Odd Lots - This Is The NYSE's Plan To Win More Direct Listings

Episode Date: November 9, 2020

This year's stock market boom has coincided with a boom in new listings. There have been plenty of IPOs, numerous SPACs, and an uptick in companies doing direct listings on the exchange. That third category has gotten relatively less attention, but it potentially represents a powerful offering from the NYSE, which unlike many other financial companies, has performed quite well. On this episode, we speak with John Tuttle, Vice Chairman and Chief Commercial Officer at NYSE about how direct listings work, and why the NYSE sees them becoming a much bigger vehicle for going public in the future.See omnystudio.com/listener for privacy information.

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, you know how people talk a lot about how big financial institutions and financial stocks in particular just like haven't really done very well lately?

It's been a long time, sort of a seeming permanent state of slump. Yeah, I think it's easy to forget in 2020 when we have all these. headwinds for the banks like loan losses, credit provisions, building up, things like that, that even before now, there was this big debate about whether we were in a secular or a cyclical downturn for banking, and especially investment banking, right? You had all these new rules that came in after the 2008 financial crisis, and there was a lot of talk about whether or not banks could ever get back to the days of making big money. Yeah, that's exactly. That's exactly. Exactly right. Even prior to this year, if you just look at sort of the main financial sectors of the S&P, lots of questions about financial company's business model in an era of mediocre growth, very low interest rates. Like there's just, this has been a sector that people haven't been into for a while.

Yeah. And of course, ultra low interest rates don't really help on the lending side either. So yeah, it feels like there have been, well, there has been a decade of challenges. for banking. But, okay, so, but also what I said before was kind of a lie because not all financial companies have struggled over the last decade and some are doing phenomenally well. You're going to have to narrow that down for me. So are you talking about non-bank financial companies? Yeah, so basically there are other parts of Wall Street besides the big banks that are killing it. And so if you look at, say, the last decade, a company like Goldman Sachs, stock, you know, pre-dividends is only up 17% over the last decade. But some of the other sort of infrastructure parts of the business, exchanges doing phenomenally well. And ICE, the parent

company of the New York Stock Exchange, they're up 300% other big sort of exchanges, platforms, index providers, doing phenomenally well. So when we talk, talk about financial is not doing well. We're talking about banks, but actually a lot of parts of Wall Street really are, have been on a phenomenal run. Yeah, I think that's right. And of course, you've had a, you've had a pretty good year for trading revenue because you had a lot of market volatility. And now you've had a big boom in bond and debt underwriting as well, because everyone's rushing to issue. So, yeah, there are parts of the banking system that are doing well. And the non-banks, of course, up until 2020. I keep caveating this. Wait, what's your caveat? Oh,

that it's not just this brief period that we're talking about the sort of, yes, absolutely. Yeah. So today we're going to be talking about one aspect of, I guess, what you would call Wall Street that is doing a phenomenally well, one interesting business. One other thing, Tracy, before we get to our guest, this has been quite a year for public offering. Yes. Even aside from traditional IPOs, we have seen a lot of SPACs, for instance, a new type of public listing or a new way of going public without actually going through the IPO process. So it's been an interesting time in equity capital markets. Yeah, it's super interesting because in addition to IPOs, we've had the SPAC boom. And we also have this sort of emergence of direct listings, which is companies saying, you know, we're just going to start trading our shares. the exchange and the market will set the price and we don't need to do the traditional IPO road show. And, you know, this is also a growing area of, or yeah, area of a new public listing. So today we're going to talk about the exchanges and that in particular. I'm very excited about our guest.

We are going to be speaking with John Tuttle, vice chairman of the New York Stock Exchange. He is a 14-year veteran of the exchange. He works on all areas of capital markets, IPOs, SPACs, and direct listings. So sort of a fascinating person to discuss the NICES role and all this. So John, thank you very much for joining us. Great to be with you guys. So it has been, I mean, is that fair like this to characterize like there is a lot of excitement these days about public markets, it feels like, in a way that we haven't seen in a while.

Yeah, I completely agree. And, you know, we are, we're in the four. quarter now, but I'll, you know, I'll give you these two points. August was the busiest month we had in over a decade. In August, you know, when it comes to new equity issuance, IPOs, and August is traditionally one of the slowest months of the year. And September of this year was the busiest month for IPOs in the over 200 year history of the New York Stock Exchange. So the market is open. It's open for new equity issuance, whether that come in the form of IPOs, SPACs, or directs. listings. So can you talk to us a little bit about that third option direct listings? Because my

understanding is that even though there's a lot of talk about that, we haven't necessarily seen that many in recent years. In fact, I guess the most famous direct listing that I can think of is Spotify, but that was a few years ago. So what's going on there and why the excitement over this particular route to public markets? Yeah. Really, if you take a look back. Over the past four years, we've created more pathways to the public markets than had been created in the previous two to three decades. The direct listing was one of them. So you're right. The first one was a few years ago in April of 2018 with Spotify. Barry McCarthy, the CFO of Spotify, is really an independent thinker. He helped pioneer this

process, someone we are proud to work with in creating a new pathway to the public market. And as we expected, you know, it would be a slow start, but now you're starting to see the the slope of the curve rise. So we had one in 2018, one in 2019 with Slack. And then we had two on the same day in September with Palantir and Asana. And it might be helpful just to take a step back and describe the differences between a direct listing and an IPO because sometimes parts of them get conflated. But an IPO is the most well-worn path to the public markets.

It's been around for a long time. A company hires an investment bank and other advisors to, sell shares into the market and they're going to raise capital that they can use to grow and expand their business, launch new products, tap into new geographies. And they conduct, you know, they file an S-1 if they're a U.S. company. They file an F-1 prospectus if they're a non-U.S. issuer. And then they go out and they talk to institutional investors, market the transaction. And the night before they're listing on the New York Stock Exchange, they get together and they say, okay, we agree to sell our shares for this price. Well, that's where.

they're sold to the institutional investors. That's not necessarily where the stock is going to open the next day. And so what happens after you see the bell ring and the price discovery on the trading floor take place is the beginning of secondary trading. And when that happens, that's really the market valuing this company, not necessarily a small group of bankers and other advisors who, by the way, are the best in the world at what they do, but there's still a dislocation. It's not the most efficient pricing mechanism for an offering. And so you see a stock open at maybe 20%, 30%, and in some cases recently, over 200% higher than that IPO price, which is referred to as, quote unquote, the pop. Sometimes people want the pop. Most of the times they don't want that big

of a pop, 200%. Now, a direct listing is a little bit different because every company goes public for different reasons. There's a variety of reasons, including that raising capital, liquidity for their shareholders, for their employees and other investors, having a share currency that they can use to conduct mergers and acquisitions down the road, whether it be branding as well, or even just things further down the list of credibility. If you're a software company and you're listed on the public markets, your clients know you're not going to go out of business overnight and leave them high and dry. So in a direct listing, the priorities are a little bit different for these companies. These are companies that want the benefits of being a publicly

traded company, most of which I just enumerated, but they don't necessarily need to raise capital at the time of their listing. So if you think about Spotify, they had cash on their balance sheet. Slack had raised, I believe, close to a billion dollars in the private markets prior to their listing. Same with Palantir and Asana. And so they didn't want to come to the market, raise capital at a arguably higher than necessary cost of capital being exemplified by that pop. And they said, is there a new pathway to the market? So we worked with Spotify. We worked with the SEC and other stakeholders to create this direct listing pathway.

And so now, you know, this is an option for companies. Like I said, we started slow. We're seeing more companies plan for them. you know, in every conversation I'd have with CFOs and company founders, this is always a topic. And we're going to see more of them as we go into 2021. Now, it's also an important distinction to make between the IPOs. The IPO, that bank also helps you set up your roadshow. They provide stabilization activities.

So they help support the stock in its early days. That doesn't happen in a direct listing. There's no underwritten offering. No shares are being sold to the public. So really, you're relying on. on the NYC's market model. You're relying on the company to meet with investors as well as part of this public debut in planning for the public debut. I was going to ask a sort of question about the mechanics of the direct listening, but before I do,

before I forget, do you think that like in 2020, the roadshow, the sort of informational services that the banks offer where they introduce a new company to prospective investors has become less necessary. I'm just thinking about like with the internet and all different ways of sort of doing research and getting information out there. Is that particular aspect of the going public, the sort of the introduction aspect, is that declining in terms of its necessariness for companies when they go public? It is changing. And that is a fact. There is no way we're going back to the 2019 style road show where a company's management team gets on an airplane, around the world or across the country and back-to-back meetings with institutional investors.

We saw during 2020 that there are new tools, so whether it be video conferencing, teleconferencing, etc, where you can have meaningful interactions with investors and not have to get on an airplane to do it. So that is a, when we talk to the companies that have gone public, you know, look, they'll be the first ones to tell you. There is nothing like a face-to-face interaction, whether that's with a customer, with an employee, or with an investor. But when it comes to coming to market, the efficiency that they're able to have by conducting the quote-unquote road show virtually is well-received. And I don't think we're going back to the ways of 2019 and prior. I have a related question before we go into the details on direct listings. But all of the criticisms of the IPO process, the idea that the banks charge big fees and the idea that maybe the stock gets mispriced in some way or the company is.

effectively leaving money on the table when they get the big pop on the first day of trading. You could have made any of those criticisms over the past decades, certainly, and maybe even beyond that, what's changed recently so that, you know, people are talking more about the direct listing or the SPAC process? What was the catalyst for this current conversation? Well, I think there's been a pent-up demand for new pathways to the public market. that are arguably more tailored to meet a company's objectives. So again, the IPO is a well-worn route. A lot of companies will take that route and like the process,

even though it may result in arguably less efficient pricing than you would have through other routes. But for companies that, again, didn't need to raise capital at the time of their listing, either because they had cash on their balance sheet from operations or they were able to get investment in the private markets, they have a new pathway that's more tailored to meet their objectives. companies that want certainty of execution and want their public entrance to be more akin to an M&A transaction than the traditional IPO now have the SPAC.

And now we're even working to combine the best of some of these where we filed with the SEC last year, received approval from the staff and are just waiting on final sign off from the commissioners to bring together the direct listing with a capital raising component as well. So there are more pathways to the public markets now. that's why you see companies more actively pursuing different routes. Now, I should also make a point, but that there's been innovation within each one of those pathways. So some of the frustrations companies had or institutional investors had around things like the lockup or the allocation process are all changing. So if you look at some recent IPOs, instead of the traditional 180-day

lock-up period, you've seen some companies incorporate more dynamic lockup period. So if there are certain thresholds or trigger points that are met, certain events happen when it comes to the ability to sell more shares to the public or employees, they will sell more shares. One of the criticisms by some investors about the direct listing was that there was no lockup period. And they thought there was not enough control over the float and who had access to selling shares. So with Palantir, they incorporated a lockup period. So not only are there more pathways, but there's more innovation within each one each of those pathways as well. June Grasso inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make

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And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you. you get your podcast. Talk to us about that the combining of the direct listing of the capital raise. So as you set it up, most of the direct listings that have happened so far were companies that had enough capital or raise enough capital, didn't need to get any of that IPO cash. Now you've said you have staff level approval for combining the two. What is the issue there? And once it's sort of fully unlocked or once it's sort of fully allowed, how?

many more companies just sort of do you think that opens up the interest if they can also raise cash from a direct list? Yeah, we're excited about the direct listing plus capital raise. And it just highlights that, you know, we've been leading a lot of this innovation in the capital markets because of how we trade stocks, our market model, the things were able to do at the New York Stock Exchange. Now, before I get to that point, one thing I would say is that if you look at, and it helps in explaining why the direct listing plus capital raises so interesting. If you look at some of these recent technology IPOs, there has been a very small public float. So less than 10% of the company being offered in an IPO. Now, if it's an

exciting company, a consumer-facing brand, an enterprise tech company, or a company coming from a sector or space where there's going to be a lot of investor demand, when you're only floating a very small percentage of the company, you encounter a supply demand dislocation. Right. And, And so there's not enough supply coming into the market. There's overwhelming demand. And that's what's leading to this quote unquote pop. What we saw at the direct listing is that you have a much, much, much bigger public float that's out there. Spotify allowed 90% of their shares to be traded in their direct listing.

What that meant was you had more robust price discovery, more buyers and sellers could come together. And that ultimately led to more liquidity and more efficient pricing. So if you look at Spotify, Slack, and Palantir, three out of the four direct listings that have come out, those three, their opening trades stand among the top 10 largest opening trades in the history of U.S. capital markets. That's because you had liquidity, you had price discovery. You also had the ability for investors that normally would have had to wait 180 days to institutional investors to start building a position without running up the stock to be able to build a bigger position more quickly because you had that liquidity. So after those direct listings and the performance we saw from an exchange standpoint and by all meaningful metrics, less volatility, more liquidity than you had in a traditional IPO. We started talking to market participants. So that companies, banks, investors, regulators, others, and said, how can we improve this?

We realized there was strong demand for saying, hey, we would love to incorporate the ability to raise primary capital or fresh new capital for the company as part of the direct listing. So this was not a solution in search of a problem. There's demand in the marketplace for this. So we worked with the SEC and others to file rule changes with the exchange. or all of our rules have to be, all of our rule changes have to be blessed by the SEC and go through a very rigorous vetting process to allow for that to happen. So what we had proposed is for if a company wants to pursue a direct listing and include a primary capital raise, they will file their registration statement just like they will with an IPO. They will disclose the number of shares they're willing to sell. They'll disclose a range at which those shares will be sold and then that they're willing to sell those shares.

And that whole block of shares will need to trade at one price, one time, and that's the opening auction of the NYSC. So it's one moment in time. That'll be the primary capital raise, but it's going to be raised at the market price. So it's, again, it's contrary to an IPO where you have, again, people who are very good at their job. setting the price, but oftentimes there's a huge dislocation between the price they're setting and what the market's actually valuing it. You're going to open your stock and raise capital at the market price. Since we're on the topic of the SEC or since you mentioned it, there are people out there who make the argument that IPOs, you know, it's not just about the pricing

process and the due diligence of the banks, but it's also about certain protections for new investors. What happens to those in the direct listing process? And what do you say to critics who think that this is basically a regulation light way for companies to go public? Look, there's, there have been some criticisms of the direct listing, but oftentimes those come from the folks that are being disrupted along the way and in the process. So these companies are filing a prospectus with the SEC. So an S-1 or an F-1 registration, they're still subject to the rigorous requirements to be listed on the New York Stock Exchange. They're still subject to the ongoing regulations of the New York Stock Exchange and the SEC. So it's a different pathway to the public markets. It disrupts some folks that have

been involved in the process. And getting resistance along the way is a sign that, from my perspective, that we're doing something right. You know, you use the term market model a couple of times in your description of how you operate. What does that mean specifically when you talk about the power of the NICES market model? Can you describe that term a bit more? Yeah, absolutely. And happy to get a little bit more into market microstructure. But the New York stock. Our listeners love that stuff. I know. This is the right audience. So I'm excited. So the New York Stock Exchange operates a market model. So how we trade your stocks, and it's differentiated from not only any other domestic exchange, but any other global exchange as well. So what does that mean? It means that at the very base layer

in the United States, there's something that's any exchange in the United States, there's something called a competitive market maker system. So the exchanges incentivize market participants to quote in a company's security. There's no obligation to do that, but if you show up, you are incentivized. Now, that's table. stakes in the U.S. market. On top of that is what we layer on, and it's called a designated market maker. So every company that's listed on the New York Stock Exchange interviews the market making firms and selects the firm that they want to represent them. That's in addition to all those competitive market makers that are quoting in the stock. But their designated market maker

has an obligation to be on the bid and the offer of that stock at all times. They cannot step away on election day or when there's market-wide volatility or some sort of single-stock event. So they have a regulatory obligation to be there. They have an obligation to be setting the best quote in the marketplace, a relatively high percentage of the time. And they have to layer interest. So meaning put orders in the order book above and below the price to help dampen volatility. Again, those are obligations. They're not voluntary. And that results in no matter how you look at the data, stocks to trade on our market trade with narrower spreads, less volatility, more depth in the order book, which can ultimately help lower companies' cost of capital. Now, how that

helps in a direct listing or in a complex transaction is, you know, you have the market model, you have best in class technology, and you have human judgment all coming together at one place. So you get that certainty of execution. You know, companies want to de-risk when they're coming to market. And so that's one of the reasons why 24 or the 25 largest IPOs have put their trust in that model. The direct listing, you don't have an underwritten offering. You do not have a stabilization agent there helping support the stock. So having that designated market maker, when you're coming out into the market with those quoting obligations, helps provide superior market quality, helps you come out of the block strong, and helps build investor confidence. Because the last thing

you want to do is open the stock at the wrong price, have it start whipsawing, and impact investor confidence and just have that bad market quality amplified even more. Sorry, can you talk a little bit more about the allocation process in a direct listing? So in a traditional IPO, the banks go out and they sound out various types of investors and they ask them how much of a stock they might be interested in and at what price and they help to build the book around that. But how does the actual allocation work in the direct listing, like who is able to get the shares? Yeah, really good question. And it's also something that we were proud to see the SEC wrote in our, in the approval order for our direct listing plus

capital is that what we're proposing with the direct listing and ultimately direct listing with the capitalized is a more democratized process, more democratized access to the marketplace. And so you nailed it with an IPO, a company works with their bankers, they go out, they do a roadshow, they talk to institutional investors, they build an order book, they place shares with those investors, and then secondary trading begins on the NYSC. In a direct listing, the company actually does much of the investor education. So they'll do an investor day. They'll talk with investors about how a direct listing works. They're limited in some of the things I can talk about. They can't really build a book. And then on day one, you know, the stock is free to trade for the current shareholders,

for anybody out there in the, whether they be institutional investors or retail investors that, you know, aren't current investors, they're able to buy into those shares. So there really isn't an allocation process. The only difference, I would say, is that for a direct listing, one of the requirements is that a company has to have, or currently has to have, a fairly distributed private shareholder base. In an IPO, you don't. And so the reason is the NYSC and the SEC have rules saying that prior to a company going public or to commencing trading on the NYC, they have to have at least 400 roundlot shareholders. A round lot shareholder, meaning holds more than 100 shares. And that helps ensure sufficient liquidity

on day one. So in an IPO, the underwriting bank will talk to a bunch of investors and they'll place the shares with more than 400 investors and meet that distribution requirement. In a direct listing, because you're not allocating shares, you need to make sure that you have at least 400 shareholders prior to your listing. So for companies like Spotify, Slack, Palantir, Asana, they had fairly robust private market trading in their stock. And that coupled with employee ownership met that 400 round lot threshold. But that's the currently the the most meaningful difference between the allocation process and distribution criteria between an IPO and a direct listing. Now, speaking of a Palantir, that was the most recent one, or I think actually they

listed on the same day as Asana. But Morgan Stanley was involved in the Palantir direct listing. Explain to us the role of banks. So even though it wasn't an IPO, Morgan, Stanley, one of the big investment banks, did have some role to play. What is that role for a direct listing? Yeah, great question. So since there aren't underwriters, the role of the banks, and the banks will always have a role in all of these pathways to the public markets. But the role of the banks was to serve as a financial advisor. So capital F, capital A, official role. Morgan Stanley and others served in that capacity. Morgan was the lead on those transactions. And they did multiple things. One, they helped advise the company on preparing for a direct listing.

B, when it came to the execution of the transaction, two things happen. In an IPO, the bank works with the company to establish an IPO price. Since there is no IPO price, in a direct listing, we have to establish what's called a reference price. Now, prior to trading, commencing, there's always a reference price. The IPO is the IPO price. On a typical day, it's the price of the stock closed the night before. but in a direct listing, we need to establish this reference price. No shares trade hands. No transaction takes place. It's just a price at which we can input into our system so we can

begin accepting orders and where market participants can start thinking about building a bulk around. And so the role of the New York stock is we consult with the company's financial advisor to help establish that reference price the night before. And then once trading begins, the market maker, who I spoke about, the designated market maker, that market maker will consult with the financial advisor before opening the stock for the very first time. So the underwriter plays a slightly different role, and that's as a financial advisor in a direct listing. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes, because

no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR. I have a different question about the Palantir direct listing. So from what I remember, well, you were talking about how one of the benefits of doing a direct listing is that you don't have to have the lockup period that you would have in a traditional IPO process. But I think Palantir did away with that or they opted to have a lockup period even though they were doing a direct listing. Why did they do that exactly if that's supposed to be one of the benefits of going this route to public market? Well, good question, Tracy. And companies go public for different reasons.

They pick different pathways for different reasons. And then within those pathways, they can innovate how they choose earlier direct. listings did not necessarily have a lockup period. Some thought of that as a benefit. Now, Palantir said, we want to have one. And so they had the ability to put one in there. And it did not adversely impact their transaction whatsoever. So for then, it was important to have that lockup period. You know, I don't want to speculate too much on specifically why they did that, but they did have the option to do that. Just as how in an IPO, you have the ability to, and companies are now working with banks to modify that traditional 180-day lockup period to put in more kind of

dynamic lockups where, again, if a company meets a certain share price or trigger, it'll trigger the release of shares for trading. So something that Tracy asked earlier, and that was about standards. And as you pointed out, that even a company that goes public through direct listing, they self to SEC standards and S1 and the NYSC's own regulations. Are there conflict of interest rules or anything set up such that there is no incentive on the teams who are your team doing direct listings versus the sort of more regulatory side of the NYSC so that there's no, there's no getting around anything, basically? Yeah, absolutely. So the NYSC and other exchanges,

in the U.S. are what are called self-regulatory organizations. And so we have an independent regulatory function that reports to an independent committee of our board of directors. So their work is completely independent from that of the business side. That is meant to completely eliminate conflicts of interest. So there is no pressure the business side can exert over the regulatory side. Is there any tension emerging or conflict between you and the banks? I mean, as you mentioned, Morgan Stanley did have a role in Palantir, but obviously this process does cut out what is a, you know, an important point of, part of revenue for the investment banks. Is there any pushback on them or any banks like, oh, we're not going to have our companies list on the NYSC anymore if the

NYSC is directly competing against us? Like, I'm just sort of curious about that relationship and how the emergence of this business for you changes those partners. actually strengthen the partnerships with the banks and I would say the banks will always find a find a role in these type of transactions in helping their clients now early on yes when we started floating this idea of the direct listing with Spotify we did receive some resistance from banks saying what are you doing what you know why are you you know this this makes no sense this is risky why would you do this and then what we saw though is a handful of banks leaned in and said well wait a second This is what my client is hoping to achieve. This is their goal. I want to help them achieve it. And in helping them achieve their goal, while my economics may be slightly different than they would be in a traditional IPO, I'm building a long-term relationship. And so I'm going to be the bank that come back to when they do a follow-in offering to the market, when they need advice around M&A or other important transactions. And so I want to be a good partner. And so you saw a number of banks lean in early on and realize that, hey, this is this is going to be a new pathway.

to the public market. We see this as an opportunity to help our clients and further differentiate ourselves from other investment banks. So you saw them lean in. And after the successful transactions that took place with Spotify, Slack, now Palantir and Asana, on top of that, you've seen pretty much every bank focus on the direct listing. Their clients are asking them about it. And if you're going to be a good banker, you better be able to provide good advice to your client. So we've seen the banks lean into this now where there was some initial resistance at first. They've come around to it. And again, the economics are a little bit different from an IPO. But for those that participated in the early transactions, while you did not get a piece of a gross spread or of the

underwritten offering, they were paid an advisory fee. And so while there were fewer banks on the cover for the Spotify prospectus than they would have had, should they take in a traditional IPO, those banks received a bigger piece of a smaller pie and were able to build a new business for themselves. But you're talking mostly about the bank's corporate clients. What happens to their investor clients on the buy side? Because my understanding in the IPO process is that banks were always trying to juggle the needs of those two groups of people. On the one hand, you have the company that's actually going public and they want to maximize their proceeds. So they probably want to sell their shares relatively high. And then you also have the investor client

who probably want to buy into an IPO at a low price and see that first day pop, it feels like the banks might be not necessarily losing the investor clients, but certainly the investors aren't getting what they used to get from the banks, which was allocation into an early IPO. Yeah. So a couple of things on that. There's a lot of differing views on this. But I would say if you are looking for high quality long-term investors,

they're not going to shy away from you for a direct listing. A couple of things there. One is many of these investors think your Fidelity, T.Row, Wellington, they've already crossed over and were private investors in the company. So they built a position there and are not banking on getting a pop to meet their overall portfolio performance targets for the year. Number two is when you look at some of the more recent tech IPOs over the past, let's say, two to three years, oftentimes these companies are floating a very, very, very small

piece of the company, sub 10%. So when you actually allocate that out to institutional investors, they're not getting that meaningful of a position. And so that pop, you know, while yes, it is a pop on that security and a return on that single investment, overall for that portfolio, I don't know how many basis points it would be, but probably de minimis. They're actually focused on building positions and companies where they have convictions. And so why I think the direct listing is fascinating is because when you have more float out there from day one, when you have true price discovery and not this kind of artificial supply demand and balance

that all of a sudden you hit 180 days, the lockup release, a bunch of new shares come onto the market. And now you start finding the actual market price for the shares. When you have that kind of pure price discovery, if you are an institutional investor, you have conviction, you want to build a position, you can do it much more quickly

and with much less impact on the share price than you would in a traditional IPO. because if you have sub 10% of a company's offering out there and you're a big institutional investor trying to build your position, because there's so little supply in the market, you're going to be running up that stock as you build your position. So with the direct listing,

a lot of those institutional investors are actually benefiting from having that increase in liquidity. Now, sometimes in an IPO, you hear them talk about, oh, we have to allocate to a certain percent to hedge funds because we know they're going to flip it overnight and provide liquidity. Yeah, I'm fine with getting rid of that. But when it comes to institutional investors, a lot of them actually like this process better than the traditional IPO.

So let's look big picture for a second. There's just been a handful of direct listings. And of course, there's been way more, there's still way more traditional IPOs. This year, there's been an incredible SPAC boom. So there are way more of those two. In terms of sort of the equity capital markets at the New York Stock Exchange, A, just sort of like, how big is direct listing is now? How big could you see it getting as part of a share of the total business? And then what is the business model for you? Like what is, you know, investment banks take several percentage points in a traditional IPO. What is the revenue model look like for you in a direct listing? And how big do you see this business getting or just as getting as a share of overall market? Yeah.

So the direct listing is you're going to continue to see more of them in the market. And whether that's four in 2021 or eight or more, you'll see that number increased from where we are today. We think it's important because, look, it's a differentiator for us. We mentioned the market model earlier. We're uniquely positioned to execute these types of complex transactions. So we think they're very interesting. From an economic standpoint, there's not much difference at all between this and IPO or any other type of listing for us. and that holds true for other exchanges as well.

So we're focused on us because it's a differentiator. It's a new pathway to the public markets. We're providing a product or a service to our clients that is more tailored to meet their objectives and help them be successful. So we continue to see it being part of the market. It'll be an increasing part of the market. Do I think it'll go on the same trajectory

that SPACs have gone on this year? No. And SPACs accounting for roughly 40% or so of the overall IPO process. raised this year. No, I don't see that happening, but we will continue to see this be a product that a lot of companies consider and ultimately select going forward. Just to be clear on something you said, are there more fees for you? Is there more revenue when a company does a direct listing versus a normal IPO? Or is that not a, is it not a major difference? It's not a major difference. So we still

receive revenue the same way from these, from these companies. How confident are you that the SEC is going to approve the direct listing with capital raising proposal? Reasonably confident because, look, the team that's down there has done a very good job at the SEC. This is my personal perspective. You know, Jay Clayton as chairman has made capital formation and innovation in the capital markets a pillar of his agenda down there. You've seen it come in different forms, whether it be with direct listing 1.0, which we saw with Spotify and Slack, which was under. the current leadership's tenure at the at the SEC or with this new process, the direct listing plus the capital raise. Now, you know, not to get too far into the kind of regulatory procedures that

go along with rule changes at the SEC, but, you know, we went through a very rigorous process for 240 days with the SEC, walking through the direct listing with capital raise, talking with the staff from trading in markets, corporate fin, the different departments within the SEC, and ultimately in the staff's approval order, which was done through something called delegated authority, and that's just a way of saying that the commissioners have delegated the decision to the professional staff or the expert staff, that they approved the direct listing. They said they went another way to say two very important things. One, it's a more democratized process. So it allows more people more access to more opportunities. And B, it's more efficient

pricing than the traditional IPO. So a industry trade group called the Council of Institutional investors petitioned for our approval to be reviewed and approved by the five commissioners at the SEC. We're just awaiting that right now, and then we'll be ready to go. No matter what pathway companies have to the public markets, having access to capital that you can use to fuel growth, so offensively or defensively in periods of time like we saw in late Q1 and Q2, where companies were starving for capital, and they were able to come to the public markets, raise it at market rates. it's nice to hear many folks in the marketplace, many participants, again, talking about the benefits of the U.S. public markets, both for companies and for investors. John, that was a great conversation. I learned a lot and I really appreciate you joining us.

Yeah, I hope once the world gets back to normal, you can come down here for the next direct listing and see it live. Yeah, that'd be fun. I'd love to do that. All right. Thanks for your time, guys. Thanks, John. That was great. I really like that conversation. You know, it's funny. I know, like, I feel like John was being diplomatic or maybe completely straightforward, but it's hard for me to imagine that this isn't going to be a source of increased angst, the fact that some of this traditional IPO money might be going away in direct listings, especially also when you compare, like I said, at the

beginning, the stock prices, like the exchanges are still doing very well at a time when the major banks are kind of stagnant. Yeah, although, I don't know, I say never underestimate the bank's ability to, find new ways of making money. The only thing sort of standing in their way, I guess, is regulation on that point. But I do wonder if you could get a more interesting response from some of the banks, like maybe altering the IPO process itself so that you don't abandon it completely, but maybe you do something that's more similar to an auction process where, you know, you blast out prices to a bunch of investors at one time and then put it through some sort of

automated system. We've talked about that processes similar to that in the bond market. So I don't know, I think it's going to be interesting to see this fight or the scrum over public markets kind of develop between the banks and the exchanges. Yeah, no, I mean, it's definitely true. I think, you know, now there's so many different models, the IPO model, obviously, which is still a huge, the SPAC model, this model, this model plus the capital raise. You know, I remember like in 2000, like 20 years ago, you had the first sort of experiments with things like auctions and no pops and stuff. And I remember I think Google tried to go or they did try to go public in an unusual way.

Yeah, but now it feels like perhaps some of these early ideas that never quite got off the ground seemed to be maturing and ready to go. and we can actually start to compare and contrast the different, the most efficient ways and the best ways for companies to go public. Yeah, for sure. I also found John's points about getting more of a float, more liquidity out of a direct listing. I thought that was interesting. But I have to confess that as a former fintech reporter, part of me is just really jaded. And every time I hear someone say the word disrupt a particular process or disrupt the banks, I immediately just think regulatory arbitrage. So much of disruption is basically regulatory arbitrage.

And I think that gets back to the questions we're asking John about whether or not this is basically a way to avoid some of the red tape around the traditional IPO process. I think those are valid points. And I don't think we've seen the end of that conversation. Yeah, I'm sure regulatory arbitrage are just sort of a patchwork of regulations is an important part of it. But the other thing to me is that, you know, one of the huge themes for a long time, and you think about tech, when you said fintech, there's over my mind. It's just like network effects. And the sort of the big index providers, the big exchanges are networks. And so there is a sense that regulation aside that these companies continue to sort of extract value from the ecosystem overall or find ways that they can build up their business or build them vertically. horizontally, I don't know which is the exact one I'm looking for right now, one of those two. But that the sort of, whether it's in tech, Facebook, Amazon, Nisi, NASDAQ, et cetera. They're all like sort of these very central infrastructure players in any industry finding the way to sort of make more money while the peripheral players finding it harder.

Yeah. You don't seem very compelled by that. You're like, I'm whatever. I'm trying to attack fully. That's fine. No, it's just like what I've... Tackfully changed the subject. Yeah, that's fine.

We'll have to talk about it. Okay. Yeah, let's just leave it there. I don't want to... Because after you leave me hanging like that, let's just wrap this up. I feel really bad. Okay, I promise we will talk more about it later. Okay, this has been another episode of the All Thoughts podcast.

I'm Tracy Allo. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You can follow me on Twitter at the stall. Follow our guest on Twitter, John Tuttle. He's at J.R. Tuttle. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts under the handle at podcasts. Thanks for listening. Hi, I'm PJ Vote. My podcast search engine has a new two-part series for you. Of all the new technologies coming out of AI, the most transformative one might be driverless cars. They're already on the road in 10 American cities. and they're quickly coming to more. We tell the story of how we got here.

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