However, the industry remains critical of several partially new proposals such as on the definition of liquid shares. The proposals could have a detrimental effect on the transparency of initial public offerings (IPOs) as well as on the survival of smaller exchanges. The definition of a ‘liquid share’ is crucial. It determines that those securities firms which do not pass on their clients’ orders to an Exchange but deal against their own books (so-called ‘internalisers’) have to comply with minimum transparency requirements by publishing firm quotes. The publication of such quotes is only mandatory for shares that are regarded liquid.
Interalisers would like to have a very high threshold. That would qualify many shares as illiquid and exempt from transparency. Internalisers argue that they would otherwise be stuck with such illiquid shares after honouring a mandatory quote.
FESE President, Massimo Capuano, says he understands the argument but is not convinced. “We have to consider the overall interest of Europe’s capital markets”. He argues that transparency is a key element in creating trust. “By subtracting a substantial part from transparency requirements you are effectively making markets less transparent for the investor and issuer community”.
Capuano is particularly worried about a proposed new rule on IPOs. According to the latest Commission proposals, any share that comes new to the market shall be exempted from liquid share status – and thus from transparent internalisation – for six months, regardless of the size of the IPO and the trading activity. “This is unthinkable,” argues Judith Hardt, Secretary General of FESE. “Think of giant share issues such as Deutsche Telekom or Vodafone that immediately jumped to the top of turnover tables. To claim it cannot be predicted that some IPOs will bring highly liquid shares is a farce.”
FESE demands that market activity after an IPO be estimated ex-ante on the basis of previous offers of comparable size and attractiveness, as had been suggested by the Committee of European Securities Regulators (CESR) in an advice to the Commission. “When regulators feel comfortable that they can make estimates of a new share’s expected liquidity, why should the Commission doubt this?” asks Hardt. “It is in the first days and weeks after the IPO that transparency in trading is most important for new shares. Investors know this, regulators know this – and we do.”
