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Comment by kscaldef | Hacker News Reader

I'm not sure I understand point #2 (decimalization). Can someone explain what he is getting at?

Stocks used to be priced in eighths of a dollar per share (that is, 12.5 cents). A few years ago, the exchanges switched to pricing them in cents, like everything else. This was "decimalization".

What's not obvious is why this guy thinks that this altered IPOs in any meaningful way. (I'm not even sure why he thinks it altered trading volumes, which is how he claims it affected IPOs.)

But it fits a different pattern, in this article. It turns out that, at least according to this guy, every single change in the capital market structure since, I don't know, 1992 was somehow bad for small IPOs.

Item #3 is "the rise of the internet brokerages." You might think that having a broader customer base would make it easier to sell stuff, but no. Bad for IPOs!

Item #5 is Eliot Spitzer reining in fraudulent "analysis" at various Wall Street firms, which was getting people to invest in stuff they didn't otherwise understand. (Which, in the world I live in, happened to a great extent through internet brokerages, but ... never mind.) It turns out that chasing fraud from the marketplace is Bad for IPOs!

And so forth.

There are some good points here --- Sarbanes-Oxley regulation is a big deal, and so is consolidation on Wall Street. But some of this other stuff really does strike me as a bit of a stretch.

Item #3 makes sense in that a lot of 'casual money' or individual traders do not have access to information about IPOs much less the ability to get involved in the offering. These investors previously were forced to use an advisor or at the very least a broker who is far more in tune with what is new on the market then the individual typically is.

Stocks used to be priced in eighths of a dollar. So if a stock was selling for $1.50, the next increment up was $1.625 and the next step down was $1.375. They are now priced down to the penny, so a $1.50 stock can go directly to $1.51 or $1.49.

I'm not entirely sure why he cites this as a bad thing, but I'm assuming that there's some arbitrage opportunity to value investors when dealing with eighths of a dollar (since if a stock was priced at $1.50 but was really worth $1.55, you'd be getting $0.05 of "free" value by buying it).

Don't know if it's in any way the cause of anything related to a decline in IPO, but this spread is what the banks make money on and what enables them to do what they do, effectively a measure of their margin on trades. Going from an eighth to a hundredth just means their margins effectively were reduced, but was probably a result of an increase in volume / trading activity.

I think there is a couple of things going on here, though. Decimalization made stock market-making less profitable for Investment Banks. And the re-regulation of stock analysis prevents banks from using research analysts to tout stocks. By making it worth less to investment banks to invest in research, every customer has to invest more in research. Arguably this isn't too bad a problem - until it comes to smaller stocks, where the knowledge-base of the market is getting hollowed out - and liquidity dries up since no-one who is not in the stock has much incentive to do the initial research.

The same thing happened in High Yield Bonds. The NASD (FINRA) brought in reporting system for bond prices (TRACE) that made trading bonds inherently less profitable for the middle-men (though much more transparent for investors). That meant that there was less incentive for the middle-men to do research, causing researchers to leave to join hedge-funds. So the end-game is a very fragmented market, where if an investor wants to sell a bond, they don't have an audience that's had any consistent commentary on the situation from a 'neutral' middleman.

Taken together with his other points, I think the author is under the impression that it was the "Boiler Room" operations peddling penny stocks that were driving IPOs. Trading in eights was probably good for brokers skimming money from transactions, but I can't see how decimalization can be considered bad for investors.

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