Foster Small Stocks With Special Exchanges, SEC’s Gallagher Says

The U.S. Securities and Exchange Commission should encourage the creation of special exchanges for trading smaller and less liquid stocks in an effort to boost the number of companies going public, a top regulator said today.

Such “venture exchanges” could offer incentives to go public, such as reduced disclosure requirements and market makers that are paid to promote active trading, SEC Commissioner Daniel M. Gallagher said in remarks prepared for the FIA Futures and Options Expo in Chicago. Regulators may have to exempt such exchanges from some rules, he said, including those mandating trades occur at the best price available on any public market.

“The key to establishing venture exchanges is to create a platform which could encourage smaller companies to enter our public markets while at the same time providing adequate protection for investors,” said Gallagher, a Republican.

The SEC’s Advisory Committee on Small Business on March 21 endorsed the creation of separate markets for shares issued by companies with market values less than $250 million. The committee, whose members are appointed by SEC commissioners, said exchanges don’t provide sufficient liquidity for small stocks while imposing “onerous” listing requirements.

Nasdaq OMX Group Inc. has recommended the SEC allow small and emerging companies to trade only on their listed markets for a period of time after an initial public offering. Nasdaq says trading on a single market would boost liquidity by concentrating buy and sell offers.

Tick Size

The SEC’s advisory committee also has proposed changing SEC rules to widen the minimum quoting increment for small stocks. Advocates of widening tick size say it would promote liquidity by providing more revenue to securities firms that make markets, or promote orderly trading, in less liquid stocks. Skeptics say it wouldn’t boost trading and will cause people to pay more when they trade.

The SEC has been developing ideas for a pilot program to widen tick size, SEC Chairman Mary Jo White said Oct. 2. White said she expects the staff to recommend such a program, which would be time-limited and establish rules for what types of companies can participate.

Wider tick sizes could be allowed for companies whose shares trade on venture exchanges, Gallagher said in his speech today. Regulators also should consider eliminating some disclosure requirements for such businesses, such as the quarterly financial reports that provide updated information to investors.

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