Let the Games Begin: The Private New Issuance Market Heats Up

It was just a matter of time; bulge bracket Wall Street was sure to follow Goldman Sachs into the private issuance market. And the time is now. A five-headed competitor to the GS TrUE platform has been unveiled with yet another catchy name: OPUS-5 (do I sense some oenophiles in this Wall Street fraternity?). As reported in today's Wall Street Journal:

A group of Wall Street titans are joining forces to create a rival venue to Goldman Sachs Group Inc.'s private system to trade the stocks of companies that don't want the scrutiny and regulatory burdens of going public.

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Citigroup Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley and Bank of New York Mellon Corp. have established the Open Platform for Unregistered Securities. The firms say OPUS-5 "will provide trade reservation, shareholder tracking and transfer management for privately offered equity securities."

Bank of New York Mellon will act as administrator of the system, which is intended to "promote liquidity and efficiency for qualified institutional buyers" who trade unregistered equity securities "and enhance issuers' capital raising efforts." The companies added that more securities firms are expected to participate in OPUS-5 over time. The market is slated to launch next month.

Goldman Sachs unveiled its system, called GS TRuE, in May. Among others, Nasdaq Stock Market Inc. is also planning its own new market for smaller, unregistered securities.

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Daniel Simkowitz, head of equity products at Morgan Stanley, said in an interview that his group's system will differ from Goldman most notably in that is more open.

"There is a big difference in the way it was set up and in the philosophy" of OPUS-5, he added. "The firms believe strongly that this should be an open system -- multiple market makers and run and administered by an independent firm."

Mr. Simkowitz went on to say OPUS-5 "will be agnostic to front-end trading systems. We're trying to create more liquidity and we think that will draw more" initial offerings of stock by private companies to the securities markets.

Mr. Simkowitz has also predicted that the emerging systems will eventually become one. "This is in essence a part of the merger," he said Tuesday. "The firms have or could have created their own systems." Mr. Simkowitz noted OPUS-5 will be able to link into any number of exchanges or trading systems.

Mr. Simkowitz is essentially echoing the prediction I made back in May, when the GS TrUE platform was first announced:

But if I were a betting man, I'd wager that the TrUE structure and the inevitable variants will become an increasingly attractive alternative for top new-issue prospects, especially now that Oaktree has broken the ice. The offering was a success and congratulations to all. Except my friends at the NYSE and Nasdaq, whom I assume are shaking in their boots.

Whether or not OPUS-5 will actually create more liquidity than GS TrUE is a matter for debate (but of little consequence, I think). I firmly believe that volumes on these private exchanges will continue to grow and become an increasingly significant part of the new issue calendar, directly impacting the NYSE and NASDAQ (notwithstanding their Portal initiative). The SEC's response so far? Not much. Time will tell, but so far I've told it pretty straight. This will become a hot-button issue for both Congress and the SEC in the not-too-distant future.

Comments

[Tyrone Slothrop]

Roger-

Can this system be used for follow on offerings as well?

[Yaser Anwar]

I don't expect the SEC to do anything. If they loosen up restrictions they will hear from Spitzer-wannabes or from the US congress if some fraud occurs.

Let the free markets decide. I guess we'll be hearing from Barclays, UBS, DB, et al soon about a European-esque private plaform.

I wonder where the BATS exchange comes in.