Not so fast. All things held equal, lower financing costs can be cheered as a positive. But in this case, the cost of creating this dynamic is pushed through to investors — both institutional and retail — as the total cost of purchasing or selling a stock equals the fees you pay plus the trading spreads. Since this bill would widen those spreads, costs to the investor go up.
And what do investors get in exchange for those higher trading costs? Wall Street rah-rahs small, potentially ill-capitalized companies that are hoping to dilute shareholders through new share sales. And as for the “research” coverage, how many full Wall Street research reports are average retail investors getting access to? Yet they’ll be helping to subsidize that research through these wider spreads.
In other words, this isn’t a boon for investors small or large, nor is it necessarily helpful to profitable, growing companies or those with attractive business models.
It is, on the other hand, an attractive proposition for Wall Street. Brokers benefit because they profit from the trading spread. It’s been a hellish decade-plus for the industry because decimalization has whacked the amount of money they typically make on a trade. This bill would take a step in the opposite direction — more money in the brokers’ pockets via less kept in those of investors.
Wall Street investment bankers should love this as well. Though the big investment banks prefer to do deals for giant companies such as Facebook Inc (NASDAQ:FB) (cringe), in a tougher deal environment they’re likely to take what they can get. This month, Citigroup Inc (NYSE:C) has taken Emerge Energy Services LP Common Units representing Limited Partner Interests (NYSE:EMES) public, Goldman Sachs Group, Inc. (NYSE:GS) has brought CYANOTECH CORP (NASDAQ:CYAN) to the public markets, and Wells Fargo & Co (NYSE:WFC) has led Insys Therapeutics Inc (NASDAQ:INSY)‘s IPO. All of these companies are at or near the market cap threshold for what this bill would cover.
To the extent that Wall Street firms can suddenly make more money dealing in the stocks of smaller companies, it would make doing more deals like these that much more attractive. It’s also an additional selling point when the bankers are trying to rustle up business.
In other words, we have a potential bill that would put more money in the pockets of Wall Street at the expense of investors, while amping up the cheer section for small, questionable companies that want to sell more stock to public-market investors.
Come on. Is this for real?
The article This Congressional Bill Is No Win for Investors originally appeared on Fool.com.
Matt Koppenheffer owns shares of Goldman Sachs. The Motley Fool recommends Facebook, Goldman Sachs, and Wells Fargo and (NYSE:WFC) owns shares of Citigroup, Facebook, and Wells Fargo.
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