<THE RULE BREAKER PORTFOLIO>
NYSE Cutting the Delisting Strings
Nasdaq a Rule Breaker Market?
By Yi-Hsin Chang ([email protected])
ALEXANDRIA, VA (Jan. 21, 1999) -- On Tuesday I attended a luncheon in Washington featuring a talk by Nasdaq President Al Berkley with fellow Fool Warren Gump (TMFGump). Berkley made a compelling case for the strengths of the Nasdaq over "the competition."
For one, the average monthly closing spread, or the difference between the bid and the asking price, was $0.09 for the 25 largest Nasdaq companies in 1998 versus $0.17 for the 25 largest NYSE issues. This means it was much cheaper to buy stocks on Nasdaq than on the NYSE -- at least when you're talking about the top companies.
But the most interesting part of Berkley's presentation was the mention of NYSE Rule 500 -- the first time I had heard of it. The rule was adopted in the 1930s as a "corporate governance safeguard" and requires a listed company to obtain supermajority shareholder approval -- votes from 66% of its shareholders, with less than 10% of the shareholders objecting -- before it can delist its shares. The stringent rule essentially has made it almost impossible for companies to delist from the New York Stock Exchange.
When the rule was originally adopted, delisting from the NYSE meant ending public trading of a company's shares -- there were no alternative markets to the Exchange. Because that's no longer the case, the NYSE proposed to amend Rule 500 in late 1997 to make it easier for companies to delist while still protecting shareholder rights. The amended guidelines would've required a company seeking to delist to win approval of a majority of its full board of directors as well as its audit committee.
In response to comments received by the Securities and Exchange Commission, the NYSE has now amended its proposed amendment to include a less strict requirement: Approval by a majority of the board as defined by individual states, which generally means the majority of a quorum rather than a majority of the whole board.
In addition, U.S. companies would have to issue a general press release and provide written notice to no fewer than 35 of their biggest shareholders at least 20 business days prior to the planned delisting. At the same time, companies would be required to act within 60 business days to prevent the persistence of "lame duck" status of the stock.
Of course, Al Berkley, the Nasdaq president, encouraged those of us at the luncheon to write the SEC in support of the rule change. After all, if it's easier for companies to delist from the NYSE, then maybe, just maybe, companies would be more inclined to switch to the Nasdaq. Indeed, Berkley says if the changes take effect, he intends to pitch the Microsoft and Intel success stories to tech companies now on the NYSE.
Whether Nasdaq wins over NYSE companies or not in the era of the newly amended Rule 500, it makes sense to change the archaic and anti-capitalistic regulation to allow for truly free markets. Companies should be able to switch exchanges just as shareholders can pick and choose between the shares of various companies. Certainly, we don't want to see companies delisting to the detriment of their shareholders, but if a stock can be more actively traded (that is, more liquid) more efficiently (at a lower cost) on the Nasdaq, or on any other exchange, the company should be able to make the switch.
It seems that the official deadline for comments has passed, but why should we let that stop us from sharing our two cents? Here's the email address for the SEC: [email protected] All submissions should refer to File No. SR-NYSE-97-31.
Here's my two cents:
To Whom It May Concern:
I am writing in support of Amendment No. 2 to the proposed rule change (SR-NYSE-97-31) by the New York Stock Exchange to change its Rule 500 relating to voluntary delistings by listed companies. The current rule requiring supermajority shareholder approval before a company can delist from the NYSE is not only onerous but in effect keeps companies hostage on the Exchange. Making it easier for companies to delist gives companies the freedom to act in the best interest of their shareholders.
In fact, it looks like the rule change is about to be approved by the SEC, though the person I spoke to there declined to specify exactly when that might happen.
Imagine the possibilities -- the NYSE would have to fight to keep companies that might be tempted to move over to Nasdaq. Companies and shareholders alike would be able to use that as leverage in trying to get the Exchange to make changes to better serve investors. America Online (NYSE: AOL) could move back to the Nasdaq to rejoin its Internet brethren. So could Iomega (NYSE: IOM).
Of the 13 stocks currently in the Rule Breaker Portfolio, five of the holdings reside on the Nasdaq. If you take out the Foolish Four stocks and the spin-offs derived from them -- namely Lucent Technologies (NYSE: LU) from AT&T (NYSE: T) -- plus the Donald, Trump Hotels & Casino (NYSE: DJT), which is being shorted anyway, you'd have just two Rule Breaker stocks that are listed on the NYSE: America Online and Iomega -- the very stocks that could migrate over to the Nasdaq.
Aside from the annual Foolish Four swap, the stocks the Rule Breaker Portfolio bought last year were all Nasdaq components: Amgen (Nasdaq: AMGN), @Home (Nasdaq: ATHM), Starbucks (Nasdaq: SBUX), and 3Dfx (Nasdaq: TDFX). In fact, the stocks the portfolio sold were also traded on Nasdaq: 3Com (Nasdaq: COMS), Innovex (Nasdaq: INVX), and KLA-Tencor (Nasdaq: KLAC).
Why is the Rule Breaker Port Nasdaq-heavy? Because the Nasdaq itself is a Rule Breaker in its industry, while the NYSE is without a doubt a Rule Maker. Nasdaq was the world's first electronic stock market and is the nation's fastest growing market. In 1984, it introduced the Small Order Execution System (SOES), which improved efficiency and increased trading capacity by automatically executing small orders against the best quotations.
In mid-1997, Nasdaq adopted the 1/16th quotes for issues with a bid price of $10 or more, decreasing the average quoted spread for these issues by 20.5%. Early next year, Nasdaq plans to switch to decimal pricing, which should make trading less expensive, quotes easier to understand, and the market more in line and competitive with other world markets already using the decimal system.
Indeed, Nasdaq continues to embrace new technology to automate trading, drive down costs, and link to other markets around the world. It is this commitment to innovation and Rule Breaking that has kept the likes of one-time Rule Breakers and now Rule Makers Intel (Nasdaq: INTC), Dell Computer (Nasdaq: DELL), and Microsoft (Nasdaq: MSFT) -- the world's largest company by market cap -- from moving to the NYSE.
While the NYSE may be the more "prestigious" of the exchanges, Nasdaq clearly is breaking new ground by working to offer automated executions, global cross-market listings, order gathering for foreign markets, and before- and after-hours trading. If the NYSE measures high by Wise standards, Nasdaq is certainly winning more cool points as the industry trendsetter.
The question now is when will Nasdaq cease to be a Rule Breaker, become a Tweener, and evolve into a glorious Rule Maker? It may not be as far off as you think.
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Day Month Year History Annualized R-BREAKER -4.77% -0.48% -0.48% 898.86% 67.48% S&P: -1.70% 0.48% 0.48% 182.16% 26.17% NASDAQ: -2.93% 6.94% 6.94% 225.58% 30.28% Note: Yearly, historical and annualized returns for the S&P include dividends Rec'd # Security In At Now Change 8/5/94 1100 AmOnline 1.82 141.00 7657.06% 9/9/97 1320 Amazon.com 6.58 106.00 1511.13% 5/17/95 1960 Iomega Cor 1.28 9.88 671.24% 10/1/96 84 LucentTech 23.81 107.00 349.43% 8/12/96 130 AT&T 39.58 88.25 122.98% 12/4/98 450 @Home Corp 56.08 97.38 73.63% 4/30/97 -1170*Trump* 8.47 5.00 40.96% 12/16/98 290 Amgen 85.75 110.00 28.28% 2/20/98 200 Exxon 64.09 71.13 10.98% 7/2/98 235 Starbucks 55.91 52.75 -5.65% 2/20/98 215 DuPont 59.83 54.25 -9.33% 2/20/98 270 Int'l Pape 47.69 42.31 -11.28% 1/8/98 425 3Dfx 25.67 13.38 -47.89% Rec'd # Security In At Value Change 9/9/97 1320 Amazon.com 8684.60 139920.00 $131235.40 8/5/94 1100 AmOnline 1999.47 155100.00 $153100.53 12/4/98 450 @Home Corp 25236.13 43818.75 $18582.62 5/17/95 1960 Iomega Cor 2509.60 19355.00 $16845.40 12/16/98 290 Amgen 24867.50 31900.00 $7032.50 10/1/96 84 LucentTech 1999.88 8988.00 $6988.12 8/12/96 130 AT&T 5145.11 11472.50 $6327.39 4/30/97 -1170*Trump* -9908.50 -5850.00 $4058.50 2/20/98 200 Exxon 12818.00 14225.00 $1407.00 7/2/98 235 Starbucks 13138.63 12396.25 -$742.38 2/20/98 215 DuPont 12864.25 11663.75 -$1200.50 2/20/98 270 Int'l Pape 12876.75 11424.38 -$1452.38 1/8/98 425 3Dfx 10908.63 5684.38 -$5224.25 CASH $39332.55 TOTAL $499430.55
</THE RULE BREAKER PORTFOLIO>