NASDAQ vs. NYSE: Stock Trading Transformed by Technology and Competition

by | Jan 12, 2004

Today’s bold and surprising announcement that six New York Stock Exchange companies would also list their shares on the NASDAQ Stock Market is a clear sign that more competition is coming to the vast markets where stocks are bought and sold. The decision by the six firms, said NASDAQ’s chief executive officer Robert Greifeld on […]

Today’s bold and surprising announcement that six New York Stock Exchange companies would also list their shares on the NASDAQ Stock Market is a clear sign that more competition is coming to the vast markets where stocks are bought and sold.

The decision by the six firms, said NASDAQ’s chief executive officer Robert Greifeld on CNBC this morning, will help other companies and the public “judge markets not as a brand but on how they perform for investors.” Greifeld says the NASDAQ can offer swifter executions of trades, with more value to investors, and he wants to prove it this year with the six companies in a head-to-head comparison with the NYSE.

The NASDAQ uses an electronic trading system with 300 market makers while the NYSE, uniquely among large global markets, uses specialists on the floor of the exchange to match buyers and sellers.

Jeffrey Sonnenfeld, associate dean of the Yale School of Management, said that “dual listing” of the six companies “ratchets up the debate regarding the quality of the trading environment for securities — and what is best for shareholders.”

Today’s announcement is also a sign that the NYSE, weakened by scandals involving its former chairman Richard Grasso and its specialists, is rapidly losing its dominance. In the past, top managers at companies like Walgreen Co. and Hewlett-Packard would not have dreamed of offending the Big Board powers by striking up a relationship with the upstart NASDAQ.

For the NASDAQ itself, winning the six dual listings — in addition to Walgreen, the nation’s largest retail drug chain, and HP, the diversified technology firm, the companies are Cadence Design Systems, software; Apache Corp., energy; Countrywide Financial, mortgage lending; and Charles Schwab, financial management — is a huge boost. NASDAQ, which is top-heavy in tech firms, has, since 2000, lost more than 100 companies to the NYSE. But with a new aggressive CEO and a rising market — its Composite Index rose by half in 2003 — NASDAQ is surging again.

Investors will benefit from the increased competition, but they would benefit even more if the Securities and Exchange Commission would revise its “trade-through” rules, which gives the NYSE a significant advantage over electronic markets and has helped it preserve its near-monopoly in some stocks.

Those rules are a throwback to a low-tech age. They mandate that markets cannot ignore better prices that are available elsewhere. In practice, the rule means that trades slow down as orders are routed to the floor of the NYSE — instead of electronic markets like NASDAQ — because the NYSE often posts the best price. Some investors, however, prefer speed of execution to the potential for gaining a penny a share. The current system denies them such a choice.

Another change that would increase competition is granting NASDAQ full status as a stock exchange — so-called “exchange registration.” That decision, which has been delayed at the SEC for years, would permit NASDAQ to make a complete break from its regulator, the National Association of Security Dealers, and increase its capital by launching a public offering of its stock.

A similar change at the NYSE is also overdue. In the wake of the scandals involving Grasso and the specialists, the NYSE revised its management structure, but, unlike the NASDAQ, it still lacks an independent regulator The NYSE, too, would benefit from being publicly owned by thousands of investors, rather than being the property of traders and investment firms.

But these continuing problems do not detract from the importance of today’s NASDAQ announcement. Dual listing has the support of some of the largest money-management institutions, such as Fidelity Investments, the mutual fund giant. The decision by the six firms, however, must be a catalyst for future changes, not just from markets and listed companies, but, more importantly, from regulators.

Ambassador Glassman has had a long career in media. He was host of three weekly public-affairs programs, editor-in-chief and co-owner of Roll Call, the congressional newspaper, and publisher of the Atlantic Monthly and the New Republic. For 11 years, he was both an investment and op-ed columnist for the Washington Post.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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