Felix Salmon is a finance blogger for Reuters. On Monday, on the eve of Deutsche Börse's official announcement that it would acquire the New York Stock Exchange, he penned a New York Times OpEd, dramatically titled Wall Street's Dead End. His thesis: the US stock market is on its way to irrelevance--and, by extension, we are too.
I see a handful of Felix's points: what the US market is doing (going up, right now) and what the economy is doing (going sideways) seem untethered. And our focus, really, needs to remain trained on the latter, not be distracted by the former.
Further, the public market today is not your grandfather's stock market. Shares are traded in massive quantities, at a rapid clip, by computers, not humans. Individuals invest more often via funds than they do through brokers. It's big, it's fast, it's impersonal.
And for corporate management running a publicly traded firm is time consuming and expensive. Regulatory and reporting requirements are onerous, investors are demanding, performance expectations are relentless, quarter after quarter. It is, in many ways, easier to be private.
All of this said, however, to conclude that the markets are irrelevant--and, by implication, so are we--is, to my mind, to misread and misrepresent the picture. Faulty data may have contributed some to his dire outlook, combined, I believe, with a tale part told and a narrow a perspective.
First, on the data front--Felix grounds his argument partially in the view that that the number initial public offering is steadily declining and that those companies that do bother to tap or remain in the public markets are large, old, lacking in vibrancy. In fact, last year the number of US IPOs well more than doubled, up to 154 from 63 a year earlier.
That pace continues in the first six weeks of this year with 24 deals completed, versus 14 in the same period last year. And many of the companies that have gone public or are filing are exactly the kind of companies he fears are fleeing the public markets--Pandora, LinkedIn, Tesla, Zip Car, Skull Candy, Masergy--small, young, innovative, VC-backed. Despite the associated headaches, being public is still sexy.
Second, the tale part told--to conclude that public markets aren't working because Facebook and Twitter aren't public--yet--is skewing the picture. Facebook, as we know, will be public within a year. And Twitter is very young, with only $45 million in revenues in 2010. While private investors are showing a willingness to grant heady valuations to social media companies, public investors have not yet been put to the test. LinkedIn will be the first measure.
Meantime, that start ups go through multiple rounds of private fundraising that are closed to public investors is the path that's always been trod. That it perhaps feels different this time is a function of increased scale--of valuations and funds raised--and radically increased transparency (thank you, internet). It is not, however, an indicator that public markets are not working.
Finally, the narrow perspective--markets are changing, change that is driven not only by the shake down of the last two years, but also, importantly, by the scale and scope of being truly global. What's good for Wall Street isn't driven by Main Street anymore. And that's not necessarily bad, it's just new, different.
As existing exchanges grow and expand in response to globalization, opportunities for innovation open at the grassroots level. These opportunities are being taken up by a number of dynamic companies, including private share exchanges like SharesPost and SecondMarket, and the newly renamed and smartly structured over the counter market maker OTC Markets.
Shares for sale via SharesPost and SecondMarket are only available to accredited investors, but companies traded via OTC Markets are accessible to retail investors through broker dealers. And the rigor that OTC Markets has introduced to their business model over the last 18-24 months--segmenting the market, introducing a premier designation and making information on the almost 10,000 companies that trade on the OTC more transparent and accessible--indicates that they are actively pursuing the opportunity to address the capital market needs of small, growing companies and individual investors--in the same way that London's AIM has successfully done over the last 15 years.
Business Week famously pronounced the stock market DOA just over 30 years ago, in its August 1979 cover story The Death of Equities. The lesson learned then, that can and should be applied now, is to declare not "Markets are irrelevant.", but to ask--and to answer--the question "How are markets evolving?". By answering that question while recognizing that markets remain most relevant, we, by extension, will identify dynamic ways to remain relevant too.
Note: A follow-up three part series on the US IPO climate starts here.