Traditionally the world looked to the United States for
lessons on how to run a state-of-the-art stock market. But the
decline of small-business listings suggests that America may do
well to look for advice from some of its former students.
Ironically, it may be the most antiquated exchange that offers
the clearest guidance.
Of course, the United States is not the only global market
to see a drying up of small-cap public offerings. Even
exchanges that specialize in making life easy for such
businesses have been struggling. By the end of 2011, the number
of companies listed on Londons Alternative Investment
Market was at its lowest level in seven years.
There are tentative signs that this IPO disease has
been spreading to Europe too, says Colin Mason, a
business professor at the University of Strathclyde in Glasgow
and author of a report on the subject for the City of London.
Various mature markets look to be seeing this.
Yet this IPO atrophy has not occurred everywhere. Markets in
China, Australia and Poland continued to help the little guy
flourish. Still, it is Hong Kong that offers the best example
of how old-fashioned practices may end up promoting microcap
listings. Hong Kong has been among the most active exchanges
for small public offerings in recent years.
The reason for this success is likely to be complicated.
While giant institutional investors dominate stock trading in
the United States, retail investors play a bigger part on the
Hong Kong market, accounting for about 22 percent of trading by
value in the Asian market compared to less than 5 percent on
the New York Stock Exchange. These
individual and usually
amateur investors are typically more willing
to take a flier on riskier small companies.
Hong Kong may also get a tailwind for IPOs from the faster
economic growth in Asia and also from lower costs for listing.
This second factor is the preferred explanation for the
exchange itself. We adhere to a principles-based regime
rather than a prescriptive, or black-letter law
approach, which is in use in the United States, says
Lorraine Chan, a senior vice president for corporate
communications at Hong Kong Exchanges and Clearing Limited.
We believe our system can be applied with some
flexibility in practice, resulting in lower compliance costs
for issuers than that in the United States, which has the
But higher trading spreads and fees which
help support a flourishing network of brokers may also
foster small-company listings. A survey in 2011 by ITG, an
independent global broker, showed investors pay up to 35
percent more on average to buy and sell stocks in Hong Kong
than in the United States and 25 percent more than in the
United Kingdom even excluding the chunky tax
on each trade levied in the first. Securities brokers in Hong
Kong have resisted moves to encourage narrower spreads by
lawmakers who have long sought to inject more competition into
The resistance from Hong Kongs brokers may turn out to
be a good thing. The wider spreads in Hong Kong support a
flourishing ecosystem of institutions that support microcap
listings including large numbers of retail
brokers, boutique fund houses and financial services firms. A
mass extinction might result if the exchange were to be fully
To really revive small-company listings in the United
States we might need to look to the past, says David
Weild, the former Nasdaq executive. If we keep focusing
exclusively on low-cost trading and the fetish for liquidity,
we simply wont have enough brokers and research to
support small companies. Weild would like to establish a
parallel exchange in which companies could set minimum spreads,
offering a greater incentive to trade in their shares. The
example of Hong Kong appears to support this idea.
Of course, proving beyond doubt why small-company public
offerings have declined in the United States is impossible.
This makes forging policies to reverse the decline a tricky
task. Still, looking at successful exchanges overseas may offer
valuable clues. Giving up on small IPOs could be a costly
mistake. When Weild wants to highlight the importance of small
public offerings he relates the tale of a diminutive technology
company that listed in 1971 with an IPO value of just $8
million around $44 million in todays
money. A tiny firm like this almost certainly
wouldnt have been able to go public today, he says.
The company was Intel, the hugely successful chipmaker, which
now has a market capitalization of $142 billion.