Stacey Cunningham, president of the New York Stock Exchange, said the traditional initial public offering model is not broken but not right for every company.
Cunningham spoke at at SIFMA’s Equity Market Conference yesterday. She said: “Capital markets have been a bright light of 2020.”
Businesses that were adversely impacted by the pandemic came to the market first and more than $110bn (€93bn) was raised from follow-ons. Then sectors such as biotech and technology firms experienced a boom in business and this caused private companies to revisit public markets.
“August is usually the slowest month for initial public offerings but this month has been the busiest since October 2013,” Cunningham said. “September is on track to be busiest month for IPOs for 15 years.”
This week Snowflake went public, which Cunnigham said was the largest ever software IPO.
“Snowflake raised $3.3bn and popped $4bn on the first day,” she added. “We need to solve this problem and avoid the first day pop so there will be innovations in how companies go public.”
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One of these innovations has been direct listings, a mechanism first used by Spotify in 2018.
In a direct listing companies list outstanding shares on an exchange but unlike a traditional IPO, the firm does not raise any capital so banks are not needed to underwrite the deal. Existing shareholders, such as employees and early-stage investors, can choose to sell their shares on the exchange but have no obligation to do so.
Cunningham explained that the chief financial officer of Spotify had questioned the traditional IPO model. The music streaming company did not need to raise funds but wanted to list for visibility, to gain a currency and provide liquidity.
“We worked with the Securities and Exchange Commission for a year and a half to approve the direct listing,” she said.
Slack, the workplace messaging platform, completed a direct listing last year and Palantir Technologies, the data-mining company, has also filed to go public through a direct listing.
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Cunnigham said some companies want to raise capital through a direct listing without the traditional underwriting process. The NYSE has filed a proposal with the SEC, which has been approved by staff at the regulator but not yet by the commissioners.
The Council of Institutional Investors has filed a notice with the SEC objecting to public companies raising capital through direct listings on the NYSE.
CII said in a statement it was concerned that companies may attempt to limit their liability to investors for damages caused by false statements of fact or material omissions of fact within registration statements associated with direct listings.
“That issue was highlighted by the litigation over the direct listing of Slack, in which the company argued that investors could not challenge a misleading registration statement if they cannot trace their shares to those offered in the registration statement,” added CII.
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Cunningham added that some firms prefer the traditional PO because they can shape their shareholder base. She said: “The IPO is not not broken but it is not for everybody.”
Financial transaction tax
New Jersey, where the NYSE and Nasdaq have data centres, has proposed a financial transaction tax in order to shore up the state’s budget.
Cunningham said she understood that states are under budgetary pressure but financial transaction taxes have been shown to never work as charges are passed back to the end-investor and make trading more expensive.
“Vanguard calculated that a 10 basis point tax means retirees have to work for another two and a half years to reach their goals,” she added. “Displayed spreads widen so execution is worse and volumes can move.”
NYSE has already demonstrated how easy it is to move trading by running one of its exchanges from Chicago for one week and Nasdaq is aiming to do the same.
“We want to avoid relocation,” said Cunningham. "However, I have already had calls from other state governors offering space and power.”
Floor closure
Cunningham said the closure of the exchange’s floor due to the Covid-19 pandemic led to smaller displayed size and less efficiency during the closing auction.
NYSE, which is owned by Intercontinental Exchange, reopened its floor on May 26 after being closed for two months, with new social distancing rules in place.
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“We learnt the value of our model which is based on technology, the accountability of market makers and the human element,” she added. “I have to give a shout out to the industry for enhancing resiliency as the markets were traumatic but continued to function.”
She continued that the exchange had only rolled out a new trading system, NYSE Pillar, a year ago.
“In March peak messages rose to 330 billion a day compared to an average of 110 billion,” Cunningham added. “That is an astronomical amount of processing but there was no degradation of service and clients continued to have certainty of execution.”
