Competitive Intelligence

Nasdaq vs. NYSE: Dual Listings Gain Traction with New Nasdaq Lobbying Efforts, Even as NYSE Strengthens Marketshare

Just as a new competitive push by the Nasdaq threatens to weaken an already hard-hit institution, in a year-end statement released on the NYSE Web site, the world's largest exchange said its market capitalization increased to $16.8 trillion during 2003 from $13.4 trillion at the end of 2002. The NYSE said it maintained a market share of 81 percent in listed stocks traded during NYSE trading hours it garnered "the dominant share" of the market for initial public offerings during the year with 65 new offerings, while adding 106 new companies to its listings.

The exchange managed to divert business from its largest rivals, including among its 90 new domestic listings were 17 companies that transferred from the No. 2 Nasdaq Stock Market, and six firms which left the No. 3 American Stock Exchange.

But, as the Big Board is embroiled in a controversy stemming from the $188 million compensation package of former NYSE Chairman and Chief Executive Officer Richard Grasso, who was forced from his post by widespread criticism over the size of his pay package, the Nasdaq started a new lobbying effort directed at dual-listing many of the exchanges biggest listing stocks.

Following the scandal, interim chairman John Reed appointed a whole new board, splitting the oversight mechanism from its market functions. And, the sweeping governance changes altered the manner by which board members are selected and the functions they oversee.

On December 18, this new board named John Thain chief executive officer and separated the roles of chairman and CEO, but has yet to select a new chairman to manage the NYSE's regulatory arm.

The NYSE has also come under fire for a weak governance practices and the trading practices of its six specialist firms, which match buyers and sellers on the exchange's trading floor. Nasdaq’s new lobbying efforts are directed at pointing out the obsolescence and inherent conflicts of interest present in the so-called "specialist system".

Meanwhile, as the Reuters excerpt below explains, the Nasdaq’s "kick-em-while-they’re-down" attempt at a new round of dual-listing lobbying is an attempt to put more competitive pressure on the NYSE:

The Nasdaq Stock Market, seeking to capitalize on recent woes at the New York Stock Exchange, said on Monday six NYSE-listed blue-chip companies had agreed to have their shares also trade on Nasdaq.

The six companies, from a variety of industries and with a combined market capitalization of about $156 billion, are Apache Corp. (NYSE:APA), Cadence Design Systems Inc. (NYSE:CDN), Charles Schwab Corp. (NYSE:SCH), Countrywide Financial Corp. (NYSE:CFC), Hewlett-Packard Co. (NYSE:HPQ) and Walgreen Co. (NYSE:WAG).

The six companies - the first to list on both markets - will not be required to pay Nasdaq's listing fees for the first year.

Nasdaq, whose list of traded companies is heavily weighted in technology, is trying to reinvigorate its business after suffering the implosion of the dot-com bubble in 2000 while facing a growing competitive threat from electronic-based trading platforms.

"It's certainly a public relations coup for the Nasdaq," said Matthew Andresen, head of global trading at Sanford C. Bernstein & Co. LLC in New York.

"This is an organization that has had an unending succession of negative news, and this is a piece of pretty good news," he said, though he added that the financial impact would be minimal for both the Nasdaq and the NYSE.

A spokesman for the NYSE declined to comment except to point to a statement the exchange made last week. That statement said the Big Board's studies showed "companies that transfer to the NYSE from Nasdaq experience higher-quality markets" as well as lower costs and volatility.

In fact, 680 companies have transferred from Nasdaq to the NYSE since 1990, according to the NYSE. During that time, only one company has defected from the Big Board to Nasdaq, it added.

Nasdaq's move comes as the Big Board, which controls about 80 percent of the U.S. market in listed stocks, is undergoing upheaval related to the ouster of former Chairman Richard Grasso over his $188 million pay package.

The NYSE is also now under regulatory scrutiny over its specialist-based open outcry system, which critics say is less efficient than Nasdaq's electronic trading system.

The revelation about Grasso's compensation set in motion a chain of events that led to the most extensive governance changes in the exchange's history.

Those developments have emboldened Nasdaq to become more aggressive in trying to lure business away from its largest rival as its listings have declined.

"This is the first time that companies on a manual floor-based market have endorsed and recognized the merits of an electronic market with multiple participants," Nasdaq Chief Executive Robert Greifeld told Reuters.

The decision by the companies to maintain dual listings, Greifeld said, "is stating that the performance they see as possible on the Nasdaq ... is a good outcome for their shareholders and investors."

Silvia Davi, a Nasdaq spokeswoman, said the new listings should begin trading on the market within the next few weeks - under the same three-letter trading symbol on both markets.

Nasdaq said any companies that wish to maintain dual listings must meet national market listing standards.

For their part, the companies involved expressed the desire to see more liquid trading in their stocks.

"In our belief, the more stock exchanges you are listed on, the greater the liquidity or the greater opportunity for volume of share trades," said Brian Humphries, a spokesman for Hewlett-Packard. "We believe there are many advantages to being on the Nasdaq, and it somewhat increases the choice or competition, which is always healthy in our view."

One industry official saw the Nasdaq move as a development in the ongoing fragmentation of stock trading that has accompanied the rise of electronic platforms.

"The world used to be divided into (the NYSE and Nasdaq) ... and now everyone's taking the gloves off," said Kevin O'Hara, chief administrative officer at Archipelago Holdings, an automated exchange.

Meanwhile, Pfizer, the world's largest drug company and a leader in U.S. corporate-governance reform, is evaluating Nasdaq's offer to have Pfizer trade its shares on the electronic exchange. At the end of 2003, Pfizer had the third-largest market capitalization of all New York Stock Exchange-listed companies - $345.26 billion, according to NYSE data.

"We met with Nasdaq officials in December at their request, and reviewed their dual listing proposal," Pfizer spokesman Paul Fitzhenry. "We made it clear in our meeting that we would not reach any conclusion in any particular time frame. We are evaluating the proposal."

If Pfizer makes the change, it could represent an intriguing new way the two markets compete for stock listings and orders – in the short run, Nasdaq wants primarily to change the rules of what used to be a decidedly zero-sum game, through persuading large NYSE-listed corporations not to abandon the NYSE entirely, but simply to dual-list their shares on Nasdaq. Reuters continues:

In a statement, the NYSE said that while it isn't familiar with Nasdaq's plan, the dual-listing concept "does nothing to serve the interests of shareholders." The NYSE also said that "there's nothing new" about the effects of dual listings.

Indeed, at first blush, not much would change if dual-listings were widely embraced among blue-chip NYSE stocks. After all, Nasdaq already has a system that trades NYSE stocks. But experts said Nasdaq's dual-listing threat may pack a powerful public-relations punch that could have negative consequences for the NYSE and the trading firms that do business there.

One trading executive, Matthew Andresen of Sanford C. Bernstein, said Nasdaq's move to dual-list companies would represent "a PR coup" that could nevertheless "muddy the franchise" of the NYSE. Having Hewlett-Packard agree to dual-list its shares is "saying that Nasdaq is real," Andresen said.

Though nothing has changed as far as what can trade where, such a stamp of approval could result in more trading volume in NYSE stocks going Nasdaq's way. The NYSE said it "continues to produce the best prices in our listed equities." But some observers said that dual listings could encourage market participants such as active traders to do more business on Nasdaq.

"I think it might draw more liquidity. More competition on price is a good thing for market participants," said Keith Keenan, head of institutional trading at Wall Street Access, a New York brokerage firm.

That could be a negative for the NYSE's floor-trading "specialists." These auctioneers oversee the trading in assigned stocks at the Big Board and therefore command an important part of the volume in those stocks. Hewlett-Packard's specialist, for example, is the specialist unit of Amsterdam-based Van der Moolen Holding NV.

In its statement, the NYSE said it is proud "that the best companies choose to list on the NYSE, which has the most stringent listing requirements of any market. The vast majority of U.S. companies that are eligible to list on NYSE have in fact done so, and as new firms grow and meet our demanding requirements, most eventually decide to make the investment in an NYSE listing because of the benefits to their shareholders."

The threat of dual listings could pressure the NYSE in other ways as Jefferies analyst Charlotte Chamberlain said last week, that this is really a "psychological fire-bombing by the Nasdaq of the NYSE to get them to get serious about merging with the Nasdaq."

I agree that Nasdaq’s success in dual listings will ultimately lead toward a merger, of interests if not companies, into a closer, one-market system. In December, the Wall Street Journal reported that Nasdaq had approached the NYSE about a possible merger of the organizations, but the NYSE has declined comment on the rumor, while Nasdaq denied talks ever having been underway.

- Arik

Posted by Arik Johnson at January 13, 2004 12:49 PM | TrackBack