Posted on Nov 30, 2013 in Perspectives
In 2000, the SEC mandated that stock prices be “decimalized,” or traded in fractions of a dollar as small as $0.01. Prior to 2000, stocks traded in 1/16 dollar, 1/8 dollar, or perhaps even 1/4 dollar increments, depending on volume. The trading desk of an investment bank makes its money being a market maker in a particular stock — and the profit it makes is dictated by the bid/ask spread between the selling and buying prices for the stock.
Decimalization reduced the profit a bank can make at the expense of the shareholder, which is good. But, how much can a bank make on a thinly traded stock with only a few million dollars traded each day if the bid/ask spread is a penny? The answer is, not enough to stay in business and certainly not enough to support research that would stoke further interest in the company.
So, companies have to get to a scale where the banks can profitably be market makers, and that seems to be about a minimum $75 million offering, which means a much bigger IPO. But with fewer, larger IPOs, what is the path to liquidity for VCs and angels?
Reuters PE Hub
Read full article at pehub.com
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