The Wall Street Journal
Smaller IPOs Less Profitable Now
July 22, 2008; Page A18

Regarding James Freeman's "Who's Going to Fund the Next Steve Jobs" (op-ed, July 18): Trading commissions on Wall Street continue to decline as new liquidity pools and trading alternatives become more and more prevalent. The buy side demands frictionless trading, without a high-priced intermediary, and the role of the sell-side bank diminishes every day. Selling research in exchange for trading commissions is a dying proposition. The buy side was very happy to have the sell side foot the bill for research coverage while the traditional system existed, but as the cost structure became untenable, the best of the research analysts migrated to the buy-side firms, where their insight is even more valuable, as the information that they provide is no longer disseminated widely.

The disruption in the traditional investment banking model has affected the smaller initial public offerings, as well. Without the inflated trading commissions and trumped up research coverage in place, the bulge bracket firms cannot execute smaller IPOs profitably. They've found that expensive bankers, salesmen and analysts cost much more than the underwriting fees garnered in a $100 million IPO. A new, low-cost model is called for, one that combines impartial distribution, low cost research, and an unconflicted approach to underwriting. Mr. Freeman was right to cite Google in his piece, as it was a pioneer in utilizing a low cost, impartial platform for their own offering, an auction IPO.

 

Matthew Regan
Director of Brokerage Services

WR Hambrecht + Co
A Disruptive Financial Services Firm For People Who Think For Themselves.