Posted by Tom Foremski - October 25, 2012
NASDAQ has plans to unify US private shares markets and introduce set periodic trading periods in a bid to reduce volatility and improve liquidity in shares of startups.
The NASDAQ plans would help startup founders, investors, and employees, cash out some of their shares without the need for an IPO. The money could be used to fund additional startups.
Secondary share markets are somewhat controversial because they are lightly regulated and potentially vulnerable to price manipulation because of low trading volumes. However, they are restricted to wealthy accredited individuals, hedge funds, and institutions, so-called "smart money." Ordinary retail investors are barred.
Robert McCooey (above), NASDAQ's senior vice president of capital markets and new listings, told Silicon Valley Watcher: "There are multiple places people are trading private shares and we have an opportunity to create a single market."
Mr McCooey was speaking in Dublin where he was attending the F.ounders Conference and scouting for new IPOs.
He said he had been thinking "a lot" about the secondary shares market and how to solve problems in lightly traded stocks. Small numbers of trades can significantly affect the price of private shares because of the small number of outstanding shares.
"An insider might want to sell some shares to buy his wife a gift and that could affect a company's share price. It would be better to consolidate trades on specific days," said Mr McCooey.
This would improve liquidity and reduce volatility of share prices.
Mr McCooey said that NASDAQ would reveal details about its plans sometime next year.
The private trading of shares in startups has grown considerably over the past five years and has been led by Facebook, Zynga, and LinkedIn. There are two startups, Sharespost, and SecondShares offering an electronic trading platform in privately held startups.
However, the volume of trades in private companies has fallen considerably this year because of the IPOs of Facebook and others. This means NASDAQ doesn't feel it needs to rush into the market and is willing to take its time and make sure it avoids problems.
NASDAQ faced considerable criticism earlier this year when its trading platform briefly crashed during Facebook's IPO. Some blamed the NASDAQ failure for the poor performance of Facebook's IPO where the "smart money" lost a lot of money.
People who had traded Facebook shares in private markets had bid up the price of the stock prior to the IPO to more than $34. The final pricing was set at $38 giving private investors an easy profit but retail investors, the "dumb money" wasn't buying and the price of Facebook [$FB] plummeted.
But NASDAQ wasn't to blame for the poor IPO performance. Facebook management had doubled the share offering on IPO day, and the huge volume drove down prices.
The "smart money" was left with large losses, which continued as several lockups expired over the following months, releasing three times as many shares for trading.
Facebook was trading at $22.70 in mid-day on Thursday.
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