Nasdaq Small-Cap Liquidity Proposal Runs Into Flak

“It’s anti-competitive,” a rival exchange says of letting small-caps choose whether to trade on exchanges other than Nasdaq.
Matthew HellerApril 24, 2018

A proposal by Nasdaq to increase the liquidity of small-cap stocks is running into opposition from other exchanges who say it is anti-competitive.

Nasdaq officials have said they will ask the U.S. Securities and Exchange Commission to let it give thinly-traded companies that list on its main U.S. stock exchange a choice as to whether their shares can be traded on other exchanges.

Currently, around a dozen exchanges and more than 30 off-exchange “dark pools” compete for trades in U.S. equities, creating a fragmented market that supporters of the Nasdaq proposal makes it difficult for investors to buy small-cap stocks.

The Treasury Department endorsed the proposal in October as part of a broader regulatory review.

“Our markets are no longer able to support small growth companies,” Frank Hatheway, Nasdaq’s chief economist, said Monday at a roundtable discussion hosted by the SEC in Washington on improving the markets for thinly-traded companies.

But the chief executive of upstart stock exchange IEX Group, which is seeking to start its own corporate-listings business, blasted the Nasdaq plan, according to Reuters. “It’s anti-competitive, in a way the commission has historically rejected,” Brad Katsuyama said.

IEX Group supports giving thinly-traded companies the option of having their stocks trade on one exchange per exchange group, which would mean a stock would trade on four exchanges instead of 13.

According to The Wall Street Journal, the fragmentation in the trading market is a result of “past SEC efforts to break the dominance of the NYSE and Nasdaq and bring more competition to the trading space.”

Advocates for small-caps say the thin liquidity makes it harder for those companies to raise capital or even to entice top talent with stock-option grants.

“It’s a pretty austere challenge for these companies,” said Adam Epstein, founder of Third Creek Advisors, which advises small-cap firms.

But Cboe Global Markets said giving exchanges monopolies on the trading of certain stocks would create the risk that they would begin charging higher fees for things like market data and exchange connectivity.

The SEC is seeking public comment on the issue.

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