Speaker 1: Hello, and welcome to another episode of the Odd LODs podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. So, Tracy, you
Speaker 1: know how people talk a lot about how big financial
Speaker 1: institutions and financial and financial stocks in particular, just like,
Speaker 1: I haven't really done very well lately. It's been a
Speaker 1: long time sort of a seeming permanent state of slump. Yeah.
Speaker 1: I think it's easy to forget in when we have
Speaker 1: all these headwinds for the banks, like loan losses, um
Speaker 1: credit provisions, building up, things like that. That even before now,
Speaker 1: there was this big debate about whether we were in
Speaker 1: a secular or a cyclical downturn for banking and especially
Speaker 1: investment banking. Right, you had all these new rules that
Speaker 1: came in after the two thousand eight financial crisis, and
Speaker 1: there was a lot of talk about whether or not
Speaker 1: banks could ever get back to the days of making
Speaker 1: big money. Yeah, that's exactly right. Even prior to this year,
Speaker 1: if you just look at sort of the main financial
Speaker 1: sectors of the SMP, lots of questions about financial companies
Speaker 1: business model in an era of mediocre growth, very low
Speaker 1: interest rates, Like there's just this has been a sector
Speaker 1: that people haven't been into for a lot. Yeah, and
Speaker 1: of course ultra low interest rates don't really help on
Speaker 1: the lending side either. So yeah, it feels like there
Speaker 1: have been well, there has been a decade of challenges
Speaker 1: for banking. But okay, so, but also what I said before,
Speaker 1: it was kind of a lie because, uh, not all
Speaker 1: financial companies have struggled over the last decade, and some
Speaker 1: are doing phenomenally well. You're gonna have to narrow that
Speaker 1: down for me. So are you talking about non bank
Speaker 1: financial companies? Yeah, So basically there are other parts of
Speaker 1: Wall Street besides the big banks that are killing it.
Speaker 1: And so if you look at say the last decade
Speaker 1: company like Goldman sax uh stock you know, pre dividends
Speaker 1: is only up over the last decade. But some of
Speaker 1: the other sort of infrastructure parts of the business, UM
Speaker 1: exchanges doing phenomenally well, and ICE, the parent company of
Speaker 1: the New York Stock Exchange, they're up. Other big in
Speaker 1: the uh sort of exchanges platforms, index providers doing phenomenally well.
Speaker 1: So when we talk about financial is not doing well,
Speaker 1: we're talking about banks. But actually a lot of parts
Speaker 1: of Wall Street really are have been on a phenomenal run. Yeah,
Speaker 1: I think that's right. And of course you've had a
Speaker 1: you've had a pretty good year for trading revenue because
Speaker 1: you had a lot of market volatility, and now you've
Speaker 1: had a big boom in bond and debt underwriting as
Speaker 1: well because everyone's rushing to issue. So yeah, there are
Speaker 1: parts of the banking system that are doing well, and
Speaker 1: the non banks of course, up until I keep caveating this, Wait,
Speaker 1: what's your caveat so that it's not just this's a
Speaker 1: brief period that we're talking about the Yeah, so today
Speaker 1: we're going to be talking about one aspect of I
Speaker 1: guess what you would call Wall Street that is doing
Speaker 1: phenomenally well, one interesting business, one other thing, Tracy before
Speaker 1: we before we get to our guests. Um, this has
Speaker 1: been a quite a year for public offering. Yes, even
Speaker 1: aside from traditional I p o s, we have seen
Speaker 1: a lot of SPACs, for instance, a new type of
Speaker 1: public listing or a new way of going public without
Speaker 1: actually going through the I p O process. So it's
Speaker 1: been an interesting time in equity capital markets. Yeah, it's
Speaker 1: super interesting because in addition to I p o s,
Speaker 1: we've had the spack boom, and we also have this
Speaker 1: sort of emergence of direct listings, which is companies saying, note,
Speaker 1: we're just gonna start trading our shares on the exchange
Speaker 1: and the market will set the price and we don't
Speaker 1: need to do the traditional I PO road show. And
Speaker 1: you know this is a also a growing area of yeah,
Speaker 1: area of new public listing. So today we're going to
Speaker 1: talk about the exchanges and that in particular. I'm very
Speaker 1: excited about our guest. We are going to be speaking
Speaker 1: with John Tuttle, Vice Chairman of the New York Stock Exchange,
Speaker 1: is a fourteen year veteran of the exchange. Uh he
Speaker 1: works on all areas of capital markets, I p o S,
Speaker 1: SPACs and direct listing, so sort of a fascinating person
Speaker 1: to discuss the nicetiest role and all this. So John,
Speaker 1: thank you very much for joining us. Great to be
Speaker 1: with you guys. So it has been I mean, is
Speaker 1: that fair like this to characterize like there's a lot
Speaker 1: of excitement these days about public markets. It feels like
Speaker 1: in a way that we haven't seen in a while. Yeah,
Speaker 1: I completely agree, and you know we are we're in
Speaker 1: the fourth quarter now, but I'll you know, I'll give
Speaker 1: you these two points. August was the busiest month we
Speaker 1: had in over a decade in August. You know, when
Speaker 1: it comes to new equity issuance I p o s
Speaker 1: and August is traditionally this one of the slowest months
Speaker 1: of the year, and September of this year was the
Speaker 1: busiest month for I p o s in the over
Speaker 1: two hundred year history of the New York Stock Exchange.
Speaker 1: So the market is open. It's open for new equity issuance,
Speaker 1: whether that come in the form of I p o s,
Speaker 1: SPACs or direct listings. So can you talk to us
Speaker 1: a little bit about that third option direct listings because
Speaker 1: my understanding is that even though there's a lot of
Speaker 1: talk about that, we haven't necessarily seen that many in
Speaker 1: recent years. In fact, I guess the most famous direct
Speaker 1: listing that I can think of is um Spotify, But
Speaker 1: that was a few years ago. So what's going on
Speaker 1: there and why the excitement over this particular route to
Speaker 1: public markets? Yeah, really, if you take a look back
Speaker 1: over the past four years, we created more pathways to
Speaker 1: the public markets than had been created in the previous
Speaker 1: two to three decades. The direct listing was one of them,
Speaker 1: So you're right, the first one was a few years
Speaker 1: ago in April of eighteen with Spotify. Barry McCarthy, the
Speaker 1: CFO Spotify, is really an independent thinker. He helped pioneer
Speaker 1: this process. Someone we are proud to work with uh
Speaker 1: in in creating a new pathway to the public market.
Speaker 1: And as we expected, you know, would be a slow start,
Speaker 1: but now you're starting to see the uh the slope
Speaker 1: of the curve rise. So we had one in two
Speaker 1: thousand eighteen, one in two thousand nineteen with Slack, and
Speaker 1: then we had two on the same day in September
Speaker 1: with palat Here and Asana. And it might be helpful
Speaker 1: just to take a step back and describe the differences
Speaker 1: between a direct listing and an I p O, because
Speaker 1: sometimes parts of them get conflated. But an I p
Speaker 1: O is the most well worn path to the public markets.
Speaker 1: It's been around for a long time. A company hires
Speaker 1: an investment bank and other advisors to sell shares into
Speaker 1: the market, and they're going to raise capital that can
Speaker 1: use to grow and expand their business, launch new products,
Speaker 1: tap into new geographies, and they conduct you know, they
Speaker 1: file an S one if they're a US company, they
Speaker 1: file an F one perspectives if they're non us issuer,
Speaker 1: and then they go out and they talk to institutional
Speaker 1: investors market the transaction, and the night before they're listing
Speaker 1: on the New York Stock Exchanged, they get together and
Speaker 1: they say, okay, we agree to sell our shares for
Speaker 1: this price. Well, that's where they're sold to the institutional investors.
Speaker 1: That's not necessarily where the stock is going to open
Speaker 1: the next day. And so what happens after you see
Speaker 1: the bell ring and the price discovery on the trading
Speaker 1: floor take place is the beginning of secondary trading. And
Speaker 1: when that happens, that's really the market valuing this company,
Speaker 1: not necessarily a small group of bankers and other advisors, who,
Speaker 1: by the way, are the best in the world at
Speaker 1: what they do. But there's still a dislocation. It's not
Speaker 1: the most efficient pricing mechanism for an offering, and so
Speaker 1: you see a stock open at maybe percent and in
Speaker 1: some cases recently over two higher than that I p
Speaker 1: O price, which is referred to as quote unquote the
Speaker 1: pop um. Sometimes people want the pop most of the
Speaker 1: times they don't want that big of a pop. Now,
Speaker 1: a direct listing is a little bit different because every
Speaker 1: company goes public for different reasons. There's a variety of reasons,
Speaker 1: including that raising capital, liquidity for their shareholders, for their
Speaker 1: employees and other investors, having a share currency that they
Speaker 1: can use to conduct mergers and acquisitions down the road,
Speaker 1: to be branding as well, or even just things further
Speaker 1: down the list about credibility. If your software company and
Speaker 1: you're listed on the public markets, your clients, no, you're
Speaker 1: not going to go out of business overnight and leave
Speaker 1: them high and drive. So in a direct listing, the
Speaker 1: priorities are a little bit different for these companies. These
Speaker 1: are companies that want the benefits of being a publicly
Speaker 1: traded company, most of which I just enumerated, but they
Speaker 1: don't necessarily need to raise capital at the time of
Speaker 1: their listing. So if you think about Spotify, they had
Speaker 1: cash on their balance sheets. Slack had raised I believe
Speaker 1: close to a billion dollars in the private markets prior
Speaker 1: to their listing. Same with palant Here and Asana, and
Speaker 1: so they didn't want to come to the market raised
Speaker 1: capital at a arguably higher than necessary cost of capital
Speaker 1: being exemplified by that pop, and they said, is there
Speaker 1: a new pathway to the market. So so we worked
Speaker 1: with Spotify. We worked with the SEC and other stakeholders
Speaker 1: to create this direct listing pathway and so now now
Speaker 1: you know this is an option for companies. Like I said,
Speaker 1: we started slow, we're seeing more companies planned for them.
Speaker 1: You know, in every conversation I'd have with CFOs and
Speaker 1: company founders, this is always a topic and we're going
Speaker 1: to see more of them as we go into one. Now,
Speaker 1: it's also an important distinction to make between the IPO.
Speaker 1: That bank also helps you set up your road show.
Speaker 1: They provide stabilization activities, so they helped support the stock
Speaker 1: and it's early days. That doesn't happen in a direct listing.
Speaker 1: There's no underwritten offering, no no shares are being sold
Speaker 1: to the public. So really you're relying on the NYC
Speaker 1: S market model. You're relying on the company to meet
Speaker 1: with investors as well as part of this public debut.
Speaker 1: In planning for the public debut, you know, before I
Speaker 1: was gonna ask you a sort of question about the
Speaker 1: mechanics of the direct listening, but before I do it,
Speaker 1: before I forget, do you think that like in the
Speaker 1: road show, the sort of informational services that the banks
Speaker 1: offer where they introduce a new company to perspective investors
Speaker 1: has become less necessary. I'm just thinking about, like with
Speaker 1: the Internet and all different ways of sort of doing
Speaker 1: research and getting information out there, is that particular aspect
Speaker 1: of the going public, the sort of the introduction aspect,
Speaker 1: is that declining in terms of its necessariness for companies
Speaker 1: when they go public. It is changing and that is
Speaker 1: a fact. There's no way we're going back to the
Speaker 1: two thousand nineteen style road show where a company's management
Speaker 1: team gets on an airplane, flies around the world or
Speaker 1: across the country, and back to back meetings with institutional investors.
Speaker 1: We saw during that there are new tools, so whether
Speaker 1: it be video conferencing, teleconferencing, etcetera, where you can have
Speaker 1: meaningful interactions with investors and not have to get on
Speaker 1: an airplane to do it. So that is a when
Speaker 1: we talk to the companies that have gone public, you know, look,
Speaker 1: they'll they'll be the first ones to tell you there's
Speaker 1: nothing like a face to face interaction, whether that's with
Speaker 1: a customer, with an employee, or with an investor. But
Speaker 1: when it comes to coming to market, the efficiency uh
Speaker 1: that they're able to have by conducting the quote unquote
Speaker 1: road show virtually is well received, and I don't think
Speaker 1: we're going back to the ways of twenty nineteen and prior.
Speaker 1: I have a related question before we go into the
Speaker 1: details on direct listings. But all of the criticisms of
Speaker 1: the I p O process, the idea of the bank's
Speaker 1: charge big fees, and the idea that maybe the stock
Speaker 1: gets miss priced in some way or the company is
Speaker 1: effectively leaving money on the table when they get the
Speaker 1: big pop on the first day of trading. You could
Speaker 1: have made any of those criticisms over the past um decades, certainly,
Speaker 1: and maybe even beyond that. What's changed recently so that
Speaker 1: you know people are talking more about the direct listing
Speaker 1: or this back process. What was the catalyst for this
Speaker 1: current conversation. Well, I think there's been a pent up
Speaker 1: demand for new pathways to the public markets that are
Speaker 1: arguably more tailored to meet the companies objectives. So again,
Speaker 1: the I p O is a well worn route. A
Speaker 1: lot of companies will take that route and and and
Speaker 1: like the process, even though it may result in arguably
Speaker 1: less efficient price and than you would have through other routes.
Speaker 1: But for companies that again didn't need to raise capital
Speaker 1: at the time that they're listing, either because they had
Speaker 1: cash on their balance sheet from operation or they were
Speaker 1: able to get investment in the private markets. They have
Speaker 1: a new pathway that's more tailored to meet their objectives.
Speaker 1: Companies that want certainty of execution and want their public
Speaker 1: entrance to be more akin to an M and a
Speaker 1: transaction than the traditional I PO now have this spack
Speaker 1: And now we're even working to combine the best of
Speaker 1: some of these where we filed with the SEC last year,
Speaker 1: received approval from the staff and are just waiting on
Speaker 1: final sign off from the commissioners to bring together the
Speaker 1: direct listing with a capital raising component as well. So
Speaker 1: there are more pathways to the public markets now, that's
Speaker 1: why you see companies more actively pursuing different routes. Now,
Speaker 1: I should also make a point but that there's been
Speaker 1: innovation within each one of those pathways. So some of
Speaker 1: the frustrations companies had or institutional investors had around things
Speaker 1: like the lock up or the allocation process are all changing.
Speaker 1: So if you look at some recent IPOs, instead of
Speaker 1: the traditional one day lock up period, you've seen some
Speaker 1: companies incorporate more dynamic lock up periods so if there
Speaker 1: are certain thresholds or trigger points that are met, certain
Speaker 1: events happen. When it comes to uh, the ability to
Speaker 1: sell more shares to the public or employees, a will
Speaker 1: sell more shares. One of the criticisms by some investors
Speaker 1: about the direct listing was that there was no lock
Speaker 1: up period, and they thought there was not enough control
Speaker 1: over the float and who had who had access to
Speaker 1: selling shares. So so with Palace here they incorporated a
Speaker 1: lock up period. So not only there are more pathways,
Speaker 1: but there's more innovation within each one each of those
Speaker 1: pathways as well. Tok to us about that the combining
Speaker 1: of the direct listing of the capital rays. So as
Speaker 1: you set it up, most of are the direct listings
Speaker 1: that have happened so far. We're companies that had enough
Speaker 1: capital or raise enough capital, didn't need to get any
Speaker 1: of that I p O cash. Now you said this,
Speaker 1: you have staff level approval for combining the two. What
Speaker 1: is the issue there? And once it's sort of fully
Speaker 1: unlocked or once it's sort of fully allowed, how many
Speaker 1: more companies just sort of uh, do you think that
Speaker 1: opens up the interest if they can also raise cash
Speaker 1: from a direct list. Yeah, we're we're excited about the
Speaker 1: direct list in plus capital raise, and it just highlights that,
Speaker 1: you know, we we've been leading a lot of this
Speaker 1: innovation in the capital markets because of how we trade stocks,
Speaker 1: our market model, the things we're able to do with
Speaker 1: the New York Stock Exchange. Now, before I get to
Speaker 1: that point, one thing I would say is that if
Speaker 1: you look at and it helps in in in explaining
Speaker 1: why the direct listing plus capital raise is so interesting.
Speaker 1: If you look at some of these recent technology i
Speaker 1: p o s, there has been a very small public flow,
Speaker 1: so less than ten of the company being offered in
Speaker 1: an i p O. Now, if it's an exciting company,
Speaker 1: a consumer facing brand and enterprise tech company, or or
Speaker 1: a company coming from a sector space where there's going
Speaker 1: to be a lot of investor demand, when you're only
Speaker 1: floating a very small percentage of the company, you you
Speaker 1: encounter a supply demand uh dislocation, and so there's not
Speaker 1: enough supply coming into the market. There's overwhelming demand. And
Speaker 1: that's what's leading to this quote unquote pop. What we
Speaker 1: saw at the direct listing is that you have a
Speaker 1: much much, much bigger public float that's out there. Spotify
Speaker 1: allowed of their shares to be trading in their in
Speaker 1: their direct listing. What that that was you had more
Speaker 1: robust price discovering, more buyers and sellers could come together,
Speaker 1: and that ultimately lead to more liquidity and more efficient pricing.
Speaker 1: So if you look at um, if you look at Spotify,
Speaker 1: Slack and Talents, here three out of the four direct
Speaker 1: listings that have come out, those three they're opening trade
Speaker 1: stand among the top ten largest opening trades in the
Speaker 1: history of US capital markets. That's because you had liquidity,
Speaker 1: you had price discovery. You also had the ability for
Speaker 1: investors that normally would have had to wait days to
Speaker 1: institutional investors to start building a position without running up
Speaker 1: the stock, to be able to build a bigger position
Speaker 1: more quickly because you had that liquidity. So, after those
Speaker 1: direct listings and the performance we saw from an exchange
Speaker 1: standpoint in a and and by all meaningful metrics, less volatility,
Speaker 1: more liquidity than you had in a traditional I p O,
Speaker 1: we started talking to market participants so that companies, banks, investors, regulators,
Speaker 1: others and said how can we improve this. We realized
Speaker 1: there was strong demand. We're saying, hey, we would love
Speaker 1: to incorporate the ability to raise primary capital or fresh
Speaker 1: new capital for the company as part of the direct listing.
Speaker 1: So this was not a solution in search of a problem.
Speaker 1: There's demand in the marketplace for this, so we worked
Speaker 1: with the SEC and others to to file rule changes
Speaker 1: with the exchange. All our rules have to be all
Speaker 1: of our rule changes have to be blessed by the
Speaker 1: SEC and go through a very rigorous vetting process to
Speaker 1: allow for that to happen. So what we have proposed
Speaker 1: UH is for if a company wants to pursue a
Speaker 1: direct listing and include a primary capital raise, they will
Speaker 1: file their registration statement just like they will with an
Speaker 1: I p O. They will disclose the number of shares
Speaker 1: they're willing to sell, they will disclose a range at
Speaker 1: which those shares will be sold, and then that they're
Speaker 1: willing to sell those shares, and that whole block of
Speaker 1: shares will need to trade at one price, one time,
Speaker 1: and that's the opening auction of the n Y s C.
Speaker 1: So it's a it's one moment in time that will
Speaker 1: be the primary capital race, but it's going to be
Speaker 1: raised at the market price. So it's again it's contrary
Speaker 1: to an I p O, where you have again people
Speaker 1: who are very good, uh at at at their jobs
Speaker 1: setting the price, but oftentimes there's a huge dislocation between
Speaker 1: the price they're setting in what markets actually value it.
Speaker 1: You're going to open your stock and raise capital at
Speaker 1: the market price. Mhm. Since we're on the topic of
Speaker 1: the SEC or since you mentioned it, there are people
Speaker 1: out there who make the argument that I p O S.
Speaker 1: You know, it's not just about the pricing process and
Speaker 1: the due diligence of the banks, but it's also about
Speaker 1: certain protections for new investors. What happens to those in
Speaker 1: the direct listing process, and what do you say to
Speaker 1: critics who think that this is basically a regulation light
Speaker 1: way for companies to go public. Look, there's there have
Speaker 1: been some criticisms of the direct listing, but oftentimes those
Speaker 1: come from the folks that are being disrupted along the
Speaker 1: way and in the process. So these companies are filing
Speaker 1: in a prospectus with the SEC so an S one
Speaker 1: or an or an F one registration, there's still subject
Speaker 1: to the rigorous requirements to be listed on the New
Speaker 1: York Stock Exchange. They're still subject to the ongoing regulations
Speaker 1: of the New York Stock Exchange. In the SEC so
Speaker 1: it's a different pathway to the public markets. It disrupts
Speaker 1: some folks that have been involved in the process and
Speaker 1: getting resistance along the way as a sign that, from
Speaker 1: my perspective, that we're doing something right. M You know,
Speaker 1: you use the term market model a couple of times
Speaker 1: in your description of how you operate. What does that
Speaker 1: mean specifically when you talk about the power of the
Speaker 1: NICECS market model? H can you describe that term a
Speaker 1: bit more? Yeah? Absolutely, and and uh and happy to
Speaker 1: get a little bit more into market micro structure. But
Speaker 1: the New York we love, our our listeners love that stuff.
Speaker 1: I know this is the right audience, so so I'm excited.
Speaker 1: So the New York Stock Exchange operates a market model,
Speaker 1: so how we trade your stocks, and it's differentiated for
Speaker 1: not only any other domestic exchange, but any other global
Speaker 1: exchange and well as well. So what does that mean.
Speaker 1: It means that at the very base layer in the
Speaker 1: United States, there's something that's uh any exchange in the
Speaker 1: United States, there's something called a competitive market maker system.
Speaker 1: So the exchanges incentivized market participants to quote in a
Speaker 1: company security. There's no obligation to do that. But if
Speaker 1: you show up, you are incentivized. Now, that's table stakes
Speaker 1: in the US market. On top of that is what
Speaker 1: we layer on and it's called a designated market maker.
Speaker 1: So every company that's listed on the New York Stock
Speaker 1: Exchange interviews the market making firms and selects the firm
Speaker 1: that they want to represent them. That's in addition to
Speaker 1: all those competitive market makers that are quoting in the stock.
Speaker 1: But they're designated market maker has an obligation to be
Speaker 1: on the bid and the offer of that stock at
Speaker 1: all times. They cannot step away on election day or
Speaker 1: when there's market wide volatility or some sort of single
Speaker 1: stock event, so they have a regulatory obligation to be there.
Speaker 1: They have an obligation to be setting the best quote
Speaker 1: in the marketplace a relatively high percentage of the time.
Speaker 1: And they have to layer interest so meaning put put
Speaker 1: orders in the order book above and below the price
Speaker 1: to help damp in volatility. Those those those are obligations,
Speaker 1: they're not voluntary, and that results in no matter how
Speaker 1: you look at the data, stocks to trade on our
Speaker 1: market trade with narrower spreads, less volatility, more depth in
Speaker 1: the order book, which can ultimately help lower company's cost
Speaker 1: of capital. Now, how that helps in a direct listing
Speaker 1: or in a complex transaction is you know, you have
Speaker 1: you have the market model, you have best in class technology,
Speaker 1: and you have human judgment all coming together at one place,
Speaker 1: so you get that certainty of execution. You know, companies
Speaker 1: want to de risk when they're coming to market, and
Speaker 1: so that's one of the reasons why twenty four twenty
Speaker 1: five largest ideas have put their trust in that model.
Speaker 1: The direct listing, you don't have an underwritten offering, you
Speaker 1: do not have a stabilization agent there helping support the stock.
Speaker 1: So having that designated market maker when you're coming out
Speaker 1: into the market with those quoting obligations helps provide superior
Speaker 1: market quality, helps you come out of the block strong
Speaker 1: and helps build investor confidence because the last thing you
Speaker 1: want to do is open the stock at the wrong price,
Speaker 1: have it start whip sawing and impact investor confidence and
Speaker 1: and just have that that um that bad market quality
Speaker 1: amplified even more. Sorry, can you talk a little bit
Speaker 1: more about the allocation process in a direct listing. So
Speaker 1: in a traditional I p O, the banks go out
Speaker 1: and they sound out various types of investors and they
Speaker 1: asked them how much of the stock they might be
Speaker 1: interested in and at what price, and they helped to
Speaker 1: build the book around that. But how does the actual
Speaker 1: allocation work in the direct listing? Like who is able
Speaker 1: to get the shares? Yeah, really good question and it's
Speaker 1: also something that we're we're proud to see the SEC
Speaker 1: wrote in our in the approval order for a direct listing.
Speaker 1: Plus camplies that that what we're proposing with the direct
Speaker 1: listing and ultimately direct list of the cawplories is a
Speaker 1: more democratized process, more democratize access to the marketplace. And
Speaker 1: so you nailed it with the With an I p O,
Speaker 1: a company works with their bankers, They go out, they
Speaker 1: do a road show, they talk to institutional investors, they
Speaker 1: build an order book, they play shares with those investors,
Speaker 1: and then secondary trading begins on the n Y s C.
Speaker 1: In a direct listing, the company actually does much of
Speaker 1: the investor education. So they'll do an investor day. Uh,
Speaker 1: they'll talk with investors about how a direct listing works.
Speaker 1: There's they're limited in in some of the things that
Speaker 1: can talk about. They can't really build a book and
Speaker 1: then on day one, you know, the stock is free
Speaker 1: to trade for the current shareholders. For anybody out there
Speaker 1: in the whether they be institutional investors or retail investors
Speaker 1: that that uh, you know, aren't current investors, they're able
Speaker 1: to buy into those shares, so that there there really
Speaker 1: isn't an allocation process. The only difference I would say
Speaker 1: is that for a direct listing, one of the requirements
Speaker 1: is that a company has to have currently has to
Speaker 1: have a fairly distributed private shareholder base. In an I
Speaker 1: p O, you don't. And so the reason is the
Speaker 1: n y s C and the SEC have rules saying
Speaker 1: that prior to a company going public or two commencing
Speaker 1: trading on the NYC, they have to have at least
Speaker 1: four hundred round lot shareholders around loot shareholder meeting holds
Speaker 1: more than one hundred shares and that helps ensure sufficient
Speaker 1: liquidity on day one. So on an i p O,
Speaker 1: the underwriting bank will talk to a bunch of investors
Speaker 1: and they'll place the shares with more than four hundred
Speaker 1: investors and meet that distribution requirement. In a direct listing,
Speaker 1: because you're not allocating shares, you need to make sure
Speaker 1: that you have at least four hundred shareholders prior to
Speaker 1: your listing So for companies like Spotify, Slack, palat Here, Sonda,
Speaker 1: they had fairly robust private market trading in their stock
Speaker 1: and that coupled with employee ownership, met that four hundred
Speaker 1: round lot threshold. But that's the currently the most meaningful
Speaker 1: difference between the allocation process and distribution criteria between an
Speaker 1: IP on a direct listing. Now, speaking of a palanteer,
Speaker 1: that was the most recent one, or I think actually
Speaker 1: they elicted on the same day as a sauna um.
Speaker 1: But Morgan Stanley was involved in the Palanteer direct listing.
Speaker 1: Explain to us the role of banks. So even though
Speaker 1: it wasn't an I P O H, Morgan Stanley wanted
Speaker 1: the big investment banks did have some role to play.
Speaker 1: What is that role for a direct listing? Yeah, great questions.
Speaker 1: So since there aren't underwriters, the role of the banks
Speaker 1: and the banks will always have a role in the
Speaker 1: in all of these pathways to the public markets. But
Speaker 1: the role of the banks was to serve as a
Speaker 1: financial advisor, so capital f capital a official role. Morgan
Speaker 1: Stanley and others served in that capacity. Morgan was the
Speaker 1: lead on those transactions and they they did multiple things
Speaker 1: when they helped advise the company I'm preparing for a
Speaker 1: direct listing be when it came to the execution of
Speaker 1: the transaction. Two things happen in an I p O.
Speaker 1: You know, the bank works with the with the company
Speaker 1: to establish an I p O price. Since there is
Speaker 1: no I p O price in a direct listing, we
Speaker 1: have to established what's called a reference price now prior
Speaker 1: to trading commencing. There's always a reference price in the
Speaker 1: IPO s I p O price on a typical day,
Speaker 1: it's the price the stock closed the night before. But
Speaker 1: in a direct listing, we need to establish this reference price.
Speaker 1: No shares trade hands, uh, no transaction takes place. It's
Speaker 1: just a price at which we can input into our
Speaker 1: system so we can begin accepting orders and where market
Speaker 1: participants can start thinking about building a book around. And
Speaker 1: so the role of the New York stackaches. We consult
Speaker 1: with the company's financial advisor to help establish that reference
Speaker 1: price the night before, and then once trading begins, the
Speaker 1: market maker who I spoke about the designated market maker,
Speaker 1: That market maker will consult with the financial advisor before
Speaker 1: opening the stock for the very first time. So the
Speaker 1: underwriter plays a slightly different role and that's as a
Speaker 1: as a financial advisor in a direct listing. I have
Speaker 1: a different question about the Palenteer direct listing. So from
Speaker 1: what I remember, well, you were talking about how one
Speaker 1: of the benefits of doing a direct listing is that
Speaker 1: you don't have to have the lock up period that
Speaker 1: you would have in a traditional I P O process.
Speaker 1: But I think Palenteer did away um with that, or
Speaker 1: they opted to have a lock up period even though
Speaker 1: they were doing a direct listing. Why did they do
Speaker 1: that exactly? If you know that's supposed to be one
Speaker 1: of the benefits of of going this route to public market, Well,
Speaker 1: good question, Tracy, and and and you know, companies go
Speaker 1: public for different reasons. They picked different pathways for different reasons,
Speaker 1: and then within those pathways they can innovate how they choose.
Speaker 1: Earlier direct listings did not necessarily have a lock up period,
Speaker 1: some thought of that as a benefit. Now Palatier said
Speaker 1: we want to have one, and so they had the
Speaker 1: ability to put one in there and it did not
Speaker 1: adversely impact their transaction whatsoever. So for then it was
Speaker 1: important to have that lock up period. You know, I
Speaker 1: don't want to speculate too much on specifically why they
Speaker 1: did that, but they did have the option to do that,
Speaker 1: just as how in an I p O you have
Speaker 1: the ability to And companies are now working with banks
Speaker 1: to modify that traditional eight day lock up period to
Speaker 1: put in more kind of dynamic lockups where again, if
Speaker 1: a company needs a certain share price or trigger UH,
Speaker 1: it'll trigger the release of sharff for trading, so something
Speaker 1: that tracys earlier. And that was about standards, and as
Speaker 1: you pointed out that even a company that goes public
Speaker 1: through direct listing, they still have did SEC standards and
Speaker 1: S one and the n y c s own regulations.
Speaker 1: Are there conflict of interest rules or anything set up
Speaker 1: such that there is no incentive on the teams who
Speaker 1: are doing your team doing direct listings versus the sort
Speaker 1: of more regulatory side of the n y C, so
Speaker 1: that there's no um, there's no getting around anything. Basically, Yeah, absolutely,
Speaker 1: So the the n y s C and other exchanges
Speaker 1: in the US are what are called self regulatory organizations,
Speaker 1: and so we have an independent regulatory function that reports
Speaker 1: to an independent committee of our board of directors, so
Speaker 1: their work is completely independent from that of the business side.
Speaker 1: That is meant to completely eliminate conflicts of interest, so
Speaker 1: there's no pressure the business side can exert over the
Speaker 1: regulatory side. And is there any tension emerging or conflict
Speaker 1: between you and the banks? I mean, as you mentioned,
Speaker 1: Morgan Stanley did have a role in palant here. But
Speaker 1: obviously this process does cut out what is a you know,
Speaker 1: an important point of part of revenue for the investment banks. Uh.
Speaker 1: Is there any pushback on them or any banks like, oh, well,
Speaker 1: We're not gonna have our companies list on the n
Speaker 1: y C anymore if the n y i C is
Speaker 1: directly competing against us, Like, I'm just sort of curious
Speaker 1: about that relationship and how the emergence of this business
Speaker 1: for you changes those partnerships actually strengthened partnerships with the banks,
Speaker 1: And I would say the banks will always find a
Speaker 1: find a role in these type of transactions and helping
Speaker 1: their clients. Now, early on, yes, when we started floating
Speaker 1: this idea of the direct listing with Spotify, we did
Speaker 1: receive some resistance from banks saying, what are you doing? Well,
Speaker 1: you know, why are you you know this? This makes
Speaker 1: no sense, this is risky, why would you do this?
Speaker 1: And then what we saw though is a handful of
Speaker 1: bank banks leaned in and said, well, wait a second,
Speaker 1: this is what my client is hoping to achieve. This
Speaker 1: is their goal. I want to help them achieve it.
Speaker 1: And in helping them achieve their goal, well, my economics
Speaker 1: may be slightly different than they would be in a
Speaker 1: traditional I p O. I'm building a long term relationship,
Speaker 1: and so I'm going to be the bank that come
Speaker 1: back to when they do a following offering to the
Speaker 1: market when they need when they need advice around M
Speaker 1: and A or other important transactions. And so I want
Speaker 1: to be a good partner. And so you saw a
Speaker 1: number of banks lean in early on and UH and
Speaker 1: realized that hey, this is this is gonna be a
Speaker 1: new pathway to the public market. We see this as
Speaker 1: an opportunity to help our clients in different and further
Speaker 1: differentiate ourselves from other investment banks. So you saw them
Speaker 1: lean in, and after the successful transactions that took place
Speaker 1: with Spotify, slack now Palace here in Hassana. On top
Speaker 1: of that, you seem pretty much every bank focus on
Speaker 1: the direct listing. Their clients are asking them about it.
Speaker 1: And if you're gonna be a good banker, you better
Speaker 1: be able to provide good advice to your clients. So
Speaker 1: we've seen the banks lean into this now. Where there
Speaker 1: was some initial resistance at first, they've come around to it.
Speaker 1: And again the economics are a little bit different from
Speaker 1: an I p O. But for those that participated in
Speaker 1: the early transactions, while you did not get a piece
Speaker 1: of a gross spread or the underwritten offering, they were
Speaker 1: paid an advisory fee. And so while there were fewer
Speaker 1: banks on the cover for the Spotify UH perspectives than
Speaker 1: they would have had should they take in a traditional
Speaker 1: I PO, those banks received a bigger piece of a
Speaker 1: smaller pie and were able to build a new business
Speaker 1: for themselves. But you're talking mostly about the banks corporate clients.
Speaker 1: What happens to their investor clients on the buy side,
Speaker 1: because you know my understanding in the IPO processes that
Speaker 1: banks were always trying to juggle the needs of those
Speaker 1: two groups of people. On the one hand, you have
Speaker 1: the company that's actually going public and they want to
Speaker 1: maximize their proceeds, so they probably want to sell their
Speaker 1: shares relatively high. And then you also have the investor
Speaker 1: clients who probably want to buy into an I p
Speaker 1: O at a low price and see that first day pop,
Speaker 1: it feels like the banks might be uh, not necessarily
Speaker 1: losing the investor clients, but like certainly the investors aren't
Speaker 1: getting what they used to get from the banks, which
Speaker 1: was allocation into an early I p O. Yeah. So
Speaker 1: a couple of things on that there. And there's a
Speaker 1: lot of different views on this, but I would say
Speaker 1: if you are looking for high quality long term investors,
Speaker 1: they're not going to shy away from you for a
Speaker 1: direct listing. A couple of things there. One is, many
Speaker 1: of these investors think your Fidelity t row Wellington, they've
Speaker 1: already crossed over and we're private investors in the company.
Speaker 1: So they built a position there and are not banking
Speaker 1: on getting a pop to meet their overall portfolio performance
Speaker 1: targets for the year. Number two is when you look
Speaker 1: at some of the more recent tech I p O
Speaker 1: s over the past let's say two to three years,
Speaker 1: Oftentimes these companies are floating a very very very small
Speaker 1: piece of the company sub ten percent, So when you
Speaker 1: actually allocate that out to institutional investors, they're not getting
Speaker 1: that meaningful of a position, and so that pop, you know,
Speaker 1: while yes it is a pop on that security and
Speaker 1: a return on that single investment overall for that portfolio.
Speaker 1: I don't know how many basis points it would be,
Speaker 1: but probably diminimus. They're actually focused on building positions and
Speaker 1: companies where they have convictions. And so why I think
Speaker 1: the direct listing is fascinating is because when you have
Speaker 1: more float out there from day one, when you have
Speaker 1: true price discovery and not this kind of artificial supply
Speaker 1: demand and balance that all of a sudden you had
Speaker 1: eight days the lock up release, a bunch of new
Speaker 1: shares come onto the market, and now you start finding
Speaker 1: the actual market price for the shares. When you have
Speaker 1: that that kind of pure price discovery, if you are
Speaker 1: an institutional investor, you have conviction you want to build
Speaker 1: a position, you can do it much more quickly and
Speaker 1: with much less impact on the share price than you
Speaker 1: would in a traditional I p O. Because if you
Speaker 1: have sub ten percent of a company's offering out there
Speaker 1: and you're a big institutional investor trying to build your
Speaker 1: position because they're so little supply the market, you're gonna
Speaker 1: be running up that stock as you build your position.
Speaker 1: So with the with the direct listing, a lot of
Speaker 1: those institutional investors are actually benefiting from having that increase
Speaker 1: in liquidity. Now, sometimes in an I p O you
Speaker 1: hear them talk about, oh, we have to allocate to
Speaker 1: a certain percent of hedge funds because we know they're
Speaker 1: going to flip it overnight and provide liquidity. Yeah, I'm
Speaker 1: fine with getting rid of that. But when it comes
Speaker 1: to institutional investors, a lot of them actually like this
Speaker 1: process better than the traditional IPO. So let's some big
Speaker 1: picture for a second. Uh, there's just been a handful
Speaker 1: of direct listings, and of course there's been way more.
Speaker 1: There's still way more traditional I p O s. This
Speaker 1: year there's been an incredible spack boom, so they're way
Speaker 1: more of those two in terms of sort of the
Speaker 1: equity capital markets at the New York Stock Exchange. A
Speaker 1: just sort of like how big is direct listing is? Now?
Speaker 1: How big could you see it getting as part of
Speaker 1: a share of the total business? And then what is
Speaker 1: the business model for you? Like, what is you know,
Speaker 1: investment banks take several percentage points in a traditional I
Speaker 1: p O. What is the revenue model look like for you,
Speaker 1: uh in a direct listing? And how big do you
Speaker 1: see this business uh getting or just as getting as
Speaker 1: a share of overall UM. Yeah. So the direct listing
Speaker 1: is you're going to continue to see more of them
Speaker 1: in the market, and whether that's four in one or
Speaker 1: eight or more, you'll see that number increased from from
Speaker 1: from where we are today. We think it's important because, look,
Speaker 1: it's a differentiator for us. We mentioned the market model earlier.
Speaker 1: We're uniquely positioned to execute these types of complex transactions,
Speaker 1: so we we think they're very interesting. From an economic standpoint,
Speaker 1: there's not much difference at all between this and I
Speaker 1: p O or any other type of listing for US,
Speaker 1: and that holds true for other exchanges as well. So
Speaker 1: we UH, We're focused on this because it's a differentiator.
Speaker 1: It's a new pathway to the public markets. We're providing
Speaker 1: a product or service to our clients that is more
Speaker 1: tailored to meet their objectives and help them be successful.
Speaker 1: So we continue to see it being part of the market.
Speaker 1: We continue it will be an increasing part of the market.
Speaker 1: Do I think it will go on the same trajectory
Speaker 1: that SPACs have gone on this year? No? Uh, and
Speaker 1: SPACs accounting for roughly or so of the the overall
Speaker 1: I p O proceeds raised this year, UH, no, I
Speaker 1: don't see that happening, but we we will continue to
Speaker 1: see this be a product that a lot of companies
Speaker 1: consider and ultimately select going forward. Just just to be
Speaker 1: clear on something you said, Um, are there more fees
Speaker 1: for you? Is there more revenue when a company does
Speaker 1: a direct listing versus a normal I P O or
Speaker 1: is that not a Is it not a major difference?
Speaker 1: It's not a major difference. So we still receive revenue
Speaker 1: the same way from these from these companies. How confident
Speaker 1: are you that the SEC is going to approve the
Speaker 1: direct listing with capital raising proposal? Reasonably confident? Because look,
Speaker 1: the team that's down there has done a very good
Speaker 1: job at the SEC. This is my personal perspective. Uh.
Speaker 1: You know, Jay Clayton as chairman has made capital formation
Speaker 1: and innovation in the capital markets a pillar of his
Speaker 1: agenda down there. You've seen it come in different forms,
Speaker 1: whether it be with direct listing one point oh, which
Speaker 1: we saw a Spotify and Slack which was under the
Speaker 1: current leadership's tenure at the at the SEC, or with
Speaker 1: this new process the directlessing plus the capital raise. Now
Speaker 1: you know, not to get too far into the kind
Speaker 1: of regulatory procedures that go along with rule changes at
Speaker 1: the SEC. But you know, we went through a very
Speaker 1: rigorous process for two forty days with the SEC walking
Speaker 1: through the direct listing with Capital Raise, talking with the
Speaker 1: staff from Trading and Markets, Corporate thin the different departments
Speaker 1: within the SEC, and ultimately in the staff's approval order,
Speaker 1: which was done through something called delegated authority. And that's
Speaker 1: just a way of saying that the commissioners have delegated
Speaker 1: the decision to the professional staff or the expert staff,
Speaker 1: that they approved the direct listing, and they said they
Speaker 1: went other way to say two very important things. One,
Speaker 1: it's a more democratized process so allows more people, more
Speaker 1: access to more opportunities. And be it's more efficient pricing
Speaker 1: than the traditional IPO. So a industry trade group called
Speaker 1: the Council of Institutional Investors petition for our approval to
Speaker 1: be reviewed and approved by the by the five commissioners
Speaker 1: at the SEC. We're just awaiting that right now, and
Speaker 1: then we'll be ready to go. No matter what pathway,
Speaker 1: companies have to the public markets, having access to capital
Speaker 1: that you can use to fuel growth, so offensively or
Speaker 1: defensively in periods of time, like we saw in late
Speaker 1: Q one and Q two where companies were starving for
Speaker 1: capital and they were able to come to the public
Speaker 1: markets raise it at market rates. It's nice to hear
Speaker 1: uh many folks in the marketplace, many participants again talking
Speaker 1: about the benefits of the U S public markets, both
Speaker 1: for companies and for investors. John, that was a great conversation.
Speaker 1: I learned a lot and really appreciate you joining us. Yeah.
Speaker 1: I hope once the world gets back to normally you
Speaker 1: can come down here for the next direct listing and
Speaker 1: see it live. Yeah, that'd be fun. I'd love to
Speaker 1: do that, all right, Thanks very Thanks John. That was great.
Speaker 1: I really like that conversation. You know, it's funny. I know,
Speaker 1: like I feel like John was being diplomatic or maybe
Speaker 1: completely uh straightforward. But it's hard for me to imagine
Speaker 1: that this isn't going to be a source of increased
Speaker 1: angst the fact that some of this traditional imp O
Speaker 1: money might be going away in direct listings, especially also
Speaker 1: when you compare like I said at the beginning of
Speaker 1: the stock prices, like the exchanges are still doing very
Speaker 1: well at a time when the major banks are kind
Speaker 1: of stagged it. Yeah, although I don't know, I say,
Speaker 1: never underestimate the bank's ability to find new ways of
Speaker 1: making money. Um, the only thing sort of standing in
Speaker 1: their way, I guess is regulation on that point. But
Speaker 1: I do wonder if you could get a more interesting
Speaker 1: response from some of the banks, like maybe altering the
Speaker 1: I p O process itself so that you don't abandon
Speaker 1: it completely, but maybe you do something that's more similar
Speaker 1: to an auction process, where you know, you you blast
Speaker 1: out prices to a bunch of investors at one time
Speaker 1: and then put it through some sort of automated system.
Speaker 1: We've talked about that process is similar to that in
Speaker 1: the bond market. So I don't know, I think it's
Speaker 1: going to be interesting to see this fight or the
Speaker 1: scrum over public markets and developed between the banks and
Speaker 1: the exchanges. Yeah. No, I mean it's it's definitely true.
Speaker 1: I think, you know, there's now there's so many different models.
Speaker 1: The IPO model obviously with just still a huge the
Speaker 1: back model, this model, this model, plus the capital raise.
Speaker 1: You know, I remember like a two thousand, like twenty
Speaker 1: years ago, you had the first sort of experiments with
Speaker 1: things like auctions and no pops and stuff, And I remember,
Speaker 1: I think Google tried to go or they did try
Speaker 1: to go public in an unusual way. Yeah. But but
Speaker 1: now it feels like perhaps some of these early ideas
Speaker 1: that never quite got off the ground seemed to be
Speaker 1: maturing and ready to go, and we can actually start
Speaker 1: to compare and contrast the different uh the most efficient
Speaker 1: ways and the best ways for companies to go public. Yeah,
Speaker 1: for sure. I also found John's points about getting more
Speaker 1: of a float more liquidity out of a direct listing.
Speaker 1: I thought that was interesting. But I have to confess
Speaker 1: that as a former fintech reporter, part of me is
Speaker 1: just really jaded, and every time I hear someone say
Speaker 1: the word disrupt a particular process or disrupt the banks,
Speaker 1: I immediately just think regulatory argage, trage. So much of
Speaker 1: disruption is basically regulatory arbitrage, And I think that gets
Speaker 1: back to the questions we're asking John about whether or
Speaker 1: not this is basically a way to avoid some of
Speaker 1: the red tape around the traditional I P O process.
Speaker 1: I think those are valid points, and I don't think
Speaker 1: we've seen the end of that conversation. Yeah, I'm sure
Speaker 1: regulatory arbitrage or just sort of the patchwork of regulation
Speaker 1: is an important part of it. But the other thing
Speaker 1: to me is that you know one of the huge
Speaker 1: themes for a long time and you think about tech
Speaker 1: when you said fintech is over my mind, when it's
Speaker 1: just like network effects and the sort of the big
Speaker 1: index providers, the big exchanges, our networks, and so there
Speaker 1: is a sense that regulation aside that these companies continue
Speaker 1: to sort of extract value from the ecosystem overall or
Speaker 1: find ways that they can build up their business or
Speaker 1: build them vertically or horizontal horizontally. I don't know which,
Speaker 1: just the exact one I'm looking for right now, one
Speaker 1: of those two, but that the sort of whether it's
Speaker 1: in tech, Facebook, Amazon, Nicey, Nas Deck, etcetera, there all
Speaker 1: like sort of these very central infrastructure players in any
Speaker 1: industry finding the way to sort of make more money
Speaker 1: while the peripheral players finding it harder. Yeah, you don't.
Speaker 1: You don't seem very compelled about it. You're like whatever,
Speaker 1: I'm trying to chack fully. It's fine. No, it's just
Speaker 1: like what I probably changed the subject. That's fine, we'll
Speaker 1: have to talk about it. So okay, Yeah, let's just
Speaker 1: leave it there. I don't wanna because after you leave
Speaker 1: me hanging like that. Let's let's just write this up
Speaker 1: really bad. Okay, I promised we will talk more about
Speaker 1: it later. Okay. This has been another episode of the
Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway and I'm Joe Wisn't Thought.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our guest on Twitter, John Tuttle, He's at j R Tuttle.
Speaker 1: Follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesca Levie at Francesca Today,
Speaker 1: and check out all of our podcasts under the handle
Speaker 1: AD Podcasts. Thanks for listening.