We talked to the president of the Nasdaq Stock Exchange about IPOs, IEX, and how to revitalize the market
- Nelson Griggs, president of the Nasdaq Stock Exchange, heads up the listing business at the $12 billion financial-services firm.
- Griggs told Business Insider that Nasdaq is hoping to attract 150 listings to the exchange by year end. There have been 74 so far.
- He outlined Nasdaq's blueprint to make the capital markets more attractive for firms to go public, his thoughts on rebates, and upstart exchange IEX.
Nelson Griggs knows about competing for business in a tough market. He joined Nasdaq's listing business in 2001, right after the dot-com crash. During his first full year at the company, in 2002, just 70 companies went public in the US, compared to 406 IPOs in 2000, according to data from Renaissance Capital.
Today, Griggs, who was just handed a new job title as president of Nasdaq Stock Exchange, finds himself in a similarly dry market. A mere 100 companies went public last year. 2016 is on course to be better, with close to 74 IPOs on Nasdaq so far this year. The historical Nasdaq average, for comparison, is 150. So Griggs and his team are chasing every single listing, from small-cap tech firms to large pharma companies.
The competition is fierce. On Griggs' radar are upstart exchanges IEX and Bats, which are looking to lure companies and exchange-traded funds (ETFs) from Nasdaq to list on their venues. Then, of course, there's the New York Stock Exchange, Nasdaq's most bitter rival, which this year welcomed Blue Apron and Snap. That was a blow to Nasdaq, which considers itself the go-to exchange for innovative technology companies.
Business Insider recently caught up with Griggs at Nasdaq's MarketSite in Times Square to discuss the IPO market, rival IEX, and Nasdaq's Revitalize initiative, a blueprint to make the capital markets more attractive for companies thinking about going public.
This interview has been edited for clarity and length.
Frank Chaparro: How's business going?
Nelson Griggs: Business for Nasdaq is terrific. Our stock is at an all-time high. We had an excellent quarter. But the listing business is a bit more muted than we expected.
So you probably know what drives us is how many companies we can get to list on the exchange. But that is subtracted by how many companies leave us from M&A or other areas. So, on the M&A front, we don't control that, but this year is better than last year. We are seeing less M&A activity, but that can pick up at any point. Same thing on the IPO side. We've had 77 initial public offerings. We would love to see 150 in a year. That's kind of a benchmark for us. It's the historical average. Clearly, when you do the math on that you see we are short. But we do anticipate a pretty good fall. Companies will line up for September, November, and December. There will be a good handful in September. But there are a lot of TBDs there.
Editor's note: Nasdaq's stock hit an all-time high of $77.12 on August 16. It is currently trading at about $75.
Chaparro: What is indicating that the fall is going to be a good time for business?
Griggs: There are a number of companies right now making the decision with their boards. It's not a question of if they want to go; it's a question of when they want to go. It is a question of what their bankers are saying about their valuation, and whether they can get their board to agree to that valuation.
The average Nasdaq IPO - and we are not taking credit for this - is up 17%. It's probably happenstance. Some of the real growthy ones have done really well, whether it's a RedFin or Okta. We've had some quality deals. Generally, however, the buy side is thinking, Well, if I can buy the top five Nasdaq 100, or what have you, and that's outperforming at this time of year, do I want to take the risk on an IPO?
As a result, pre-IPO companies are getting a valuation that is less than what they would like to get. So do they decide to go right now? Or do they wait? But it's been like that all year.
Chaparro: What's more important to you: getting as many listings as possible or getting the best listings?
Griggs: For us, it is quantity and size. More companies mean more listing revenue. But larger companies can drive more economics for an exchange in general because of the trading component. That is, the revenue of off trading, but that is pretty hard to predict for most companies. I'd say the average IPO is a pretty small public company compared to the median Nasdaq company size or even [New York Stock Exchange] size.
To be in the Nasdaq 100, you need to be $13 billion on the floor. Not too many IPOs are at that level. And it's hard to pick winners too. I think us and [the NYSE] have the same mentality today. They've pivoted dramatically over the years. But every deal is competitive between us. Every exchange wants every single deal to come to them, regardless of size. So it is both.
Chaparro: It seems as if having less activity in the IPO market has made the listing business even more competitive. How are you and your team navigating this new environment?
Griggs: Welcome to my world! You can't predict this. Neither can New York. About how often companies are going to go and when companies are going to go. We need to be a good partner to companies. Support them pre-IPO, support them in any aspect of what it takes to prepare for that, and also gear them up to be a successful public company. We just have to live with that.
Chaparro: Specifically, how has the strategy shifted to adapt to a drier IPO pipeline?
Griggs: We are talking and being engaged more on the investor-relations side than we ever have been. So another component you might have seen or heard - the brand side is very important. That will always be there. But if do you look at how stocks have performed post-IPO, that is catching the attention of the board members.
Nasdaq is in a unique position that we have the adviser asset, the corporate solutions, to really go in and help them understand more about how investors are reading the market. Such as, what are some things to learn from the companies that have gone, in terms of telling their stories more effectively, and preparing for that level of volatility? Preparing companies more from an investor-relations standpoint is something we are very, very focused on.
And companies are more receptive than they ever have been. When the market is hot and everything is going, people spend a lot less attention on that, but today they are really looking for our guidance, our advice, to help them prepare to be a public company. It's not as glamorous as, "Hey, let's do all the visibility and public-relations stuff." But if you talk to the CFO, they are viewing us now as a partner in that process, which is cool.
Chaparro: David Swensen, the head of Yale University's $25 billion endowment, came down hard on Nasdaq and NYSE for the practice of rebates, in his recent New York Times op-ed. As did IEX president Brad Katsuyama, who once said: "They cause clear and significant harm to investors." What's your defense of rebates, and why shouldn't they be considered "kickbacks" to brokers?
Griggs: I'll answer this in two parts. First, liquidity is not free. If you look at the average US stock, let's say the top 500 or top 1,000, they trade very well and are very liquid. When you get to the ones below that, which is the vast majority, many of those stocks are illiquid. So how do you incentivize market makers to provide support? Rebates play a very important role in that. And if you suck that out of the marketplace, and say, "Let's just have stocks trade," then who is going to support the stock when there are no natural buyers and sellers? The vast majority of stocks, we believe, benefit from incentives to liquidity providers.
The second piece is connected to our project Revitalize. It has a lot to do with a broad-based plan to make the public markets more inviting. There is a component in Revitalize that talks about [unlisted-trading privileges]. So our proposal there is to make it so that emerging growth company stocks trade on their listed market. These are the stocks trading 10,000 or 20,000 shares a day. This doesn't mean competition isn't valuable, but today volume is very fragmented. It is hard to provide these companies the level of support they need. We think we could provide more analysis if all that trading is on Nasdaq. There's not a lot of money to make in those stocks. Any additional money we make we plan to commit into the system to incentivize market makers. If that volume is all in one marketplace, using machine intelligence, we can provide the right incentives at the right time to the right market makers.
We are definitely believers in the maker-taker model. We don't know if it is at the right level right now. But we definitely believe you have to pay for liquidity.
Chaparro: IEX is looking to go after you and NYSE's listings. It's been a year since their request for exchange status was approved by the SEC. What's your impression of them and what they are doing?
Griggs: Getting over the original consternation of their SEC process, looking back it was probably a good thing because it shows there is more of a willingness to let exchanges be innovative. We possibly can do some of the different things we've been thinking about doing. New York maybe thinks the same. That was not really possible until the SEC broke from their historical rule-making process with RegMNS and then approving IEX's request for an exchange license.
This has given us more internal confidence that we can be creative and provide different types of services. We have a lot of things we are proposing. We think IEX came along with an innovative solution. It was a good thing they got through the SEC process because now we can do some of the same sorts of stuff.
Chaparro: But this is a pretty big change of heart, no? Before they got exchange status you and NYSE lobbied aggressively against it.
Griggs: Listen, for 10-plus years we were told we weren't allowed to do any of these things. In fact, we tried to introduce something very similar to IEX four years ago. And we were never allowed to. There was always this idea that you needed to have immediacy. So we had a viewpoint: Why now and why them? But then you get over it and move on, and you figure out how to turn lemons into lemonade. So we are over that. That's history, and now we are moving on.
Chaparro: Are you concerned they will successfully lure listings off your exchange?
Griggs: IEX today, they are a good dark pool. They have 2% market share.
At 2% it's hard to say. They've had their exchange license for a year, but it seems that's where the needle has been pegged. So when we talk about what people want in a listing venues, it is what we provide across 2,700 companies: the right surveillance, the right liquidity, market share, and visibility. All these things, we think, make up the guts of our value proposition. And we think it stands up pretty well against IEX.
We look at every competitor and we take them all very seriously. We are having conversations with companies who have met with IEX. They have a sales team talking to our companies. But we have a deep belief in our value proposition.
Chaparro: Shifting gears, and focusing on Nasdaq's Revitalize initiative to make the capital markets more appealing, why do you think companies are waiting longer to go public?
Griggs: Let's assume the buy side likes the company. There is always going to be a valuation question. Is there a right valuation? But aside from that, there are three different areas to focus on.
Most of Revitalize focuses on the cost of being a public company and the question of, how can you create a better environment to say it's worth going through that process? Cost is part of it, but another factor is the short-termism of the markets. Companies look at the press and the short-term nature of the marketplace. That is probably keeping a lot of the technology companies from going public because they're asking themselves, "Am I ready to be public? Do I want to deal with the quarter-by-quarter environment?"
Chaparro: What are some of the low-hanging fruits that can be easily addressed that Nasdaq is recommending?
Griggs: For us, the proxy process. Both the proxy firms and the proposal process. The quarterly disclosure - your 10Q is almost identical to your press release. The press release is probably sufficient. There are a lot of little things that can be changed. But the main theory under Revitalize is that Apple is required to do the same thing as a small cap. And that shouldn't be the case. The costs associated with that for a small cap is a couple of headcounts, which for them is big money. Large caps can put money toward this, no big deal. In general, the pendulum has swung too far. We can take some things off the plate for small caps, especially the things that don't add any value.
Editor's note: A "10Q" is a performance disclosure that public companies are required to submit to the Securities and Exchange Commission quarterly.
Chaparro: What are the consequences of not addressing these issues?
Griggs: Today, there are roughly half the public companies there were 30 years ago. If fewer companies go public, there are fewer companies for investments for 401(k)s. And also companies create most of their jobs post-IPO. So you could have a big economic impact on job and wealth creation if fewer and fewer companies go public.