How much value do public markets add?

By Felix Salmon
February 18, 2011
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It wasn’t much of a debate, sadly, when I talked the decline of the public markets with Andrew Ross Sorkin: he told me that he pretty much agrees with me. He did manage to drag an actual policy prescription out of me, though — the idea that some kind of Tobin tax might alleviate the problem a little. But truth be told, I’m still not sure just how big the problem is. Has anybody ever tried to quantify the societal benefit of public stock markets, or the social harm that might be done if Facebook just stays private? Where would you even begin?


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Aren’t private markets just public markets with no regulations and no oversight? If there are no markets for trading shares of companies, public or private, there won’t be investments in new companies, as the investors need liquidity events, unless all new businesses plan to pay healthy dividends. And who will risk capital just for dividends?

The companies Felix mentioned in this video, who he thinks don’t need public markets to raise capital, would never be able to raise equity without the existence of public markets. Also, they are the exceptions rather than the rule, and have only been able to raise the giant sums of money after proving they.., , well I don’t know what they have proven, but there are only a handful of private startups that are able to raise that kind of money, and they can only do it because they have a great hype machine working for them. That model can’t be used by every other google wannabe (or Apple wannabe), because only the companies that stand out can attract that kind of attention, and they can’t all stand out from the rest.

The high frequency trading that Felix laments does generate undeserved profits for the those traders, but only affects transient prices of stocks. The long term values of companies are not that greatly impacted by high speed trades, and anybody who wants to play in that arena better come equipped with very fast computers and networks and really slick algorithms.

With no public markets, you will have a third world economy. We don’t need to throw out the system because of some flaws, we just need to fix those flaws.

Posted by KenG_CA | Report as abusive


A Tobin Tax would have no effect on the fact that Facebook, Google and Groupon haven’t listed their stocks publicly yet. Surely you realize that.

In your interview with Sorkin, you made the interesting point that by the time these companies list, they are already huge – basically, instead of making a wide variety of public shareholders rich, they make their founders and private investors rich. But that’s because founders and early stage investors have become more savvy and aggressive.

Stick with the angle about private vs public investment privilege – HFT and Tobin Tax is a total red herring which I’m not going to get into here, although I think KenG has it right when he says it “only affects transient prices of stocks. The long term values of companies are not that greatly impacted by high speed trades”

Posted by KidDynamite | Report as abusive

“Where would you even begin?”

1. Take the total public market capitalization, forecast it, and apply whatever you think the liquidity premium is compared to privately held companies.
2. Take total trading, forecast it, and apply the difference in transaction costs between public and private companies.
3. Some sort of measurement of the benefits of the faster and more accurate pricing mechanism. Could be included in #2 I suppose…
4. Deduct losses due to dispersed ownership (lack of management monitoring, bad corporate governance structures, etc.).

That’ll put you quite close I think.

Posted by a.soffronow | Report as abusive

OK, leave them private but impose disclosure requirements on ALL companies.

Posted by Setty | Report as abusive

Perhaps private markets are likely to have less accurate price discovery over time. If true, we should expect to see the opposite movement in twenty years or so.

Posted by Chiguy1001 | Report as abusive

We could also move away from continuous trading and instead have a call auction every week, day or hour, depending on the liquidity of a particular issue, kind of like SecondMarket for all stocks.

@KidDynamite: It’s likely a second order effect, but if issuers like Facebook hate HFT, they are less likely to list publicly.

Posted by guanix | Report as abusive

I want to add one more thing – what would keep a private market from allowing the same kind of high frequency trading that warps prices just like the public markets do now? As a private market became more popular, the trades would be more frequent, and eventually it would have the same issues as the public market, but with no protections.

Posted by KenG_CA | Report as abusive

That the stock market isn’t as relevant today as it was in 1997 (the year cited in the original NYTimes piece) is just a function of bad timing. In 1997, the market was concluding the biggest bull run in its history. Obviously everybody wanted to list on the public exchanges. In 2011, the market is concluding a pretty awful decade, with the Nasdaq still down 40% from the peak and the S&P 500 in negative territory when adjusted for inflation. Listing in this environment isn’t all that attractive.

It’s even less attractive if you are Facebook and the options are 1) list publicly for a reasonable valuation, or 2) get an insane valuation of 100x PE in the private market.

As soon as the market puts together a healthy bull-run, companies (Facebook and Twitter included) will be lining up to list on the public exchanges.

I’ve written longer piece of this issue here:  /how-many-tulips-to-buy-facebook.html

Posted by marginofsafety | Report as abusive

How about we agree that it isn’t a zero sum game? Both sides gain by having the other around. Private equity brings the early fuel to launch startups public as an entry into market instead of an exit strategy. Private equity gets to run the show in the early days that matter most, shoulder less risk as the company becomes public, startups keep more of their companies. Add in crowd sourced seed capital and social media market incubators, you get what we have at Check us out.

Posted by GrowPublic | Report as abusive