A Few Good IPOs?

There is a new Grant Thornton report out arguing that the U.S. is suffering from an IPO drought caused by high-frequency trading and broken market microstructure (but not SarbOx). The alleged consequences? 22-million fewer jobs in the U.S. than would otherwise be the case.

Whoa, it’s a provocative claim. Does it hold up?

It would indeed be good see more IPOs, so I’m with the authors on that, but after that they mostly lose me. I have multiple objections, including that the authors refuse to recognize that the venture industry has grown too large; that the technology industry is maturing; and that financial markets have changed & are no longer engineered for brokers & bankers to make money via flipping over-valued startups to retail investors via institutional cronies.

Instead of recognizing this, the authors want to blame high-frequency trading. You know, computers. And hedge funds. Baddies in black hats, in other words.

While that is au courant, it is tough to support. It has never been easy to build institutional-class trading volumes in early-stage public companies — I used to cover them as an equity analyst — and now is no different. That market-makers in large public companies are increasingly algorithmic – 75% of the trading volume in the largest U.S. stocks — is something to be applauded, not decried, and it has little to do with the relative dearth of IPOs in the U.S.

Further, the implied claim that market microstructure — increased efficiency, decimalization, etc. — has cost the U.S. 22-million jobs via the under-production of IPOs is cargo cult illogic. It is tantamount to ignoring everything that has changed in markets and technology over the last decade, all in favor of positing an immutable relation between IPO rate and GDP. Financial markets are not nearly so neat, tidy and predictable.

The authors have a solution, however. They want to turn the capital market clock back to the days of dealer-driven markets, wide spreads, research analysts who are really bankers, and a brokerage industry that preyed on retail investors. It’s like hungry great white sharks proposing that newly speedier seals be fattened up, given weight handicaps and kept in open water, away from dry land & rocks.

Technology has changed the way growth companies are produced, funded, and sold in this country. Some people might not like it, but not liking disruptive change is the response of most industries that have been disintermediated.