NYSE CEO: market reforms needed to boost confidence

WASHINGTON Wed Jun 20, 2012 5:13pm EDT

WASHINGTON (Reuters) - Dozens of small and medium-sized private companies are talking to the New York Stock Exchange about going public because of a recent law, but more reforms are needed to ensure successful IPOs, NYSE Euronext NYX.N Chief Executive Duncan Niederauer said on Wednesday.

Niederauer, testifying before a congressional hearing on market reforms, said NYSE has had conversations with 50 to 100 of these companies since the legislation was passed in March.

The JOBS Act eases regulatory burdens associated with going public for "emerging growth companies" that have less than $1 billion in annual revenue. It also allows crowdfunding in which investors take small stakes in companies over the Internet.

Its benefits have been hotly debated, with some critics saying the legislation dangerously erodes investor protections.

Facebook's (FB.O) glitch-filled and much-hyped public debut last month only deepened reservations about whether Washington needs to be tightening rules rather than easing regulations.

Niederauer said that market confidence has been shaken by the social network's IPO, but he largely focused his comments on the extra work that is needed to help ensure that emerging growth companies will be successful once they get to market.

"The good news is we get a lot of small companies to market to get access to the growth capital to create some jobs we desperately need, but the other news is that once they get there, they run the risk of being orphaned," he said.

An orphaned stock is one that is illiquid and rarely trades.

Niederauer, along with 10 other top executives from exchanges, broker dealers, and investment firms, voiced support to the House Financial Services capital markets subcommittee for a pilot program which would raise the trading increments of emerging growth companies in order to increase liquidity.

As part of the JOBS Act, the U.S. Securities and Exchange Commission is looking at whether penny spreads have hurt liquidity in small- and mid-capitalization stocks, making investors less likely to trade in them.

The SEC is also considering allowing issuers to pay market makers to make liquid markets in their stocks.

THE FACEBOOK EFFECT

Facebook's IPO was expected to be a hot topic at the hearing, but lawmakers did not press the market players on the issue, and the witnesses only made brief references to it.

Its May 18 market debut was delayed by half an hour due to a technical glitch, after which market makers did not receive confirmations of their opening orders for two hours, while some orders were lost entirely. Losses among market makers have been pegged as high as $450 million.

Nasdaq OMX (NDAQ.O) did not participate in the hearing, citing pending litigation against the exchange operator in connection with the Facebook debacle, a U.S. House of Representatives aide had said last week.

"The citizenry has lost trust and confidence in the underlying mechanism," Niederauer said.

Confidence has been shaken by "a series of scandals, financial crises, and technological mishaps," said Kevin Cronin, Global Head of Equity Trading at asset manager Invesco.

He pointed to Facebook's IPO as well as the May 6, 2010, "flash crash" in which $1 trillion in shareholder equity was temporarily wiped out in a matter of minutes.

The IPO market has been frozen since Facebook's debut.

Nasdaq, which like other exchanges has a limited liability for technical glitches, has proposed a $40 million plan to compensate clients harmed in the Facebook IPO. Clients would be paid $13.7 million in cash, while the balance would be credited to affected members to reduce trading costs.

Other exchanges say that firms will be forced to give Nasdaq their business in order to be reimbursed.

Dan Mathisson, managing director at Credit Suisse Securities LLC, told lawmakers it may be more fair to injured parties if lawmakers remove caps on liabilities at exchanges.

He argued that since exchanges are public, for-profit companies, they should be held to the same standards as other public companies.

But David Weild, senior advisor to the capital markets group at Grant Thornton, and a former Nasdaq vice chairman, said that could have unintended affects that go beyond the stock markets.

"If one of them had a catastrophic failure and were liable and put out of business, that would just irrevocable harm investor confidence in the United States."

REFORMS UNDER WAY

Regulatory market structure reforms have been high on SEC Chairman Mary Schapiro's agenda since she took the post in 2009. They were given a new sense of urgency after the flash crash.

Among the many reforms being considered by the SEC is the creation of a "consolidated audit trail" to track all orders, messages and trades.

The agency is also exploring ideas floated last year by a flash crash advisory panel, including imposing fees on high-frequency traders and a "trade-at" rule.

That rule would prohibit U.S. venues and wholesale market makers from executing an incoming order unless they were already publicly displaying the best bid or offer in a particular stock.

(Reporting By John McCrank; Editing by Tim Dobbyn)

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