The primary market refers to the part of the financial system where new stock and bond issues are first offered and sold before trading on secondary markets. Technology has played an increasingly important role in transforming primary markets over the past few decades. New innovations have impacted primary market operations, structures, participants and products.
One of the biggest technological transformations has been the shift towards fully electronic trading platforms for new securities issues. Rather than traditional phone-based orders and manual trading, new online platforms like E-TRAN and InvestONE allow for automated book-building, issuance, allocation and allotment. These streamline the overall process, reduce costs, increase accessibility to more participants and provide greater transparency.
They have gradually become the industry standard globally across both public offerings and private placements. While traditional intermediaries like investment banks still play a major role, electronic platforms are changing relationships and operations.
Related to this shift has been the emergence of alternative trading systems (ATS) aimed specifically at the primary market. Using sophisticated matching algorithms and big data analytics, companies like EquityZen, Forge Global and Zanbato allow private companies and investors to facilitate primary liquidity and investment outside traditional public exchanges.
Rather than IPOs, they allow mature startups to get initial liquidity and valuation discovery. They also enable more investors such as hedge funds, family offices and high-net-worth individuals to access pre-IPO investment rounds in unicorns like AirBnB, Palantir and SpaceX.
Technology is also playing an increasingly useful role on the issuance side itself. Book building has historically been an imprecise art – investment banks try to estimate valuations and issue prices based on informal investor demand checks and limited comparable analysis.
New innovations in big data analytics allow more data-driven recommendations of value and optimal issue price based on hard comparative data of past IPOs and quantitative analysis of factors impacting prices. This can result in more optimal pricing, reduced volatility and better returns for issuing companies. Some startups providing these data tools include Ipreo, Prime Unicorn Index, Ravelin and New Constructs.
On a more operational level, innovations like digital wallets, payment gateways, automated clearing and same day settlements can make primary issuance and capital raising easier. Technology allows automating payments, collections and refunds related to IPOs and direct listings. By integrating payment mechanisms directly, companies can facilitate retail and institutional investor participation both before and after public listing. Further technological shifts like decentralized finance, automated marketplace lending and crowdfunding business financing can change how companies raise money.
From a compliance perspective, new regtech solutions leverage artificial intelligence, blockchain solutions and cloud computing to help companies manage know-your-customer and anti-money laundering regulations around primary issuance. They streamline compliance checks on investor identities, sources of funds, politically exposed status to prevent issues like fraud, scams and illegal activity which can derail new offerings. Their automation and improved compliance helps build investor trust and confidence.
Experts argue that these types of technological shifts will invariably impact incumbent institutions and structures in the primary market. Investment banks may see their influence get reduced as alternative platforms raise their share of new offerings. This can reduce issuance costs and fees. Many of the traditional intermediary functions done manually by investment banks around promotion, book building, syndication and placement may shift to fintech disruptors.
Estimates suggest new issues could raise over $1 trillion via fintech platforms like EquityZen and Forge Global over the next 5 years. Large banks however are preparing for this change by acquiring innovative startups and launching their own alternative trading systems integrated with their other strengths.
By improving accessibility, transparency, ease-of-use and embedding advanced analytics, new primary market platforms can attract different categories of investors also. More non-traditional players like hedge funds, private equity firms, family investment offices, wealth managers and international investors at different deal sizes can access primary deals that were earlier available mainly to large institutions. This can expand the investor base for issuers.
On the flip side, even mass affluent and high net worth individuals can now access pre-IPO investment rounds for elite startups via special purpose vehicles created by platforms like EquityZen. This is gradually democratizing the private investing world.
Many experts argue that by facilitating access to capital, delayed IPOs and tech-enabled private share trading, these shifts are contributing to ‘unicornization’ of private tech companies. The comfort with staying private longer while accessing growing capital from non-traditional sources is changing startup financing norms. Companies no longer need to go public to gain liquidity, valuation marks or publicity. While the volume is still low, the growing number, size and maturity of billion-dollar plus private unicorns relying on primary tech platforms is seen as an industry trend.
Among the most futuristic shifts has been the emergence of digital asset offerings as an alternative capital raising mechanism using distributed ledger technology. Cryptocurrencies and crypto tokens have created a new primary issuance ecosystem via Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) that exist in parallel with traditional equity and debt issuance. Companies like Blockstack, Telegram, Ripple and Decentraland have raised billions using this mechanism, hinting at how nascent developments in blockchain, cryptoassets and their primary issuance could disrupt status quo methods.
While still evolving, technology is clearly having a transformative impact on primary capital market operations. As innovators leverage artificial intelligence, big data analytics, blockchain, cloud computing and decentralized architectures, the future primary issuance landscape could change even more dramatically.
More issuers and investor types are participating. While risks around volatility, fraud and governance exist, improved regtech, data tools and trusted intermediaries can aid better price discovery, optimized returns and effective capital allocation. Overall, technological innovation is improving access, transparency, costs and connectivity for all participants yielding a more mature primary market structure.
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