What Twitter’s IPO means for Nasdaq

Nasdaq’s long legacy can’t save it from its recent past.
Nasdaq’s long legacy can’t save it from its recent past.
Image: Reuters/Andrew Kelly
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Today Twitter made official that it would list on the New York Stock Exchange’s Big Board. It’s one of the first major technology companies to toss off a historical trend; tech companies have traditionally listed on Nasdaq, the world’s first fully electronic stock market. Nasdaq’s loss of Twitter comes at a really bad time; it has been plagued by a spate of technology problems, the most serious occurring during Facebook’s May 2012 IPO.

But there’s more to it than simply losing a high-profile IPO. Nasdaq was created in opposition to NYSE, providing what the latter did not. With one of the biggest tech IPOs in years now going to a competitor, it looks like Nasdaq has also lost what remains of its unique identity as an exchange for technology-focused firms.

The history

The New York Stock Exchange was long considered the public markets kingpin, a country club for the biggest US companies. It imposed—and still does—size, price and policy restrictions on companies that wanted to list there. In return, those companies got prestige and publicity. This visibility raised popular interest in investing. When more people were willing to buy and sell a stock, the difference between the bid (the price at which investors are willing to purchase a stock) and the ask (the price they’re willing to sell it at) declined. This also produced stability in stock prices; even large quantities of some stocks could be bought and sold without significantly changing the share price.

In the old days, small, emerging companies would typically seek financing privately—known in the industry as “over the counter”—by selling equity to private investors or funds. As a company grew, it would first list on the American Stock Exchange (AMEX)—now owned and incorporated into NYSE Euronext—before ultimately switching over to NYSE’s Big Board.

Nasdaq—the National Association of Securities Dealers Automated Quotations— was born in 1971 as an electronic platform where investors could trade over-the-counter shares of companies.  It effectively standardized the process by which small companies could raise funds. A big, public company would never have moved its listing from NYSE to Nasdaq at this time; instead companies were expected to make the shift from Nasdaq to NYSE.

Notably, a few of Nasdaq’s early tech behemoths stayed on: Intel, one of Nasdaq’s earliest listings, issued 350,000 shares at $25 per share in 1971, raising $8 million. Microsoft raised $58 million there in 1986. But unlike most of the companies listing on Nasdaq at that time, these two tech behemoths stayed. At the time, NYSE was a sort of country club for companies, thanks to its higher costs. In 1998, a study estimated (pdf) that Intel would have had to pay $504,600 up front to shift its shares to NYSE, then annual fees of at least $500,000.

By the late 1990s, more and more companies were choosing not to shift their listing from Nasdaq to NYSE, most of them tech firms that had an affinity for the electronic trading method Nasdaq offered, mostly firms that had grown very quickly. In 2006, it officially registered with the US Securities and Exchange Commission to become a “national market exchange,” formalizing its ascent as a full alternative to NYSE.

By then, Nasdaq was also considered technologically superior to NYSE, and it offered more services for listed companies. For NYSE, the struggle wasn’t really about keeping its listed companies on the Big Board; it was about making changes that would help it attract the next slew of companies. Trying to grab more customers and cut costs, NYSE merged with Euronext in 2006. Later Nasdaq even tried to buy NYSE, to no avail.

At this point, NYSE and Nasdaq aren’t really so different anymore. A single floor trader still handles all the market-making for a long list of companies at NYSE. Executives have a person standing at the exchange to call when their stock price moves wildly, or even someone who can tell them why shares of their stock are trading cents lower than they were the day before. And NYSE still has a physical trading floor, which is home to a CNBC set.

But the substantive differences are few. Even the old naming traditions have faded away; Nasdaq-listed stocks used to have a four-letter ticker symbol, while NYSE-listed ones had three letters or fewer. No more.

Then came Facebook…along with trading glitches

Although Nasdaq wasn’t the only player in Facebook’s botched May 2012 IPO, the fact that software glitches marred the highest-profile IPO in years tarnished both Nasdaq’s reputation and Facebook’s. Outsized trading volume exacerbated its system’s flaws, and investors found themselves unsure of whether their orders for the stock went through. It took the company 14 months to return to its IPO price.

This gaffe might have been forgettable, if not for another software glitch (paywall) that shut down trading on Nasdaq’s exchange on August 22. This was bad timing, with an announcement from Twitter about an IPO expected any day.

NYSE has had its own share of glitches, but it hasn’t suffered from as many recent high-profile snags. And because the two exchanges have otherwise become so similar, their glitch records tend to stand out. “In 2000, no question that this thing would be listing on the Nasdaq,” says Sal Arnuk, a partner at brokerage firm Themis Trading. “It’s now a question of who’s going to keep my stock trading up 99.9% of the time?” Trading glitches, he says, also beg the question of why we need so many exchanges.

The future

The cost of expensive technology weighs heavily on exchanges, and pressure to increase revenues has kept both NYSE Euronext and Nasdaq on the hunt for deals. With Twitter going to NYSE, Nasdaq is stuck in a relatively weak position. Though Nasdaq’s board says it is standing firm behind CEO Robert Greifeld (paywall) after the recent glitches, some bankers speculate that it could be a defining moment for the exchange and prompt a reevaluation of its priorities.

Shares of Nasdaq are still valued poorly against some of its peers. Investment bank Sandler O’Neill calculates that Nasdaq’s stock trades at 11 times its 2014 estimates for the exchange, while the exchanges CME, CBOE and ICE trade at 20 to 21 times their 2014 earnings estimates.

Reuters has reported that the company’s directors have taken a hard look lately at breaking the company up or merging with another exchange, specifically the London Stock Exchange. A merger could offer new leadership and lower costs.

Either way, Nasdaq won’t be able to lean on its pedigree as a technology-focused exchange to stay relevant.