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What Else Can Go Wrong at Nasdaq? Well...


Despite the recent snapback, the damage from the turbulence in Nasdaq stocks is spreading. It's hitting that market itself. So far this year, nine Nasdaq companies have announced they are switching to the New York Stock Exchange. The first to go was E*Trade Group Inc. (ET), the online brokerage. Other defectors include BMC Software Inc. (BMCS) and Krispy Kreme Doughnut Corp. (KREM), one of last year's most successful initial public offerings.

If the pace continues, as expected, it will reverse a trend driven by the bull market in technology stocks. Nasdaq had been using the success of stocks such as Microsoft (MSFT), Intel (INTC), and Cisco (CSCO) to champion itself as the market of the future, changing the traditional view that all companies aspired to list on the NYSE. In fact, Nasdaq dramatically cut the number of companies switching each year from 96 in 1996 to 25 in 2000.

"THINGS HAVE CHANGED." Recent defectors to the NYSE generally cite traditional reasons, such as reaching milestones in their growth. But some also are using euphemisms for getting away from Nasdaq's losses. Clothing chain Chico's FAS Inc. (CHCS) says its NYSE listing should result in "increased liquidity and reduced volatility for our shareholders, helping us to achieve our long-term goal of increased shareholder value."

Patrick J. Healy of the Issuer Network, a consultant to companies reviewing their listings, says Nasdaq had been doing great holding on to its stocks. Now, he says, "it is going to be a very significant year for the New York Stock Exchange."

NYSE officials are thrilled. Catherine R. Kinney, group executive vice-president for client services, says "things have changed" since the Nasdaq balloon popped. When prices were soaring, companies weren't concerned if one market offered lower trading costs for shareholders. "People are starting to come back to basics," she says.

Which company will be next to move? Speculation on Wall Street includes Cisco Systems Inc. and Sun Microsystems Inc. (SUNW) The NYSE's Kinney won't comment other than to say, "Stay tuned, because we know we won't disappoint you." The exchange keeps the ticker symbols M and I available for Microsoft Corp. and Intel Corp. Microsoft, Sun, and Intel say they have no plans to switch to the NYSE. Cisco declined to comment, citing a longstanding policy.

Nasdaq officials insist the setback is temporary. "Given the fact that there has been a decline in the market, we are incredibly pleased," says David Weild, Nasdaq executive vice-president for corporate clients. Over the past year, Nasdaq listed about half of the companies spun off by NYSE-listed corporations, he says. The exchange counters that nearly all of those would not have met its listing standards.

Weild contends some companies would be checking out of the NYSE and moving to his market if it weren't for what he calls the "anticompetitive, Roach Motel rule," a.k.a. NYSE Rule 500. The rule requires NYSE companies to notify their biggest 35 shareholders and take a vote of directors before leaving.

But the rule probably isn't much of a factor compared with Nasdaq's other obstacles. First among those are widespread doubts that its dealer market works as well as the centralized auctions at the NYSE. The two markets have been arguing for decades over which gives investors better trading prices, each citing their own academic studies. In January, however, the Securities & Exchange Commission issued its own study that essentially gave the nod, and a marketing tool, to the NYSE.

PETS WELCOME. Now, the NYSE is moving more aggressively than ever. It just cut its initial listing fee for large companies from $500,000 to $250,000. It has been keeping a Silicon Valley office for two years. It happily hosts publicity stunts for issuers, welcoming to its floor Gateway Inc.'s cow in 1997 and E*Trade's chimpanzee on a horse in February.

Meanwhile, Nasdaq officials are trying to wipe away the tarnish from so much tech and telecom. Weild contends that stocks on Nasdaq actually trade at higher valuations than industry peers on the NYSE. "We believe that is the case," he says. He hopes to have research soon to prove it. He had better hurry. By David Henry in New York


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