Why Do Stock Exchanges Matter?

While researching a recent article, I realized I didn't know what set the major stock exchanges apart.

So I set out to learn more about the big three: the New YorkStock Exchange, the Nasdaq, and the American Stock Exchange. It's all here for your edification and mine. Let's start with a rundown of the basics.

The big dog: NYSE
The Big Board has a history stretching all the way to 1792, yet the company has managed to remain nimble. By merging with Rule Breakers pick Archipelago earlier this year, the NYSE itself went public and gained some new trading tricks. The time-honored "specialist" system -- with a trading floor full of brokers yelling and signaling to each other -- has now been complemented by a modern computerized trade system. And that's not all: A planned merger with pan-European stock exchange Euronext promises to globalize operations.

The NYSE is the largest U.S. stock exchange by total market value -- roughly $23.9 trillion as of Dec. 11, 2006 -- and it's set up to attract only top-quality companies. To that end, the initial listing requirements are the toughest in the business. A new company must have a minimum IPO value of $60 million; companies that want to move to the NYSE from other exchanges must have at least a $100 million market cap. Would-be NYSE stocks also need at least $10 million in three-year pre-tax earnings, or $25 million of free cash flow over that period. And those are just a few of the obligations.

A couple of corporate-governance limitations add to the NYSE's high-standards reputation. To qualify for an NYSE listing, a company must have at least 50% independent directors on the board, and the entire compensation committee must be composed of outsiders. These requirements ensure that NYSE companies have more independent oversight of executive paychecks than do those of any other exchange. And incentive plans, including stock-option grants, must be approved by a shareholder vote.

Joining this elite club isn't cheap. Depending on the size of your company, it can cost as much as $250,000 to get your initial listing, with as much as $500,000 in annual listing fees on top of that. It's no wonder that NYSE-listed companies are big, with an average market cap of $8.9 billion.

The exchange is home to some of the world's largest companies, including Pfizer (NYSE: PFE  ) ,Wal-Mart (NYSE: WMT  ) , and Procter & Gamble (NYSE: PG  ) .

The hot hand: Nasdaq
With its first trade facilitated in 1971, the Nasdaq doesn't have quite the same illustrious past as the Big Board. Nevertheless, the cheeky little bulletin board grew up to be the first electronic stock exchange, and it soon attracted scores of technology stocks, along with other companies that either couldn't meet the stringent NYSE minimums or didn't want to pay those enormous fees. The Nasdaq index was hit hard when the tech bubble burst a few years ago, but a recent merger with the Archipelago-like Instinet and continued nibbles at the London Stock Exchange that have given the American exchange a large stake in its British counterpart make it clear that the Nasdaq hasn't lost its hunger.

The total value of all Nasdaq issues is $4.4 trillion right now. That's small next to the NYSE, though it beats the larger exchange in the number of companies listed and the average number of shares traded. Investors still see Nasdaq stocks as potential growth opportunities; as such, the stocks here attract more short-term trading than the stable behemoths of the value world do. It's not that much easier to qualify for a Nasdaq listing, though: Among other things, your company must present $75 million of total assets or revenue or $1 million of annual operating income, plus shareholder equity of at least $15 million.

While the Nasdaq fees are lower than the NYSE's, they're still not exactly pocket change. Bring a check for $150,000 if you're introducing a large company to this market, and be prepared to shell out a maximum of $60,000 a year for continued listing. The average company here sports a $1.6 billion market cap, and you may be somewhat familiar with a few of these companies. The largest companies here include Apple Computer (Nasdaq: AAPL  ) , Amgen (Nasdaq: AMGN  ) , and Oracle (Nasdaq: ORCL  ) .

Please note that this discussion covers only the Nasdaq National Market. There is also the less restrictive Capital Market -- nee SmallCap Market -- and the new, more exclusive Nasdaq Global Select classification. Find out more about those markets in a separate article.

The little exchange that could: AMEX
The American Stock Exchange started as a gathering on the sidewalk outside the NYSE, where enterprising stockbrokers started trading the stocks that didn't make it inside that other august institution. That was a long while back, and the exchange moved indoors some 75 years ago. The AMEX still sports something of an inferiority complex, and it gets little respect from Wall Street in general -- CNBC doesn't usually run an AMEX ticker tape across the screen, for example. To carve out its own niche, the exchange has focused on trading options and other derivatives. It was also the first market to introduce exchange-traded funds (ETFs), such as the iSharesMSCI Emerging Markets Index Fund.

Including all of those nontraditional issues, the value of AMEX-traded shares totals a comparatively minuscule $441 billion. Here we have the lowest barriers to entry of all of the major exchanges; your company needs only a $4 million shareholder-equity figure and either a $50 million IPO, an existing $75 million market cap, or $750,000 in before-tax annual earnings.

It's no surprise, then, that AMEX companies are generally smaller than their larger-exchange brethren, with just a $506 million average market cap. The largest share isn't a company, but an ETF: the famed SPDR Trust Series 1 (AMEX: SPY  ) , which trades for an aggregate $64.2 billion. The biggest regular AMEX stock today is the $7.9 billion petrochemical company Ultra Petroleum. That's solidly in mid-cap territory; all of the 800-pound gorillas have migrated to tougher but more respected territories.

The AMEX is planning to follow in the footsteps of the Nasdaq, its former owner, sometime soon: It's drawing up plans to "demutualize," or convert its old-school trading seats to company stock. After that, the next logical step is to test the IPO waters on its own. I think I already can guess on which exchange it will register ...

No exchange at all: bulletin boards
If your company doesn't qualify -- or doesn't want to qualify -- for any of the major exchanges, there's always the over-the-counter market or the Pink Sheets. Here there be dragons, for investors at least. There is very little regulation regarding the quality of businesses that can trade on bulletin boards, and there's none at all on the Sheets. Without a sponsoring organization to speak of, the shares aren't too efficiently traded. Liquidity is low, even for large companies like global food company Nestle or technology giant Samsung with its $86.7 billion market cap. That means it's hard to get a fair price on your trades. Those same attributes make the unregulated markets ideal for penny-stock scams and other shady operations. Tread lightly, if you go here at all.

More exchange-related Foolishness:

This article was originally published in June 2006. It has been updated.

Pfizer and Wal-Mart are bothMotley Fool Inside Valueselections, while NYSE Group is aMotley Fool Rule Breakerspick. Follow the preceding links to try either newsletter free for 30 days.

Fool contributorAnders Bylund is a Pfizer shareholder, but holds no other position in any of the companies or ETFs discussed here. You can check outAnders' holdingsif you like, and Foolishdisclosureis always on the market.


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