Why Public Markets No Longer Reward Long-Term Growth

Public Markets Have Drifted From Their Purpose

Public equity markets were built to perform three essential functions: raise capital for growing companies, establish fair price discovery, and provide liquidity for investors. For much of the last century, those goals were broadly aligned. Companies raised money to invest. Investors evaluated long-term value. Intermediaries earned reasonable returns for facilitating the exchange.

That alignment has weakened significantly.

Over the past two decades, particularly in small-cap and OTC securities, U.S. equity markets have evolved into systems that are optimized less for capital formation and more for trading efficiency and monetization of volatility. This change was not the result of a single policy decision or technological leap. It is the cumulative effect of incentive shifts that now favor speed, optionality, and turnover over ownership and growth.

Capital formation still occurs, but it is no longer the market’s organizing principle. This shift has serious consequences for both companies and investors.

Short Selling Has Become a Capital Structure Trade

Short selling has always been part of healthy markets. When based on research and conviction, it serves an important disciplinary function by exposing fraud, challenging excess, and anchoring valuations to reality.

That is no longer the dominant model in the lower end of the market.

In today’s small-cap and OTC environment, short strategies are often built not on business analysis but on a company’s reliance on capital. The strategy is straightforward: a company will need capital, and the market structure will penalize it for trying to raise it.

Common triggers include planned equity raises or ATM facilities, convertible securities, pre-revenue or early-revenue operating models, thin floats with limited natural buyers, and predictable disclosure or audit timelines.

None of these triggers indicate failure. They are features of growth-stage businesses. Yet in modern markets, they function as invitations for pressure that is largely mechanical.

The effect is corrosive. Companies are penalized not for poor execution, but for operating within the financial realities of building a business.

Market Making No Longer Looks Like a Utility

Digitization has transformed market making from a stabilizing service into a highly strategic operation. Historically, market makers earned modest spreads in exchange for providing continuity and absorbing short-term imbalances. Their role was simple: keep markets orderly and liquidity available.

Electronic trading changed that calculus. Speed became decisive. Algorithms replaced human judgment. Market making evolved into an exercise in risk management and opportunistic positioning, often disconnected from the operational realities of the companies being traded.

This becomes particularly important when a company announces a capital raise. When an ATM offering or convertible issuance is filed, algorithms detect the event immediately. They anticipate an increase in supply and a temporary imbalance between buyers and sellers. For market makers, this represents risk, but also opportunity.

To manage risk and extract profit, market makers adjust liquidity. They can temporarily remove bids or asks, widen spreads, or route trades internally. Pulling bids reduces buying interest, which can push prices lower. Raising asks makes it more expensive for investors to buy, limiting upward pressure. Routing trades internally keeps transactions out of the visible market, making liquidity appear thinner and amplifying short-term price swings. Every adjustment benefits the market maker and intensifies volatility around the capital raise.

The consequence is that a company doing exactly what it should—raising capital to grow—becomes a predictable trading event. Prices can move sharply even when the business fundamentals are sound. Market makers profit from the volatility they create, while the company bears the consequences in share price performance and investor perception.

In effect, raising capital stops being purely a financing decision. It becomes a tactical challenge: CEOs must consider timing, float, liquidity, and algorithmic behavior to avoid being penalized by the very systems meant to support orderly markets. This is a structural reality of modern markets. It is legal, but it is a direct result of the way speed, automation, and concentrated liquidity intersect with corporate finance.

Concentration Has Shifted Power Quietly but Significantly

As trading became more capital and technology intensive, market power consolidated. The same firms now frequently act as market makers, proprietary traders, and primary counterparties for retail order flow.

This concentration has reshaped outcomes.

Liquidity is increasingly internalized rather than displayed. Execution quality is opaque. Risk is managed centrally, often at the expense of smaller issuers whose securities are easiest to de-risk by widening spreads or stepping away.

The result is a market where prices can move sharply without new information and where those moves are rational for intermediaries but destabilizing for companies and investors alike.

From Investment Venue to Trading Ecosystem

The dynamics that distort small-cap equities are not confined to stocks. Algorithmic market making has spread to options, futures, crypto, and even tokenized assets. These are markets that are already more volatile, less regulated, and structurally thinner than traditional equities. When you layer the same liquidity manipulation, spread widening, and internalization behavior onto these instruments, the consequences are magnified exponentially.

Think of it this way: in the equities market, aggressive algorithmic trading around a capital raise might be like setting off a firework. The price jumps, spreads widen, and liquidity fluctuates—but it is mostly contained to that stock and its immediate ecosystem. In derivative markets, the same behavior is more like setting off an atom bomb. Options and futures are leveraged instruments. A single move in the underlying can ripple across multiple strike prices, expirations, and linked contracts. Thin liquidity in crypto markets means that any mechanical trade or large order can wipe out price levels across exchanges in seconds. The “feedback loops” are immediate, and volatility compounds itself as automated systems react to their own signals.

The same patterns are visible in leveraged ETFs, tokenized assets, and even DeFi platforms. Algorithms do not distinguish between asset classes. They respond to signals—capital raises, option expirations, token issuances—with speed and precision. In less regulated or thinner markets, those responses create outsized swings, temporary illiquidity, and dramatic price dislocations.

The takeaway is clear: the market behavior that penalizes growth in small-cap equities is not contained. It spreads, amplifies, and mutates across instruments. In these other markets, the consequences are more extreme, less predictable, and harder for both investors and issuers to manage. A system designed to extract micro-profits from volatility in one market ends up engineering instability across the entire financial ecosystem.

The CEO’s Burden Has Expanded and Not by Choice

CEOs of public companies, especially small-cap and OTC firms, must now navigate the market as much as they manage the business itself. Raising capital, investing in growth, or simply maintaining transparency can trigger mechanical selling, liquidity imbalances, and algorithm-driven swings that have little to do with the company’s fundamentals.

Understanding the float and how shares are held or loaned has become central to managing these pressures. Tightening the float reduces the shares available for daily trading, limiting the impact of predatory strategies. Anticipating short interest and monitoring lending programs allows executives to foresee potential pressures before they manifest in the stock price.

Capital raises require careful timing and design. Structuring offerings to stagger tranches, clarify pricing, and secure investor pre-commitments can signal stability and reduce susceptibility to algorithmic trading and speculative attacks. Market makers’ behavior around spreads and liquidity can no longer be ignored; deliberate engagement or temporary support during sensitive periods can help stabilize trading.

Investor communication is now inseparable from operational strategy. Explaining the rationale behind capital allocation, the expected trajectory of growth, and the company’s priorities helps counter misinterpretation by algorithms and retail investors. Even when volatility is unavoidable, having contingencies in place—whether through temporary liquidity support or strategic buybacks—can help maintain confidence and mitigate swings in stock price.

Raising capital is no longer simply a financial decision. CEOs who anticipate market mechanics, understand the incentives of intermediaries, and actively manage how information and shares flow into the market can raise funds more effectively, protect value, and maintain credibility.

Markets Can Be Pro-Trade Without Being Anti-Build

None of this requires abandoning modern markets or technological efficiency. But it does require acknowledging that incentives matter and that current incentives are misaligned with the stated purpose of public equity markets.

Encouraging signs exist. Retail investors are more informed about market structure. Alternative venues are experimenting with slower execution and reduced arbitrage. Regulatory scrutiny of payment for order flow, internalization, and short transparency is increasing.

Rebalancing markets toward capital formation likely requires meaningful transparency around short interest and securities lending, enforceable obligations for market makers during periods of stress, constraints on excessive internalization that removes liquidity from public venues, and practical education for executives before they enter public markets.

These are not radical proposals. They are functional ones.

Rebuilding the Contract

Public markets work best when they honor an implicit contract. Companies invest and disclose, investors assess and commit, and intermediaries facilitate rather than dominate.

That contract has frayed. Not because markets are malicious, but because their incentives have drifted.

Recognizing that drift is no longer controversial. Correcting it is the harder work.

Markets evolve, but if they are to remain credible engines of growth, they must once again serve the businesses that depend on them, not merely the systems that trade them.