of experts at the Securities and Exchange Commission (SEC) voted unanimously last week to recommend, in effect, that a new stock exchange be created for small- and micro-cap companies. It would only be accessible to so-called accredited investors — or people that typically have a net worth north of $1 million.
The group's goal was to find ways to breathe life, and trading volume, into scores of illiquid stocks, thereby making them more viable and enabling them to grow and hire. As laudable as that objective is, the chosen solution seems, at the very least, a bit tone-deaf and, at worst, downright laughable.
''It's just rife with potential for abuse,'' says Barry Ritholtz, CEO of Fusion IQ, in the attached video. "I remember when the Nasdaq had their logo, 'the stock market for the next 100 years.' This idea comes with its own pre-built tagline, 'the stock market for the 1%.'"
By purposely widening the spread (or the amount of money between shares that are bought and sold) beyond a penny, it is thought that trading desks would be more inclined to deal in stocks that they otherwise choose to ignore. The problem is, as much as these may be small businesses, they represent 80% of all the listed stocks even though they only account for a small fraction of the market's total value.
"The question should not be, 'How can we get more people to buy this stuff?' It should be, 'Why are you public?' Just get out of the public markets," Ritholtz says in his notoriously blunt manner. "If you want to be private, be private. You don't get to go to the public markets and say, 'By the way, we're not sure if we're comfortable reporting, and we really don't want grandma buying us. We just want accredited investors.'"
As he sees it, there are far too many of what he calls "essentially pre-public companies" that are currently listed but rarely traded.
While the full SEC board will now decide whether to act on or to reject the panel's recommendation, if nothing else, the discussion has shed light on a dark corner of the markets where only the brave of heart go to play.
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