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Facebook Inc (FB), Citigroup Inc (C) & A Game-Changer From Congress

I cringed at the headline: “Why decimalization is a bad idea.” It’s the second article I had seen in as many days apparently supporting a proposed new Congressional bill that I find incredibly stupid.

Of course, I’d also misread the headline. What it actually said was “Why dedecimalization is a bad idea” [emphasis mine]. And it wasn’t just the headline that Felix Salmon nailed, as he concluded in the post that “there’s no way that small investors can possibly benefit from this.”

Amen.

But let’s backtrack for a moment. The “problem” this bill attempts to rectify is that there are many small public companies out there that don’t have much Wall Street research coverage. The reason is that trading is so sparse and spreads — that is, the difference between the bid and ask prices — are so thin that there’s little money for Wall Street firms to make trading the stocks and, thus, little reason to follow them closely. This situation was a result of “decimalization” — the changeover from quoting stocks in fractions to decimals, which allowed bid/ask spreads to fall in many cases to just a penny.

This leads to what Fortune columnist Dan Primack deemed “a cycle of arrested development.” And, as he expanded, that cycle is far less amusing than the TV show of the same name:

They are small, so they are ignored by analysts and market-makers. And because they are ignored by analysts and market-makers, they remain small.

To Primack and supporters of the bill, this sad situation would be mitigated by walking back decimalization and making spreads wider — between five and 10 cents.

Boiling down Salmon’s rebut to Primack: hogwash! Wall Street analyst coverage is not the public-market version of Miracle-Gro. Small companies grow because they have — among other things — a good business model and products and services that customers value. Wall Street can choose to not cheerlead a good, small public company to its own detriment. There’s only so long that the market can ignore growing profits from a good company, and by the time those big-money Wall Streeters decide to tune in and recommend the shares, their clients may have missed out on a good deal of the growth.

But even if Wall Street glad-handing isn’t necessary for a company to grow, perhaps it’s nonetheless helpful. And there’s a case to be made for that. A public company can access growth capital by selling new shares into the market. The higher the company’s stock price, the more money a company can raise at a lower implied cost (for the finance nerds, it creates a lower cost of capital). If these small companies have Wall Street analysts — known for their bullish bias — cheering them on, we could expect that financing costs would be lower, more growth capital would be tapped, more jobs would be created, and everybody would be a big, big winner. Yay! Right?

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