It used to be so easy. As soon as I learned a stock ticker, I could immediately know on which exchange the stock traded. That's because in the good old days (that would be up 'til just now), ticker symbol length has been agreed upon through an informal understanding among the listing markets.
All one had to do was count the letters in a ticker to determine the trading exchange. The NYSE, a unit of NYSE Euronext (NYSE: NYX ) , utilized one, two, or three letters in its ticker symbols. The American Stock Exchange used three letters. The Nasdaq (Nasdaq: NDAQ ) employed four or five letters. That handy knowledge provided a quick reference tool, as well as impressing friends and family who didn't spend their days slogging around Wall Street.
That's about to change. On Tuesday, the SEC approved a plan which would allow companies listed on the Big Board to retain their three-letter symbols if they move over to the Nasdaq. The SEC said that the new rule would "remove a burden on competition not necessary or appropriate," as well as reduce investor confusion.
The Nasdaq had lobbied for the change, arguing that allowing ticker retention would boost exchange competition. Formerly, the Nasdaq had no shot at attracting companies unwilling to give up their highly recognizable one-, two-, or three-letter tickers. Would Harley-Davidson abandon its HOG? What about the EAT that restaurateur Brinker has claimed on NYSE, or Johnson & Johnson's venerable JNJ?
Back in November 2005, Nasdaq announced its intention to list companies with one-, two-, and three-character symbols. The exchange began testing trading systems to ensure functionality, and Delta Financial (Nasdaq: DFC ) was allowed to keep its three-character ticker when transferring from the Amex.
Two years ago, the SEC asked the exchanges to work together to develop a plan for allocating securities symbols. Two competing proposals were submitted, each bearing witness to their supporters' self-interest. A plan endorsed by Amex, the NYSE, and NYSE Arca would have limited the use of one-, two-, and three-character symbols to those listing markets which have traditionally used those symbols (i.e., them), and didn't address the use of four- and five-character symbols. A plan championed by the Nasdaq, the NASD, the National Stock Exchange, and the Philadelphia Stock Exchange would have permitted any listing market to use any symbol ranging from one to five characters.
Not surprisingly, the SEC endorsed a middle-of-the-road approach. The new rule, which permits ticker retention for companies with three-character symbols that transfer to the Nasdaq, will not apply to those lucky companies -- like Ford (NYSE: F ) and Coca-Cola (NYSE: KO ) -- that are listed on the Big Board with the much-coveted one- and two-letter ticker symbols. Nor will companies newly listing on the Nasdaq be allowed three-letter tickers.
There are only 17,576 combinations of three letters available, according to the SEC, as well as 676 two-letter combinations, and, of course, 26 available one-letter tickers. The agency worried about the limited number and lack of a formal reservation system leading to companies holding tickers captive, leading to disputes and investor confusion.
More than just a few letters
Security symbols make up an important part of a company's identity. Studies even postulate that a company's financial success is predicated in part on the selection of a clever ticker. A good ticker reduces investor confusion and maintains an existing corporate image, so one can see how valuable ticker retention would be for a company contemplating an exchange transfer, and how that could increase competition among the exchanges. That being said, the SEC's new rule didn't go far enough to level the playing field. As fun as it is to boast about being able to recognize where companies trade just from their ticker, it's more important to increase market competitiveness among exchanges.
The NYSE Group is a recommendation of Motley Fool Rule Breakers (FOOL: MFRB). Nasdaq and Coca-Cola are Inside Value (FOOL: IV) picks. Johnson & Johnson is an Income Investor (FOOL: II) recommendation. The Fool has a newsletter for every investing style -- and a 30-day free trial is available for all of them.
Fool contributor S.J. Caplan is a former vice president and assistant general counsel of Goldman Sachs and former vice president and derivative finance specialist at Lehman Brothers. She serves as an arbitrator for the New York Stock Exchange and the NASD and owns shares of NYSE Euronext. The Fool has a disclosure policy.