Is the IPO market a distorted market?

Yes (WSJ subscription required). But is that a bad thing? Not according to the Supreme Court:

In a 7-1 decision yesterday, the court said the securities markets were a different animal than ordinary commerce and that practices that might seem to violate antitrust laws in other sectors were essential to Wall Street.

The court said the job of policing combinations among brokers rests with the Securities and Exchange Commission, whose regulators possess the expertise to distinguish permissible arrangements from illegal conspiracies.

The Supreme Court, in an opinion by Justice Stephen Breyer, preferred to draw the bright line favored by the banks and the SEC. "Financial experts, including the securities regulators, consider the general kind of joint underwriting activity at issue in this case, including road shows and book-building efforts essential to the successful marking of an IPO," Justice Breyer wrote.

Justice Clarence Thomas dissented, arguing that the securities laws were intended to supplement, rather than replace, other remedies such as antitrust laws. Justice Anthony Kennedy didn't participate in the case and, as typical when justices disqualify themselves, offered no explanation why.

(Note: I think Kennedy has a relative in the investment banking business).

I would sum it up this way--it is hard to find an price for something that is not available to the market. For example, shares that have not yet been offered. Issuers, distributors, and investors work together to converge on a price, given multi-party valuation analyses and demand forecasting. It's not as good as a free market for pricing, but there is no market yet.

I've worked for banks since graduating from college (not in investment banking), so since this indirectly affects my job prospects and also my Manhattan home value, I am disclosing it.

UPDATE: Justice Stevens wrote this:

After the initial purchase, the prices of newly issued stocks or bonds are determined by competition among the vast multitude of other securities traded in a free market. To suggest that an underwriting syndicate can restrain trade in that market by manipulating the terms of IPOs is frivolous.

UPDATE: Also from the WSJ, while the Supreme Court "gets it", the Federal Trade Commission doesn't:

But this is where the FTC's story gets weird. It wants to argue both that the quality, selection and "experience" make Whole Foods unique among supermarkets and that without competition from Wild Oats (in the few markets in which they overlap), Whole Foods' quality, selection and experience will worsen. Which means, we guess, that Whole Foods would look more like an "ordinary" supermarket. Which would mean, more competition for Whole Foods. Or something. We admit the FTC lost us when it started arguing that Whole Foods' evil plan is to undermine the very uniqueness on which the FTC is basing its antitrust case.

Maybe the FTC is responding to heat from Capitol Hill to show it's on the job, but pandering to Congress has never made for good antitrust policy. Whole Foods says it will battle the FTC in court, and the case will make for some entertaining jujitsu as Mr. Mackey argues that his stores aren't as unique as his marketing materials suggest, while the FTC pleads that the merger will make Whole Foods less unique and more expensive at the same time. Such are the absurdities of modern antitrust policy.