Nasdaq offers new small cap liquidity solution


A massive market structure issue for years has concerned the plight of small companies. Wall Street once loved trading these companies' stocks because of the massive spreads and strong volumes that lined the pockets of market makers and other traders.

But all would agree that the decimalization movement was tough on small cap companies. It's pretty obvious now that liquidity has dried up, taking analyst coverage with it.

The issue has prompted a wide array of solutions, such as payment for market making services, payment for analysts' coverage, enforced wider spreads, not to mention the panoply of solutions embodied in the JOBS Act, which changed the rules for analyst coverage, and provided more lenient disclosure with the SEC.

Yet another idea comes from exchange companies. Nasdaq OMX has argued that newly listed companies should have the right to choose where their shares are traded.

More specifically, CEO Robert Greifeld has argued that regulators should allow an "emerging growth" company, the kind covered by the JOBS Act, "to determine a span of time after its flotation during which the stock would be traded solely on the exchange where it is listed. Right now, after stocks are listed for trading, they can be bought and sold across all US exchanges and private trading platforms," notes Financial News.

The article noted that, "That makes newly listed, small-cap stocks more expensive to trade, Greifeld said, because liquidity is stretched out across many different venues instead of being concentrated on one…"

Obviously, such restrictions would enhance volume at the exchanges, but Greifeld says that the impact on revenue would ultimately be nil. Dark pools will weigh in on this issue at some point. Small cap executions are internalized at rates higher than bigger stocks, but internalization service owners will make the point that this leads to price improvement that benefits retail investors. -Jim