Academic journal article Journal of Corporation Law

Venturing into the Uncharted: How Carefully Created Venture Exchanges Can Succeed While Bolstering the American Economy

Academic journal article Journal of Corporation Law

Venturing into the Uncharted: How Carefully Created Venture Exchanges Can Succeed While Bolstering the American Economy

Article excerpt

I. Introduction

Imagine a thriving country as a reliable, ever-running car. A strong economy is the engine, the essential force behind the car's reliability and productivity. Yet to start- much less continue-running, the economy engine requires, at the very least, gas. This metaphorical gas is jobs1 and gas is pumped from a station. While there are a variety of stations to choose from, one gas provider is entrepreneurial capital formation. These "[d]ynamic small and start-up companies are critical to job creation."2 To provide more jobs and "promote general prosperity," these companies must continue to grow.3 Liquid venture security markets can deliver this growth, but success will require a proper balancing of legislative structure and market freedom.4

Part II offers a brief background designed to acclimate the reader with the terminology and history of the financial marketplace. This includes a discussion on the beginning of the stock exchanges, electronic trading's rise to importance in Part II.A, and an introduction to small private and venture exchange markets in Parts II.B and II. C, respectively. Part II concludes with a description of two pieces of legislation that may affect or serve as templates for future venture security market regulation.

Part III analyzes and considers why certain small secondary exchanges have found success and continued viability while others have been quickly closed as failures. This necessarily entails further discussion of market vocabulary and history. It also examines two pieces of legislation, one of which was enacted but is yet to be fully implemented, while the other has failed to garner the needed amount of congressional support. The analysis shows that both are helpful backdrops but fall short and will fail to fully support the creation of stable and profitable venture exchanges.

Finally, Part IV provides a variety of recommendations for the creation of a venture exchange. Based on the history of large exchanges, electronic trading's rise, and proposed legislation, combined with lessons learned from both the failures and successes of small secondary markets, the recommendation outlines the ideal result: multiple venture security markets supported by a skeleton of federal legislation and bolstered by the freedom of each market's chosen set of rules. Unshackled by various current regulations, these venture markets will compete in a capitalistic "survival of the fittest," leaving the strongest few to lay groundwork for a liquid market consisting of small capital companies, the very companies that drive the economy through baseline job creation.

II. Background: The Importance of Electronic Trading, Small Secondary Markets, and Legislation's Potential Impact

To understand the past problems and potential for success of venture security markets, one must first understand the history and inner-workings of the largest U.S. exchanges, like the New York Stock Exchange (NYSE). The NYSE truly began in 1792, when a group of 24 brokers agreed to trade exclusively with each other, in reaction to oppressive government bond merchants. 5 By 1886, the exchange had greatly expanded and was trading over one million shares a day due to the railroad, canal, and bank expansions.6 Functionally, traders constantly called out "asks" and "bids" to measure the market, leading to specialists, who served as market makers.7 Throughout the next century, the exchange saw the addition of technologies, like telephones and electronic tickers, and experienced the terrors of a volatile market.8 By the 1930s, Congress began to implement regulatory legislation, like the Securities Exchange Act. 9

While it has a long history that provided a strong base, the NYSE's secret to success is liquidity. Liquidity refers to a security's ability to be readily sold.10 There is a strong positive correlation between the value and liquidity of securities.11 Greater liquidity creates more opportunities and more opportunities draw more investors. …

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