Actively Traded Private Issuances: Wall Street Hops on the Bandwagon

Well, well, well. It took a little longer then expected but it finally happened: some Wall Street firms stepped up with an answer to GSTrUE. As discussed in today’s Financial Times:

Merrill Lynch, Lehman Brothers, Morgan Stanley and Citigroup are among a group of investment banks developing an electronic trading platform for unregistered securities to compete with existing systems such as the one created by Goldman Sachs.

The move comes after Goldman signed up Oaktree Capital, the hedge fund group, and Apollo Management, the private equity firm, to sell
unregistered shares through its GSTrUE private trading system. Apollo
shares will also trade on a platform created by JPMorgan Chase.

The system being developed by the group of banks is intended to ensure that Goldman, JPMorgan or others do not come to dominate the electronic market for unregistered shares, people close to the matter said.

Not for nothing, but yours truly was all over this over two months ago. From my post titled More Evidence of the Ravages of Sarbox: U.S. Private Placements Overtake IPOs 5/19/2007:

This final point, a point which I raised in my earlier post, is
absoutely critical when assessing the magnitude of the threat posed by
these alternative exchanges. The retail investor is not the driving
force in the equity markets here or abroad, and given the structure of
U.S. regulatory doctrine once one crosses into the realm of the
“accredited investor” there is much one can do on a private basis. Like
start a private exchange. Or many private exchanges. If GSTrUE is
successful, as I expect it will be, is there any doubt that Morgan
Stanley and the like are close behind? And with the great leap forward
in low latency trading technology, what is stopping a flow aggregator
like Nasdaq or any ECN from pooling the deals originated on these
private exchanges and enabling them to be traded more broadly? In fact,
I am almost certain that this is how it will play out. So, to recap, if:

• You have a massive pool of institutional liqudity in need of high-quality product; AND

• You have a sea of high-quality companies that would like
  liquidity but are put off by the regulatory demands of going public in the U.S.; AND

• You have innovative investment banks structuring these early
  deals between high-quality issuers and high-quality, leading-edge
  investors willing to buy a new and untested product; AND

• You have ECNs with capacity that can pool flow across these
  private exchanges and centralize trading, clearing and settlement in order to broadly and efficiently distribute product; THEN

• You get a withering U.S. new issues market that will slowly and inexorably die on the vine.

We are in the early innings of an extra-inning game, but you can see where things are going. Either Commissioner Cox and his friends in Congress are going to get busy streamlining our public company regulatory environment or else…

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