NYSE or Nasdaq?
Why companies switch stock markets, and why traffic (for now) is one way
NEW YORK (CNNfn) - Moving is never that much fun. So when the third-largest U.S. brewer, Adolph Coors Co., packed its stock's $2 billion bags and switched homes from Nasdaq to the New York Stock Exchange earlier this year, it had its reasons.
"We'd looked at it various times for years," investor-relations manager Dave Dunnewald recalled. A company that dates to 1893 doesn't always move with lightning speed. But after four years of serious discussion, it looked again, and on March 11 it leaped.
Moving is also expensive. The Golden, Colo.-based company paid $193,100 for the privilege of listing almost 36 million Class B shares on the Big Board. (Its Class A shares are all owned by the Adolph Coors Jr. trust and aren't publicly traded.) That's on top of an annual fee.
And it's a hassle. Yes, the brewer got a catchy new symbol, RKY, after its mountain home, to replace the more-mundane ACCOB. But why take the chance one of the almost 3,200 shareholders that hold Coors stock (RKY) would forget it?
Prestige or not prestige
The first reason most companies that switch to the NYSE cite is prestige. Dating to 1792, the NYSE is the biggest and best-known stock market. "Trading over the counter for a company the size and importance of Coors is operating somewhere in the Stone Age," insisted Roy Burry, an analyst with Brown Brothers Harriman.
But Nasdaq has prestigious clients of its own, not least of them the largest stock in the world, Microsoft Corp. It's rather fitting that Microsoft (MSFT) edged General Electric Co. (GE) to claim the market-cap world title. Microsoft, Nasdaq, new economy. GE, NYSE, as traditional as you get.
Intel and Dell are famously Nasdaq stocks, too. High-tech stocks often end up on Nasdaq, which started in 1971, out of necessity rather than choice. Nasdaq has less restrictive listing requirements than the NYSE and opened its arms, even marketed to smaller companies the Big Board ignored. Once they got there, they stayed.
Dell (DELL) went public 11 years ago. "Back then it was because that's where new companies go to gain some visibility," Dell spokesman T.R. Reid said. "Eleven years later, it's a very natural place for us to be."
The computer maker likes being listed next to its peers, not only in product terms but growth rate and stock appreciation. "People looking to invest in high-tech stocks, that's where they go." Plus Nasdaq, a computer-based trading system, is actually a Dell customer. Dell insists its considerations are more mundane.
"What we're looking for is to make sure the people that do or might do or we'd like to have an interest in Dell have broad access to our stock, and they have that via Nasdaq," Reid said.
Why change in the first place?
So why do companies switch? Nasdaq relies on market makers to buy and sell the stock. Companies trading on the system have an average of 11 firms trading their stock.
The market-maker system gives unheard of little known stocks a boost. The market makers talk up the stock, and those firms have an interest in generating equity research for investors. As the dealer, the market maker can also profit from the difference between the buy and sell prices, the spread, so they have an incentive to trade Nasdaq stocks.
But because the market makers don't act in conjunction, the spread can be larger than on the NYSE, where every company relies on one specialist to keep the books on its trades. All the trades have to pass through the specialist, whose job it is to keep an orderly market in the issue.
Because executing the order is centralized on the NYSE, it's quicker and there's accountability, according to Patrick Healy. Healy, president of The Issuer Network in Chevy Chase, Md., consults companies on stock-related issues, including which exchange to pick.
With 15 market makers, a Nasdaq company wouldn't know who to call if it was unhappy with its trading. And you can't fault the market maker if they put in a low bid, he said. "He looks at the market and puts in a bid where he's supposed to make money." If a company is unhappy with its trading on the NYSE, "you know what to do. You call your specialist."
Lithia Motors Inc. moved from Nasdaq to the NYSE in January because it felt there was more day-to-day volatility in its stock. Lithia (LAD), a Medford, Ore., car retailer, was also unhappy on Nasdaq because it felt a market maker would sometimes put in a low bid at the end of the day, according to CFO Brian Neill.
A company such as Microsoft trades enough that its price moves fairly fluidly and doesn't jump around. But Lithia wasn't heavily traded, "so you have a lot of swings in your closing price every day," Neill said. Sometimes he felt the closing price didn't reflect the bulk of its trading activity for the day.
Iron Mountain Inc. (IRM), a Boston-based records-management company, switched in April. Like Lithia, it says it sees smaller trade-to-trade jumps and a tighter bid-ask spread on the NYSE.
Sometimes it helps that NYSE is more established, too, according to CFO John Kenny. The company uses its stock in acquisitions. "There have been a couple of sellers who are old-time thinkers and will be more comfortable getting a New York Stock Exchange stock."
Nasdaq, run by the National Association of Securities Dealers, has largely put its image problems of price collusion among its members behind it. But there are still institutions and individuals that will only buy NYSE stocks based on the idea that the exchange's listing requirements are stricter.
Coors also cites narrower spreads and lower volatility in its decision to move. And the brewer says it wants to expand internationally and feels while Nasdaq is well-known within the United States, the NYSE is much better respected worldwide.
Strangely enough, stock-price improvement itself has almost nothing to do with companies' switching. "There is no correlation between markets and stock price," Kenny, the consultant, pointed out.
Coors, for instance, only expects a benefit well into the future, if any. Amid the mass of earnings and economic numbers that drive its stock price, Dunnewald said it will be almost impossible to tell if its price has risen as a result of changing markets.
To date, the traffic has been almost exclusively one-way, from Nasdaq to the NYSE. That's because it's virtually impossible to leave the NYSE thanks to a rule known as Rule 500.
Rule 500, which dates to 1939, places a heavy burden on companies that want to delist, say to switch to another market. An NYSE stock has to get 66 percent of its shareholders to approve delisting a security, with less than 10 percent objecting.
"It's a ridiculous standard. It can never be met," Healy said. It's tough to get 66 percent of shareholders to reply, let alone approve. Wags dub Rule 500 the Roach Motel rule. "Companies get in but they can't get out," said Nasdaq spokesman Scott Peterson.
Knowing that Rule 500 deters some companies from picking it and that Nasdaq uses it against it, the NYSE filed in 1997 to amend Rule 500. As it's now written the new rule would let a company delist if it gets approval of the board, notifies the 35 largest shareholders and issues a press release. That change is "pending," according to an SEC spokesman. Healy hopes to see it go through later this year.
Still, Nasdaq feels even the adapted rule is still too restrictive. From Nasdaq, "it's very simple to change your stock exchange," Peterson, the spokesman, said. "The process can be as short as 48 hours. We believe you should be able to basically fire you stock exchange if you're not getting the service you should."
Level playing field
If and when companies are free to move in either direction, Healy expects about 50 mid-cap stocks to switch from the NYSE to Nasdaq. Mainly they'd want to benefit from the market-maker promotion they'd receive.
Nasdaq has other benefits. It has promoted its companies better and positioned itself as the high-tech alternative to the NYSE, though Healy said that's mainly a marketing issue. "New York's technology is better," he said, though it has had its problems. And there are tech companies on the Big Board. When Dell says it wants to stay with its peers, Gateway, Compaq and Hewlett-Packard all trade on the NYSE.
The annual fees each market charges are based on the number of shares traded and not that different, companies that have switched point out. But one deterrent to keep the very largest companies such as Microsoft from switching is that Nasdaq's fees are capped at $50,000 a year. NYSE charges up to $500,000 for its biggest companies.
Nasdaq's name-brand stocks claim not to have plans to switch. "Microsoft has a long history with Nasdaq and no plans at this point to change," a spokesperson said. But the electronic exchange probably gives the biggest boost to companies that aren't that well-known and need the promotion they get from market makers.
Switching certainly isn't undertaken lightly, and neither exchange is for everyone, Healy said. Either is preferable over any of the smaller regional exchanges. They've even discussed ways of linking, though the exchanges downplay that idea right now.
Neither is an awful choice. "The top end of the auction market is New York. The top end of the dealer market is Nasdaq," Healy admitted. As long as their stocks keep headed in the right direction, investors aren't likely to complain which exchange they make money on.
-- by staff writer Alex Frew McMillan