Why Do Stock Exchanges Matter?

Don't know your Nadsaq from your NYSE? Here's the lowdown.

Anders Bylund
Anders Bylund
Jun 22, 2006 at 12:00AM

While researching a recent article, I found myself looking at Krispy Kreme (NYSE:KKD) and wondering why it hadn't been delisted from the NYSE (NYSE:NYX) yet. If it was a Nasdaq (NASDAQ:NDAQ) stock, it would have been slapped with a notice of pending delisting long ago. That's when it hit me: I really didn't know what set the major stock exchanges apart.

So I set out to learn more about the big three: the New York Stock 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 back to 1792, yet the company's still stayed young. By merging with Rule Breakers pick Archipelago earlier this year, NYSE itself went public and gained some new trading tricks. The time-honored "specialist" system -- with a trading floor full of trade brokers yelling and signaling to each other -- has now been complemented by a modern computerized trade system. And that's not all: A merger with pan-European stock exchange Euronext promises to globalize operations.

Even before it merges with Euronext, NYSE is the largest U.S. stock exchange by total market value -- roughly $21 trillion as of December 2005 -- and it's set up to attract only top-quality companies. To that end, the initial listing requirements are the toughest in the business, calling for a minimum IPO value of $60 million, or a $100 million market cap for companies that want to move onto the NYSE from other exchanges. Would-be NYSE stocks also needs 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, your company must have at least 50% independent directors on the board, and the entire compensation committee must be composed of outsiders, giving these companies more independent oversight of executive paychecks than 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, though. Depending on the size of your company, it can cost as much as $250,000 to get your initial listing, with up to $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 $6 billion. The exchange is also the home of some of the world's largest companies, led by ExxonMobil (NYSE:XOM) and its current $351 billion market cap.

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 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 (giving the American exchange a 25% stake in its British counterpart) make it clear that the Nasdaq is hungry again.

The total value of all Nasdaq issues totals $3.5 trillion right now, though it beats the NYSE in number of companies listed and average number of shares traded. Investors still see Nasdaq stocks as potential growth opportunities, which 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 qualification options, 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 $1.2 billion market cap, and you may be somewhat familiar with a few of the larger companies. The biggest cap here belongs to Microsoft (NASDAQ:MSFT) at $235 billion, which would land it in the top five over on the NYSE board.

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The Little Exchange That Could: AMEX
The American Stock Exchange started as a gathering of brokers 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 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 iShares MSCI Emerging Markets Index Fund (AMEX:EEM).

Including all those nontraditional issues, the value of AMEX-traded shares totals a comparatively minuscule $380 billion. Here we have the lowest barriers to entry of all the major exchanges; your company needs only a $4 million shareholders' 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 $450 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 $54 billion. The biggest regular AMEX stock today is the $8 billion petrochemical company Ultra Petroleum (AMEX:UPL). That's solidly in mid-cap territory, since all the 800-pound gorillas have migrated to tougher but more respected territories.

The AMEX is planning to follow in its former owner Nasdaq's footsteps sometime soon, 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 which exchange it will register on ...

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 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 Hennes & Mauritz (Europe's largest retailer) or Publix Super Markets (a $16 billion regional grocery chain), making it 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.

So what about those donuts, Anders?
That brings me back to where I started: Why hasn't Krispy Kreme been delisted from the NYSE yet, after missing more than a year's worth of SEC financial filings?

It turns out that the exchanges handle misbehaving companies a bit differently. They all have policies demanding timely SEC filings, and they like to see share prices above penny-stock levels (which explains the popularity for reverse stock splits during lengthly market downturns). Beyond that, AMEX doesn't ask for much, so delistings from that market are rather rare.

The NYSE adds stern warnings about observing good accounting practices (which Krispy Kreme clearly didn't) and "other conduct not in keeping with sound public policy," but there's a loophole available. As long as you keep filing something every quarter, even if it's just a press release with best guesses about recent business performance, you can call it "SEC form 12b-25: Notification of Late Filing," and the NYSE is likely to grant you an extension as long as your trading volume is high enough. The pastry maker has wriggled through that opening quarter after quarter; it's currently on its fifth consecutive extension.

By contrast, the Nasdaq automatically tags you as a rule breaker -- the bad kind -- when your scheduled filings don't show up on time. Your ticker changes from a happy four-letter symbol (AMEX tickers are always three letters, by the way, and NYSE companies can be 1, 2, or 3 characters long) to an ominous five, with a scarlet letter "E" tacked on at the end. Unless you fix the problem within 90 days of the date of notification, you're kicked down to the bulletin boards. Not a good way to build a business reputation, so companies try very hard to comply with these rules.

So it looks like the most respectable trading institution in the world could still tighten up its delisting procedures and encourage even better business practices in the future. With so many other changes going on in the exchange business, this could be a great time for minor policy improvements. I know I'd welcome the change. Is it enough of an issue to turn me off NYSE stocks altogether? Of course not, but if the NYSE wants to be known as the best in the business, it should reflect that in all aspects of its operations. I'm just saying.

Further Foolish reading:

Microsoft is a Motley Fool Inside Value recommendation, and NYSE Group is a Rule Breaker, believe it or not. Check out our entire suite of newsletters by clicking here.

Fool contributor Anders Bylund dares to own some Hennes & Mauritz stock, and he shops at Publix every week (not stocks, silly -- food). Foolish disclosure rules are tighter than Nasdaq delisting policies.