06.13.2018
By Rob Daly

OPINION: Nothing Ventured, Nothing Gained

The House Financial Service’s subcommittee on Capital Markets, Securities, and Investments is far from a subtle body. With its recent unanimous markup approval of the Main Street Growth Act, or H.R. 5877, it wants the US Securities and Exchange Commission to address venture exchanges.

The bill layouts almost everything that needs to be done to establish venture exchanges and defining the securities that would trade on such entities.

Unlike the JOBS Act with its tick-pilot provision, it is doubtful that the Main Street Growth Act will make it into law due to Congressional gridlock unless someone tacks the bill onto one of the must-pass appropriation bills.

Rep. Tom Emmer (MN-R), the bill’s author, must have known that since he included a “Sense of Congress” section that recommends that the SEC should start using its general exemptive relief authority granted to it under the Securities and Exchange Act of 1934 as well as establish an Office of Venture Exchanges under its Division of Trading and Markets.

The SEC knows that it must make a move regarding venture exchanges. Its Division of Trading and Markets held an industry roundtable on thinly traded stocks in April, where the participants floated the idea of one or more venture exchanges more than once.

The problem the regulator faces is that there are too many unknown variables: Should there be more than one venture exchange? Should they use periodic auctions instead of continuous trading? Should over-the-counter trading of venture securities be banned?

The bill is mum on how many venture exchanges it would like as well as on OTC trading, but it does mention the use of auctions.

The one thing that is certain is that the current one-size-fits-all trading methodology is not working for the US cash equities market and has not worked for any other equities market around the globe, according to James Angel, a professor at the McDonough School of Business, Georgetown University.

“Smaller companies need a market structure that provides suitable incentives for market participants to market their securities,” he told Markets Media.  “The old Nasdaq did this with its wide spreads that were easily internalized by the dealers promoting the stocks.”

It is time for the SEC to screw its courage to the sticking place and move forward on establishing one or more venture exchanges.

Until one is up and running, the regulator will not have any hard data to collect and analyze.

It would be great if a venture-exchange pilot were successful right out to the gate without additional tweaks, but that is seldom the reality of experimentation.

No matter what a pilot’s outcome would be, the status quo is not a tenable long-term option. It is time to make a venture exchange a reality.

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