How U.S. stocks are failing

Low-cost trade execution hurts small stocks by removing the retail sales staff that supported them, study says

By Kim Peterson Nov 10, 2009 4:21PM
Kim PetersonThe U.S. is seeing a huge decline in the number of publicly listed companies, according to a new study from Grant Thornton.

This is a dire problem that can be fixed, and doing so would bring billions more in tax revenue without costing taxpayers anything, the researchers add.

In 1997, there were some 8,800 listings, the study reports. That dropped to 5,400 last year. Listings are down by 44% at American Stock Exchange, 28% at Nasdaq and 1% on the New York Stock Exchange.

Other countries aren't seeing this trend. The number of listed companies in Hong Kong, for example, has almost doubled since 1997, the study says.

What's the culprit here? The researchers blame several regulatory changes, including moves to allow for online brokerages and low-cost trading. More specifically, they blame a "longstanding experiment" in the U.S. to cut commission and trading costs.

It comes down to this: Low-cost trading has cut into the ranks of brokerage sales people, who were big cheerleaders of small-cap stocks.

Commission cuts ate into the fees that brokerages earned on trades, which in turn made it harder for brokerages to afford market research and sales. And retail salesmen were "once the mainstay story-telling engine driving small cap stocks," the researchers wrote.

Even the decimalization in 2001 -- converting trading spreads from quarter and eighth fractions to pennies -- hurt by limiting the compensation to firms.

The researchers say that 360 new listings a year are necessary just to keep a stable number of listed companies. But there have been fewer than 166 initial public offerings a year since 2001.

So how to fix it? The researchers suggest creating a "public market" that would be separate from the NYSE and Nasdaq. Commissions and spreads would be higher. Brokers would intermediate. And more research would be required.

That all sounds like higher fees for investors, too. And the researchers admit that rates of fraud are likely to increase.

But the returns, they say, would be far greater. The country would see new economic growth and innovation. And if the number of listed companies were to double as a result, for example, that would represent some $500 billion in total value.

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