The Battle of the Boards Heats Up


The struggle between the nation's two biggest stock exchanges continues. The Nasdaq won a round on Jan. 13 by luring six blue-chip New York Stock Exchange-listed companies to trade on its electronic platform. Charles Schwab (SCH), Apache (APA), Countrywide Financial (CFC), and Hewlett-Packard (HPQ) are among the first half-dozen companies to announce their intention to be listed on both markets.

HP spokesman Brian Humphries says Nasdaq pitched it just before Christmas, adding that the decision was a no-brainer. "It will increase the volume of shares traded, which will mean more liquidity for investors," he says.

The intention is clear-cut: "Nasdaq brought additional competition to the trading environment with the dual-listing program, which shows that companies are newly focused on how competition in the marketplace can benefit their shareholders," Nasdaq Chief Executive Robert Greifeld told BusinessWeek Online. The way Nasdaq sees it, all stocks should be listed on both exchanges. "What's irrefutable is that monopolistic structures, where trading is pushed through a single intermediary, are not viable long-term," Greifeld adds.

SHRINKING VOLUME. Ouch. Both the NYSE and Nasdaq have had to contend with declining market share in the past few years, with the onslaught of nonexchange-related electronic-communication networks, or ECNs, run by the likes of Instinet Group (INGP) and others. Currently about half of all Nasdaq trades are executed on Nasdaq itself, down from 100% in 1997 when new order-handling rules allowed these electronic exchanges to flourish.

At the NYSE, trading volume in its listed stocks is hovering below 80%, lower than it has been for at least 15 years. Decimalization, which narrowed the difference between the bid and ask prices of trades, more extensive computerized-program trading, and the shrinking size of orders have increasingly put pressure on these exchanges to come up with ever more innovative channels to attract liquidity and order flow.

Still, is dual listing the ultimate weapon? Some analysts suspect the announcement may be little more than a publicity ploy, since NYSE stocks already can be traded on the Nasdaq. The Nasdaq processes 13% of NYSE trades through its Intermarket Trading System that links all exchanges. And both exchanges continue to dispute which trading platform has the lowest transaction cost.

PR CAMPAIGN? The latest development has "raised more questions than answers for me," says equity analyst Colin Clark of Merrill Lynch. "It's possible that there could be a domino effect [of companies leaving the NYSE], but it's too early to tell." Clark says the NYSE has been the dominant player "as a byproduct of liquidity begets more liquidity. And they are protected by certain regulations. The market-share battle really is going to depend on how the NYSE responds."

So far, NYSE officials have downplayed the dual-listing announcement in the press and did not respond to interview requests from BW Online in time for this report.

Others agree that the Nasdaq announcement could be more fluff than substance. Richard Repetto of Sandler O'Neill & Partners concluded in a Jan. 13 note that it's "more of a marketing tool for the Nasdaq and an incremental annoyance for the NYSE." And, no surprise, Michael LaBranche of LaBranche & Co., who operates the largest specialist firm operating on the NYSE, writes the move off as "more of a public relations campaign."

The Nasdaq disagrees with that characterization, of course. And make no mistake, the NYSE is just as interested in luring Nasdaq companies to its fold. In November, 2003, it released the results of its own study on 39 companies that made the switch from Nasdaq to the Big Board in the 15-month period before last March.

FINDING LIQUIDITY. For companies such as Network Associates (NET) and Oshkosh Truck (OSK), the NYSE said it found a reduction in price volatility, tighter spreads, and lower execution costs. "The cost of trading stocks that are listed on the NYSE is as low as any market in any country," adds Wayne Wagner, chairman of the Plexus Group, a securities industry research group.

"Shopping the order has a negative connotation, but the function is to find the liquidity. It's an art, and it's done very well on the floor of the exchange," Wagner adds. It's also profitable for the specialist firms that execute the trades. Plexus Group reports that the average commission on an NYSE stock is 4.26, cents vs. 4.01 for Nasdaq stocks.

Still, there's little doubt the dual-list controversy will rage on. It's a public demonstration of Corporate America's growing support for Nasdaq's electronic exchange. And it could increase pressure on the NYSE for big structural changes, says Repetto.

"INVISIBLE FOOT." That's where the Securities & Exchange Commission comes in. Repetto, for one, forecasts that this kind of news will help build momentum for overhauling the NYSE's traditional auction model. That model, dictated by a system which still uses "specialists" -- people on the floor of the exchange to make markets -- is currently the target of a widespread SEC probe.

In April, regulators began looking into accusations that floor specialists were allegedly profiting from the mishandling of trades to their advantage. Says Rob Hegarty, a securities and investments research analyst at TowerGroup in Needam, Mass.: "What's being called into question is the value of human intervention."

Change is sure to come -- and the investor will ultimately enjoy the benefit of more competition on both exchanges. James Angel, associate professor of finance at Georgetown's McDonough School of Business, says, "There's nothing like a declining market share to focus a company's attention. You talk about the invisible hand, this is the invisible foot. It spurs companies to greater innovation and greater performance." Expect the battle of these two stock market superpowers to heat up. By Mara Der Hovanesian in New York, with Ben Elgin in San Mateo, Calif.


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