Nasdaq Supports Return of Market Monopolies to Save Small Stocks

(Bloomberg) -- There’s a fresh push to give U.S. exchanges their monopolies back -- at least for small stocks where many fret trading is too low, damaging the IPO business by scaring companies away from public markets.

Nasdaq Inc. will soon ask regulators to let companies with thinly traded stocks choose to have their shares transact on only one market, partially overriding a 2005 rule that has splintered trades across dozens of exchanges, dark pools and other venues.

“Concentration on one market would help the markets,” Frank Hatheway, chief economist for Nasdaq, said Monday at a Securities and Exchange Commission roundtable in Washington. The company, which has broached the topic before, plans to petition the SEC in coming days to make the change, he said, adding that it would be an opt-in program.

The current fragmented landscape means no single exchange has enough liquidity to support smaller stocks, making public markets a less attractive place for startups, which are choosing to stay private longer.

Read more: Whipping up small company trading seen as easier said than done

Bringing more liquidity to small stocks is among SEC Chairman Jay Clayton’s top priorities because those companies play a vital role in the economy, he said at an April 10 event in Chicago. Clayton sounded as though he’d be receptive to a proposal like Nasdaq’s, asking whether the current one-size-fits-all regulatory regime for stocks makes sense -- if a company with daily volume of 30,000 shares should be treated the same as one that trades millions of times.

Keeping some stocks on a single exchange would be a throwback. The SEC approved Regulation NMS in 2005 in part to kill the New York Stock Exchange’s near-monopoly on trading in the companies it listed. It worked. Nasdaq, Cboe Global Markets Inc., IEX Group Inc. and myriad dark pools have whittled down NYSE’s share to about a quarter of U.S. volume -- though it’s still No. 1.

The desire to concentrate small-company trading isn’t unanimous. TD Ameritrade Holding Corp.’s Ovi Montemayor, managing director of financial markets services, said at the SEC event Monday that limiting some stocks to a single exchange would hurt retail investors, his brokerage’s main client base.

But concerns about thinly traded stocks are widespread. Cboe President Chris Concannon was blunt at the event where Clayton spoke earlier this month in Chicago: “Small companies trade like crap.”

To contact the reporters on this story: Nick Baker in Chicago at nbaker7@bloomberg.net, Brian Louis in Chicago at blouis1@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Peter Eichenbaum, Steven Crabill

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