Thomas Gillen has a niche: teaching bank directors how to make their stock more liquid.
"The days when an investment banking house could make a living trading bank stocks for individual investors is over," says Mr. Gillen, the senior vice president of equity strategies at the Short Hills, N.J., office of Milestone Merchant Partners LLC, a NASD-licensed Washington broker-dealer.
"When spreads were wide, a firm could 'block position' - that is, buy up all shares offered and hold them until it found a buyer for them," he says. "The spread was wide enough to compensate for the cost of carry and the risk of price depreciation while the shares were held in inventory."
Now, however, with decimal pricing narrowing spreads drastically and recent SEC rule changes limiting market-maker discretion, OTC traders must rely on volume, Mr. Gillen says. And the tiny trading volume of most community bank stocks makes it unlikely that the market maker will give them much attention.
So Mr. Gillen - who has been a bank stock trader for two decades, ran a bank stock hedge fund, and served as a bank director - coaches bank boards and directors on what makes markets work and how they can boost their own bank's equities.
Why should the board care about liquidity?
- If a large shareholder wants to sell and the market cannot absorb the block, the bank may be bought by a hostile acquirer.
- Stock options for management have less meaning without a high dividend and a liquid market.
- Purchases and sales by directors and senior officers can have an inappropriately magnified impact on stock price in a thin market.
Of course, if the bank has a broader trading market, management will have less influence over whether blocks end up in unfriendly hands, especially if the bank wants to remain independent.Sure, buybacks, splits, stock dividends, and a dividend reinvestment plan can help provide liquidity. This is well known. But Mr. Gillen feels that a community bank should go further - that the board should be the main marketer of its stock.
How can the board help?
First, it must work to get the public to recognize that the bank is a public company, and that its stock can be bought. This is by no means always known.
Next, board members should ensure that the management makes every effort to promote the availability of its stock through its normal communications techniques, just as it promotes other services.
Finally, directors should put together lists of potential buyers, and board meetings should regularly include discussion of what the bank should be doing to build liquidity, just as it discusses every other aspect of the operation.
Mr. Gillen does have these caveats:
- If you develop lists of potential buyers and sellers, have your legal advisers examine them to make sure you are not violating securities regulations.
- Be cautious in suggesting that people move money from their deposits into the bank's stock. Though most bank shares produce higher yields than most CDs today, a share price drop could hurt major depositors and the bank's image.
Mr. Gillen also points out to bank boards that many brokers discourage individuals from buying or selling their banks' shares - by charging high commissions because of illiquidity, risks, and high costs.Bank boards should learn about electronic communication networks and how individuals can use them to buy and sell stocks cheaply, just as they use eBay to trade goods, Mr. Gillen says. This can cut the cost of purchase or sale drastically and thus build interest in the bank's shares.
Finally, liquidity is not the only reason to flog your shares to your customers, Mr. Gillen says. Turning customers into shareholders also makes them better customers, he says.
