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It’s a Rule: Nasdaq-Big Board Road Is One-Way

"The New York Stock Exchange continues to lure companies away from the Nasdaq Stock Market, and the Nasdaq market continues to complain." (WSJ, 2/8/96, p. C1)

I will use this news to answer the following three questions: (1) What is this rule and why was it created? (2) Who decides where to list (trade) their stocks, and (3) How come the Big-Board has not been able to lure some of the large Nasdaq companies like Microsoft, Novell, Apple, etc.?

1. Rule 500 stipulates that a company listed on the NYSE cannot delist from the exchange and move elsewhere unless 66.6% of the shares vote in favor of such a move and no more than 10% oppose such a move. The decades old rule was originally intended to protect shareholders from company managers deciding to have the company trade on "less favorable" markets. I will clarify what I mean by "less favorable" in (2) below.
2. Each exchange sets their own requirements for listing, typically involving the size of the company in terms of market value, the number of shares outstanding, and the minimum number of shareholders. Traditionally, large and well-established companies have listed on the NYSE.

There are two primary factors that make a market more favorable, from the shareholders’ perspective: (a) liquidity, whereby investors can buy and sell stocks upon demand without causing unfavorable price movement, and (b) lower cost of transaction as measured in terms of the bid-ask spread. There is evidence of both these factors favoring the NYSE, which of course Nasdaq officials take issue with. This is one reason why the topic is one of the hottest research issues in finance these days and falls under the rubric "market microstructure."

So if the NYSE is more favorable to shareholders, why aren’t Microsoft, Novell, and few others switching? There is no good explanation other than it’s only a handful of these large companies that are getting, indirectly, free advertising from Nasdaq through their TV and newspaper ads!

By Alex Tajirian