Do auction-rate securities have a future? I’m not sure myself, so I put a couple of questions to Floyd
Newton, a partner in King & Spalding’s finance practice. Floyd has a long history in the auction-rate market, and seems to know what he’s talking about.
My first question was whether the new electronic trading platform being launched by Restricted Stock Partners is likely to help bring liquidity back to the market. Floyd says no:
I do not believe that this imitative will have any affect on the
secondary market for auction-rate securities. These securities are
readily available from the existing broker-dealers, and I am not aware
of any reason why having an electronic trading platform from this
company would have a positive impact on this market. The principal
issues in this market are simply a lack of investor confidence in this
market. When auctions begin to fail, for whatever reason, it creates a "panic" where investors rush to get out unless the broker-dealers act to
stabilize the market, and at the present, they are not able to do this.
My second question was whether John Carney is right when he says that auction-rate securities never had much of a market to begin with, and were always supported by the broker-dealers. Floyd’s unsure about that as well:
This is a more complicated question. First, I am not sure that I agree
that the auction market "never had enough buyer demand" to support
itself. I doubt that this market would have gotten to this size if
there were not buyers out there demanding this product, at least until
they became concerned about their liquidity. Stabilization is a
different issue. There is nothing wrong with stabilization to protect
the market and produce more uniform results. Where the buyers lose
confidence in the market in a short time period and there is a "rush" to
the door by the investors, it is not surprising that the broker-dealers
are not willing to "stabilize" the market.
Going forward, I suspect that this market will not exist in its present
form. Investors in this type of security are very concerned about their
liquidity, and with the liquidity of these investments now in question,
it is unlikely that they will return in volumes needed to support this
market.
Overall, then, it seems that the market used to be healthy, once upon a time, but that it’s now a thing of the past – and nothing, not even a swanky new electronic trading platform, is likely to save it.