Hidden Costs of Regulation

Terry Flanagan

Increasing regulation has had a trickle-down effect on the marketplace.

With the market under increasingly stringent regulatory scrutiny, it has created a difficult environment for the trading of equities and equity options.

“At the peak, there were more than 8000 listed U.S. companies, we’re now down to about 4000 listed companies,” said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University during the FIA/OIC Equity Options Conference. “The number of underlying products is shrinking. If they continue to shrink, we won’t be able to fill the Standard & Poor’s 500, or even an S&P 100.

That decline in publicly traded companies has happened in just the past 14 years or so. At the rate it’s going, there are nearly 300 public companies lost per year, and that’s taking into account the introduction of newly listed companies and initial public offerings. This is in stark contrast to other markets abroad, which have been able to sustain or even grow the number of listed companies over the past two decades. The U.S., on the other hand, has seen a decline of more than 40 percent since peaking in 1997.

According to the panelists discussing the effects of market reform at the FIA conference, the reason for the decline can be traced to increasing regulation.

“The government has made a lot of regulations that make it more costly to be a public company,” Angel said. “There are dramatic costs imposed on public companies and not private companies. Put it all together, and there are fewer domestic companies going public.”

Because of the high costs and requirements imposed on public companies in the U.S., that has left certain companies to seek listing elsewhere, which further reduces trading volume.

“When companies go elsewhere, U.S. investors don’t trade those products in the U.S. as much,” said Christopher Nagy, managing director of order strategy at TD Ameritrade. “When companies delist in the U.S, their options go away too.”

“If you want to have trading in options, you need to have the underlying,” Angel said.

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