IPOs still the preserve of banks, brokers and wealthy investors

But the ASX refused to get involved when it came to the controversial issue of imposing a rule forcing each IPO to reserve a certain percentage of the securities for retail investors.

This idea was aggressively supported by OnMarket BookBuilds, which is a platform that allows retail investors and others to apply for shares in IPOs and have them allocated on a fair basis. The service is not tied to any broker.

With the encouragement of OnMarket BookBuilds more than 2000 people submitted form letters urging the ASX to adopt a rule forcing the minimum allocation of IPO stock to retail investors.

The ASX response to this call for reform is instructive because it leaves the proposition firmly in the hands of politicians.

"This would be a significant change to the manner in which Australian capital markets currently operate, and is outside the scope of ASX's spread requirements for admission that were subject to consultation," the ASX said on Wednesday.

"Such a significant change to the capital raising regime and the way in which bookbuilds are currently managed in the Australian market would have broad implications for market infrastructure, intermediaries and other stakeholders.

"The market impacts of such a change have not been examined and are not well understood, and would likely tend to promote some business interests over other stakeholders."

It is not clear what this final reference is but it seems to be direct shot at OnMarket BookBuilds and the idea that it had pushed for the idea of a guaranteed allocation of IPO stock to retail investors just so it could make more money.

That is an awfully cynical view of its submission especially when you consider OnMarket BookBuilds is helping retail investors engage with the market. Its survival depends on encouraging greater involvement in the market by retail investors.

One of the strongest arguments put by OnMarket BookBuilds in its submission in favour of reform of the IPO market was that Australia is being left behind because minimum allocations to retail are the norm in Singapore and Hong Kong.

ASX disputed this in its document published on Wednesday.

"ASX considered these recommendations (by OnMarket Bookbuilds) and concluded that they did not accurately reflect the regulatory arrangements and market structures in Hong Kong and Singapore," the ASX said.

Instead of nitpicking the submissions of one company, it would have been more useful if ASX had actually set out what is happening in the region. After all, Australia is competing for global capital flows and we would be well advised to keep up with the evolution of nearby capital markets.

It is also worrying that the ASX is apparently unable to resolve in private its disagreements with a start-up company that has been given the tacit endorsement of the Prime Minister Malcolm Turnbull, who launched the company's OnMarket business to consumer application.

Singapore Exchange's chief executive, Loh Boon Chye said in February this year:"SGX's proposal for a minimum 10% retail allocation for shares of Mainboard IPOs is aimed at giving individuals more investing opportunities in the Singapore equities market. While market conditions may have been uncertain of late, this initiative is for the long term and is part of overall enhancements to the Singapore stock market."

Singapore consulted on the idea of allocating a minimum amount of IPO securities to retail investors in 2012. It is undertaking another consultation at the moment.

Singapore's rule 250 reads as though it does require a minimum allocation of stock in IPOs to retail investors but the ASX vehemently denies that is the case. Another round of consultations might help clear up the confusion.

In Hong Kong, retail investors have for a long time been treated more fairly then in Australia.

The Hong Kong Exchange's main board rules specifically state that up to 75 per cent of an issue can be placed directly by an exchange participant or through a syndicate of other exchange participants and "the balance must be made available by the lead broker directly to the general public".

The general public is defined as "investors other than clients of the lead broker, but would not preclude its clients provided they had not received any special notification or invitation in respect of the placing."

Morrison will find that reform of the IPO market will be difficult to push through. The reason is that it will threaten the vested interests of those who benefit most from the current system.

It is common knowledge that over the past 10 years access to IPOs has been a critical element in achieving returns in excess of the returns achieved from market indices.

One study has found that the average first day return from the 1000 IPOs in the last 10 years was 14.8 per cent.

That explains why institutional investors want to be given privileged access to IPOs, particularly those involving companies with strong cash flows, good prospects, quality management and having large market valuations.

The same economic rationalism explains why investment banks, which are the IPO gatekeepers, want to make sure they allocate as much as possible of the "good" IPOs to the institutions that pay the most brokerage fees.

The same mindset affects stockbrokers who want to get as much of the "good" IPO allocations as possible for sophisticated investors, which is defined as someone with net assets of $2.5 million or more.

It is possible that the minimum free float of 20 per cent included in the new admission rules could be satisfied by offering that amount of stock to one institution and not through distribution to a range of shareholders, provide the spread test is met.

Making the IPO market in Australia a fairer system would benefit the millions of retail investors who, for some reason, are choosing to manage their financial affairs without the involvement of intermediaries.

This dissatisfaction or distrust of intermediaries is a global phenomena that has played into the hands of disruptive technology companies.

If Morrison is of a mind to consult his fellow parliamentarians he will find that this reform has been vigorously promoted to them by at least one market participant.

Australia's world leading retail participation in the stockmarket sits uneasily with a system that serves the interests of a small number of insiders.