Liquidity and stock returns in emerging equity markets investopedia

The combined results of these existing and pending rules is that companies will be able to sell their securities to a wider swath of the public and remain outside of the protections of the registration provisions of the Exchange Act for longer periods of time—perhaps even permanently.

One idea that been suggested as a way to foster an active secondary market for small company stocks is for the Commission to approve one or more venture exchanges. Venture exchanges are hardly a new idea, however, and prior efforts to establish them in this country have fared poorly. This created the impression that the ECM was populated only by unsuccessful companies.

But, it is not the only source of guidance available to us. There have been other attempts to create viable markets for smaller companies. For example, many European stock markets have experimented with a junior exchange for companies too small to meet normal listing requirements. Moreover, efforts in to establish a new venture exchange in the U. The Commission should attempt to determine the underlying causes of these problems and how best to address them.

In this regard, we may need to ask some difficult questions. For example, should venture exchanges be structured as dealer markets, rather than auction markets? Also, could venture exchanges enhance liquidity through batch auctions, rather than continuous trading?

How can the Commission, consistent with the Exchange Act, encourage traders to execute transactions on venture exchanges, rather than in off-exchange venues? Importantly, each of these questions presents the possibility of a trade-off between what is best for investors, and what is best for the exchange and its participating broker-dealers.

We must be mindful of these trade-offs as we review any proposals for new venture exchanges. We must also never lose sight of our core responsibility, which is to protect investors above all else. Investors will also need to understand what venture exchanges are—and what they are not. Investors may think venture exchanges will be the place to find the next Apple, Google, or Facebook.

To be sure, venture exchanges can, and do, attract reputable and profitable companies. The Commission needs to understand how best to address these risks before approving more of these exchanges.

It also needs to make certain that investors understand these risks. Those who have studied venture exchanges believe that they are far more likely to succeed when they focus on investor protection and education. Venture exchanges that implement appropriate listing standards, enforce them conscientiously, and educate investors about the higher risks involved with small cap companies seem to do better.

For example, several academics have argued that some listing standards are more important than others. In particular, these experts believe that effective corporate governance standards and accounting requirements are essential to the viability of any venture exchange. In sum, venture exchanges are a possible solution to a looming problem and need to be considered.

We should do so in a thoughtful and measured manner—fully cognizant of benefits, costs, and challenges—and always with the needs of investors at the forefront. Rule 15c is widely used by broker-dealers to trade in unlisted securities. In order to use Rule 15c, broker-dealers who wish to publish a quote of unlisted securities, which will often be smaller issuers, are required to review and maintain certain information about the security and the issuer.

In addition, Rule 15c requires broker-dealers, prior to publishing quotes of these unlisted securities, to have a reasonable basis for believing that this information is accurate in all material respects and that it was obtained from reliable sources. Specifically, investors need to have confidence that the quotes for these securities are fair and accurate. Without this confidence, a fair and liquid secondary market for these securities will not exist.

In this regard, the use of current Rule 15c often fails to meet expectations of fair and accurate pricing, and often fails to result in reliable quotes.

As a result, broker-dealers need not review the information collected and reviewed by other broker-dealers before publishing a quote. Moreover, because the exception allows broker-dealers simply to rely on their own prior quotations, broker-dealers have no obligation to confirm that the information they initially relied on when they first published a quotation is still valid, no matter how old the initial quotation is.

The problems of Rule 15c have long been recognized. In fact, in , and again in , the Commission proposed comprehensive amendments to Rule 15c to address concerns about fraud and manipulation that had become increasingly common in microcap securities traded in the OTC market.

The Commission hoped that the proposed amendments to Rule 15c would address abuses involving microcap securities, and more generally enhance the integrity of quotations for securities in this market sector. Without this confidence, a fair and liquid secondary market for these securities will not exist. In this regard, the use of current Rule 15c often fails to meet expectations of fair and accurate pricing, and often fails to result in reliable quotes.

As a result, broker-dealers need not review the information collected and reviewed by other broker-dealers before publishing a quote. Moreover, because the exception allows broker-dealers simply to rely on their own prior quotations, broker-dealers have no obligation to confirm that the information they initially relied on when they first published a quotation is still valid, no matter how old the initial quotation is.

The problems of Rule 15c have long been recognized. In fact, in , and again in , the Commission proposed comprehensive amendments to Rule 15c to address concerns about fraud and manipulation that had become increasingly common in microcap securities traded in the OTC market. The Commission hoped that the proposed amendments to Rule 15c would address abuses involving microcap securities, and more generally enhance the integrity of quotations for securities in this market sector.

Unfortunately, these proposed rules were never finalized. In addition, it will be critical to update Rule 15c to take into account the new information and filing requirements that will be required when the Commission adopts the proposed rules under Regulation A-plus and Crowdfunding. This is a topic that I discussed with this Committee back in December , and my views remain the same. Shareholders often rely on this exemption to sell their restricted securities in a private transaction without being considered an issuer or an underwriter.

Ultimately, the goal is to develop a viable secondary trading environment that promotes a fair, transparent, and liquid market for the securities of small businesses—a market in which investors can have confidence that they are being treated fairly. I look forward to a robust discussion on any and all viable suggestions as to how to improve the secondary trading environment for shares of small business securities. Securities Act Rule allows public resale of restricted and controlled securities if a number of conditions are met, including, for example, meeting the holding period requirement of one year assuming the seller is not an affiliate of the issuer.

See Rule under the Securities Act. Currently, companies with more than shareholders of record are required to be registered with the SEC under Exchange Act Section 12 g , while these proposed rules would expand that trigger to 2, record holders or holders who are not accredited investors. In addition, these proposed rules would exclude from the count of record holders those who acquired the securities pursuant to an employee compensation plan.

As a result, a company could have an enormous number of record holders without being required to provide the same level of disclosures as those applicable to public companies. The concern is that without the disclosure routinely provided by public companies, smaller business shares that are carved out from the Section 12 g registration requirements would be harder to value because of this lesser transparency. The JOBS Act requires that the Commission promulgate rules that, conditionally or unconditionally, exclude securities sold under the Crowdfunding provision from section 12 g of the Exchange Act.

But there are alternatives. For example, some commenters have suggested that the Commission amend Regulation ATS to facilitate the orderly sale of unregistered securities. In addition, companies like SecondMarket and SharesPost have developed marketplaces to facilitate trading in the shares of unlisted companies.

These alternative approaches are beyond the scope of these remarks. I, Reason in Common Sense , available at http: In addition, Amex Rule directly prohibited market specialists from promoting their stocks. The lack of funding has reached such a critical stage that the TSX-V in its current constitution appears to be in danger of becoming a memory in Canadian history books in the not so distant future. The rise of AIM as a stock market for growing companies , 4 Sept.

Specifically, they found that being listed on the ECM increased average daily trading volume, one measure of liquidity, for 21 firms, and that it decreased daily trading volume for 14 firms. For example, while Exchange Act Section 11A c 3 allows the Commission to prohibit broker-dealers from executing certain transactions off of an exchange, the Commission can invoke this authority only if certain criteria are met, such as that the restriction is the only lawful means of maintaining or restoring fair or orderly markets.

See 15 USC 78k-1 A c iii. Another provision implicated by venture exchanges is Exchange Act Section 12 f , which limits the amount of time that the Commission may prohibit unlisted trading of an initial public offering.

See 15 USC 78 l f. Perhaps most tellingly, AIM firm post-listing returns significantly underperform post-listing returns on other markets. See also Kyle Caldwell, A 3,pc rise or a 96pc fall: Specifically, they note that these exchanges i grew out of pre-existing over-the-counter markets; ii were dealer markets, rather than auction markets; and iii are separate entities from other national exchanges, which allows them to focus on serving their clientele.

Exchange Act Rule 15c f 3 sets forth frequency-of-quotation requirements which, if met, allow broker-dealers to publish quotations in the security without maintaining the information required by Exchange Act Rule 15c or filing a new Form Securities and Exchange Commission.