June 7, 2011
The events of recent years have highlighted the problems of anti-competitive practices and conflicts of interest that plague the financial services industry. These problems create many distortions with widespread consequences.
The proposed new section 907 rule addition to the Listed Company Manual is clearly anti-competitive as it favors an oligopoly of the two most powerful firms in the investor relations (IR) industry Thomson Reuters and Ipreo. It will create distortions which will have a negative impact of the IR industry. An industry that, for several years, has also been distorted by the exchanges and the investment banks.
The broader picture has significant importance beyond the IR industry because the primary reason the NYSE has created this IR cartel is to defend its listing business. It wants to justify its high listing costs by offering other value added services such as IR. The problem is that it is going about doing this in a way that distorts and damages the IR industry.
The NYSE is actually already supporting anti-competitive business practices because it currently subsidizes the services of both Thomson Reuters and Ipreo through a "strategic partnership". This current scheme subsidizes Thomson Reuters and Ipreo, enabling them to provide services to NYSE listed companies for free or at a cost significantly below their economic cost of production. As a result, many IR service providers already find it difficult to compete. New section 907 will take this one step further by cementing this oligopoly and blocking competition even further. This is because the proposed inclusion of an IR offer in new section 907 of the listed company manual makes the use of Thomson Reuters and Ipreo appear to be a requirement of the NYSE.
Although issuers still theoretically have the option of paying for these same IR services by going outside NYSEs scheme, there is not much incentive to pay for something they can get for free thanks to NYSE's subsidy. Supporters of NYSEs scheme will say issuers are free to choose and they are not forced to do anything. True, issuers are not forced. But there is nothing fair about their choice. Competing against free is pretty tough and the providers of competing offerings will have to demonstrate considerable added value if they are to convince issuers to pay for a similar service they can already get for free.
The proposed new section 907 is a clear case of dumping of subsidized IR services. And unfortunately it actually formalizes the anti-competitive behavior that is already taking place in practice and has been distorting the IR industry for several years.
In the longer term, these price fixing practices could wipe out many small and medium sized service providers which form a key part of the IR industry. The existence of this kind of direct subsidy not only squeezes out existing competitors but also creates a huge barrier-to-entry, discouraging new companies from entering the IR industry. This will stifle innovation in the longer term and is not in the best interest of issuers or the NYSE itself. Indeed, the NYSE should be promoting innovation rather than creating cartels.
There is an alternative. A simple solution which would be much fairer. This is to subsidize all players rather than just the two dominant market leaders. If NYSE is so keen to subsidize IR for its issuers, why doesnt it simply allocate a dollar amount to each issuer and give it the freedom to purchase the IR services from any supplier that best suits their individual requirements. Surely this would be a fairer solution, more in-line with promoting best practice across the industry. And it would even give issuers much better value for their listing fee because they would have more freedom of choice