In some recent news, the New York Stock Exchange announced they were allowing stocks from other exchanges to trade on their main floor. That reversed a centuries old policy and left some wondering why NYSE was breaking with tradition. Further, the press release explaining the new access touted the benefits of the NYSE allocation model that “deemphasizes speed.” This gave some the impression that NYSE was offering traders of Nasdaq-listed stocks a choice between high- and low-speed trading. In fact, this choice is actually a testament to the unique benefit of the role of high speed trading for issuers at the exchange. This despite stories that say the opposite and have me ready to join the “decry fake news” choir in the market structure section.
What NYSE has really done here is to reaffirm the value and exclusivity of its Designated Market Makers (DMMs), most of whom are firms known for their high frequency trading (HFT) skills in creating what are, essentially, the best markets ever for investors and issuers alike. So while the rest of the floor – the trading space, floor brokers, et al, – are being given away to non-NYSE companies, the services provided by NYSE DMMs are not.
Companies pay huge fees to list on either Nasdaq or NYSE and competition for these listings has always been fierce. When Dick Grasso was the CEO of NYSE from 1995-2003, he was known for publicity stunts with listed firms. And Nasdaq proudly proclaimed, in its 1999 annual report, that it “captured 87.6 percent of the new listings for the primary American market.” The intense rivalry has not abated one bit over the years, as evidenced in the jockeying for the upcoming Snapchat IPO and NYSE’s recent announcement that it will waive some fees for companies that move their listing to them.
A company’s decision on where to list its shares ultimately comes down to branding and the exchange’s trading model. Traditionally, Nasdaq appeals to tech-savvy start-ups (although lately some of those companies, like Twilio, have begun to IPO on NYSE) and the NYSE to more traditional firms. As for the trading model, when you think of Nasdaq, you probably think of computer servers doing the trading, after all, the second “A” in Nasdaq stands for “Automated.” In contrast, when someone says NYSE trading, what comes to mind? “The Floor” of course.
So powerful is the concept of “The Floor” that NYSE zealously prevented non-NYSE companies from trading there since its inception. NYSE claims that its listed stocks are 34% less volatile during lock up expirations, 35% less volatile at the open, and 39% less volatile at the close. All thanks to HFT DMMs like GTS, Citadel, IMC and Virtu.
So, while NASDAQ stocks will be traded at NYSE, companies that wish to have those trades afforded the oversight of a NYSE DMM using high frequency trading tools, will have to switch their listing. In effect, NYSE is giving access without giving away the store. That’s the real news and it should be music to the ears of NYSE listed companies and their shareholders.
JACK BOGLE, founder Vanguard Group
Moneywatch, April 3, 2014