Going after the Big Board
By MATHEW INGRAM
Globe and Mail Update
The news that the Nasdaq Stock Market is trying to entice companies away from the New York Stock Exchange shouldn't come as any surprise — if anything, it's surprising it has taken this long for the electronic exchange to try and capitalize on the NYSE's woes. The two markets have been at each other's throats for a decade or more, with each taking advantage of the other's misfortune whenever possible.
This latest manoeuvre is more than just the Nasdaq whispering in the ears of a few NYSE-listed companies, however. It has the backing of Fidelity Investments, the largest fund manager in North America with almost a trillion dollars (U.S.) in assets and one of the strongest critics of the NYSE — in particular, the behaviour of the "specialists" on its trading floor. Fidelity is clearly using the Nasdaq as a way of sending the larger exchange a message: pay attention to your largest customers or else.
On Monday, the Nasdaq announced that six major NYSE-listed companies will be listing their shares on the electronic exchange as well, including Charles Schwab, Hewlett-Packard and pharmacy chain Walgreen. Pharmaceutical giant Pfizer and insurance behemoth American International Group have also said they are considering such a dual listing. The Nasdaq has reportedly been trying to convince several major companies to abandon the Big Board entirely, but hasn't managed to do so yet. A spokesman for Fidelity said the firm was "supportive" of the move by the six companies.
Schwab CEO David Pottruck said in a news release that the company took the step because it believes in the "power of market competition" and that it is "proud to be among this initial group of market innovators." He said Schwab hoped that "as more companies opt for dual-listing, we will experience a healthy increased competition in our trading markets, resulting in... improved trading outcomes for all investors." HP chief financial officer Bob Wayman said the decision was about "providing more choice to investors," and giving them "more liquidity through the ability to trade on an alternative exchange."
HP's comment doesn't really make a lot of sense, however. Those who want to trade Hewlett-Packard's stock don't have to go to the New York Stock Exchange just because the company is listed there — they are free to buy and sell HP shares on electronic networks such as Archipelago and Instinet any time they wish, or even on the Nasdaq itself. Schwab's rationale is a little closer to the mark, in that it and NYSE critics such as Fidelity seem to want to yank the Big Board's chain a little and promote competition between the two markets.
What makes it even more obvious that the announcement is meant primarily as a wake-up call for the NYSE is a U.S. securities rule called the "trade-through" rule. Under Securities and Exchange Commission regulations, an order must be sent to the exchange with the lowest price, regardless of where it originates. In other words, even if someone directs a trade initially to the Nasdaq market, it will wind up being executed on the NYSE if the Big Board's posted price for that stock is cheaper.
This seems like a good thing for investors, and for small shareholders it probably is. Massive institutions such as Fidelity don't think much of it, however — they would rather pay a little extra if it means they can trade quickly and anonymously. And that, they say, is rarely possible with the NYSE's "specialist" system. This time-honoured arrangement puts individual traders in charge of a particular stock or stocks, and requires them to ensure that there is a liquid market for trading. They are allowed to buy or sell shares out of their own account in order to keep the market moving and provide the best price.
Institutions such as Fidelity and some large state pension funds, however, argue that the specialists routinely "get in front" of their trades — by submitting their own orders first, in order to benefit from the price fluctuation that occurs after someone like Fidelity puts through a massive buy or sell order. Just before Christmas, the California Public Employees Retirement System (Calpers) sued the NYSE and seven specialists — almost all of which are owned by major brokerage firms — alleging that they profited at the expense of other investors, and that the exchange knew of and approved these practices. The SEC is currently investigating whether the trading by specialists breached securities rules.
Ironically, when it comes to their competitive positions in the marketplace, the NYSE is well ahead of the Nasdaq. Although the electronic exchange has several high-profile technology stocks, including Microsoft and Intel, it has not been able to lure any NYSE companies to its fold exclusively, while the New York exchange has managed to get more than 100 to go the other way. The Nasdaq has also been steadily losing market share to networks such as Instinet and Archipelago. And it has been losing money as well: in the first nine months of 2003 it lost $84.5-million on lower revenue.
In fact, just before Christmas The Wall Street Journal said that the Nasdaq had proposed a merger with the New York exchange, although the electronic market denied the report. Instead, it seems the Nasdaq plans to continue trying to take advantage of the NYSE's misfortunes as much as it can — and Fidelity is more than happy to help rattle the Big Board's cage. |
