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Thinking to go public? Understanding the differences between the world’s two largest exchanges can help you decide which one is right for your startup
The New York Stock Exchange (NYSE) and Nasdaq are two of the world’s largest stock markets. The New York-based bourses together account for about 46% of the global stock market value.
It might be interesting to dive a little deeper into the two exchanges’ history. The NYSE was founded in 1792 when 24 brokers signed the Buttonwood Agreement outside 68 Wall Street, New York. According to rumors, the brokers had signed the agreement under a buttonwood tree, and hence the name.
The Buttonwood Agreement is regarded as one of the most important financial documents in U.S. history. It marked the start of the first stock exchange in a country that now sets the gold standard for capital markets.
In contrast to the NYSE’s over 200 years of history, Nasdaq has only been in existence for 50 years. It was founded by the National Association of Securities Dealers, now known as the Financial Industry Regulatory Authority.
Beyond their origin stories, both these exchanges have a slew of other differences between them, from how they operate, to the kind of companies that list there. Understanding these differences not only helps investors make informed investment decisions but also holds a critical influence on where startups decide to list.
The most important distinction between the NYSE and Nasdaq is the way in which they function. Nasdaq is a dealer market. This means that market participants do not buy or sell to each other directly. Instead, the transactions go through a dealer, who is appointed as a market maker.
In simple terms, these dealers electronically display the bid prices and the offer prices. Bid price refers to the price at which dealers are willing to buy a security. And offer price refers to the price at which dealers are willing to sell a security. Dealers provide liquidity to investors by staking their own capital.
The NYSE, on the other hand, is an auction market. If you’ve watched Wolf of Wall Street or The Pursuit of Happiness, you already know what the NYSE trading floor looks like. It’s where traders shout out prices and make wild hand gestures during a live securities auction process, called open outcry.
At the NYSE, stock prices are set using the auction method. Although the official opening time of the market is 9:30 a.m., market participants can register to buy and sell orders from 7:30 a.m. onwards. For trades to go through, the highest bidding price has to match the lowest asking (or offer) price.
So at the NYSE, buyers and sellers enter competitive bids. The price at which the stocks trade represents the highest amount a buyer is willing to pay and the lowest amount a seller is willing to accept. In other words, the law of supply and demand determines stock prices.
For a stock exchange to function, there is a need for traders who are constantly willing to buy and sell, so as to maintain market liquidity. Nasdaq market makers do exactly that.
They hold stock inventories to buy and sell and compete to gain investors. They display both the bid and ask prices, and their trading activity helps meet investor demand.
There are over 260 market maker firms that provide liquidity for Nasdaq-listed stocks. Another 60+ market maker firms provide liquidity for other stocks that trade on Nasdaq.
At the NYSE, designated market makers (DMMs), previously known as ‘specialists’, do the same job. Each company listed on the NYSE has one DMM on the trading floor. These DMMs help provide liquidity by trading against the market. This means that when investors are selling a stock, a DMM will move to buy it, and vice versa. In 2019, DMMs provided 17% of liquidity on average.
Trading Size and Location:
The NYSE and Nasdaq have distinct types of companies that choose to list on each exchange. Corporate giants and “blue chip” businesses generally choose to list on the NYSE. Some notable names listed on the exchange include Walmart, Exxon Mobil, and General Electric.
Nasdaq, on the other hand, is known for attracting tech companies like Facebook, Apple, Microsoft, Google, and Amazon. The exchange also has a fair share of small stocks with lower market caps.
This is perhaps because of the difference in listing fees – Nasdaq has a relatively low entry fee of US$50,000-$75,000 compared to $500,000 on the NYSE. The total yearly listing fee is also lower — $27,500 at Nasdaq, compared to up to $52,500 at the NYSE.
In terms of market capitalization, the NYSE is nearly twice the size of Nasdaq. The market capitalization of an exchange refers to the total value of all shares traded on it. At the end of 2020, Nasdaq had a market capitalization of $15 trillion. The NYSE, on the other hand, had a market cap of $24.5 trillion in January this year.
Interestingly though, in terms of daily trading volume, Nasdaq is far ahead of the NYSE. As of April 7, 2021, Nasdaq had a daily trading volume of over $23 trillion while the NYSE claimed only $10 trillion. This is because there are over 4,000 stocks listed on Nasdaq, compared to more than 2,400 listed companies on the NYSE.
In terms of where trades actually take place, the NYSE has a physical trading floor on Wall Street. But a significant portion of its trades are also executed electronically through its center in Mahwah, New Jersey.
Unlike the NYSE, Nasdaq does not have a physical trading floor. All Nasdaq trades are carried out electronically. In fact, Nasdaq is the world’s first electronic stock exchange.
Which exchange is best for your startup?
Because of the differences between the two bourses, both the exchanges come with their own set of advantages.
Advantages of Nasdaq:
Nasdaq claims that 90% of the top 50 asset managers and 76% of the top 50 investment consultants rely on the exchange to source and allocate assets. Nasdaq, therefore, typically attracts innovative fast-growth companies. This also makes Nasdaq stocks more volatile than those listed on the NYSE.
At the same time, Nasdaq now leads in the number of IPOs as of 2020, as a result of the coronavirus pandemic. Despite the economic uncertainty, 2020 was a record year for IPOs. NYSE and Nasdaq IPOs together raised $155 billion across 471 listings last year — the highest since 2014.
Nasdaq accounted for the majority of these listings, with 316 IPOs. Despite this lead, Nasdaq listings raised $81 billion in 2020, only marginally higher than the $73 billion raised by NYSE listings. This is likely because Nasdaq has a higher number of companies raising smaller IPO proceeds compared to the NYSE.
Because of the difference in the types of stocks, the exchanges attract slightly different types of investors. For instance, investors looking to invest in high-growth but volatile stocks flock to Nasdaq, while those seeking stable tried-and-tested investment options prefer the NYSE. This basically means that startups have a better chance of attracting more investors on Nasdaq than the NYSE.
Besides, Nasdaq has lower listing fees and easier listing requirements. This makes it attractive especially for smaller startups and those that are looking to list faster.
Advantages of the NYSE:
Although Nasdaq leads in terms of the number of IPOs, considering the total capital raised, including follow-on offerings by listed companies, the NYSE remains the world leader.
Low volatility is one of the main reasons why some startups choose to list on the NYSE. More than 90% of tech IPO proceeds in 2017 were raised at the NYSE. Some notable tech companies that chose to list on the exchange include MuleSoft, Twilio, Switch, GoDaddy, and Oracle.
According to their website, volatility is up to 60% lower on the first day of trading on the NYSE for tech IPOs. Even in case of critical events such as lockup release — the day when company insiders can sell their shares after the IPO, typically after a waiting period of 90 to 180 days — stock volatility is up to 44% lower on the NYSE.
But the NYSE has more stringent listing requirements compared to Nasdaq. For instance, the NYSE requires companies to have an independent compensation committee, an independent nominating committee, an internal audit function, and corporate governance guidance — none of which are required on Nasdaq. However, listing on the NYSE is often seen as more prestigious compared to a Nasdaq listing.
So, while Nasdaq is better suited for tech and startup IPOs due to low listing fees and requirements, startups looking to avoid volatility prefer the NYSE.
Choosing between the NYSE and Nasdaq for listing can be difficult for startups since both have their pros and cons. Ultimately, it boils down to each startup’s preference concerning which exchange would serve their needs better, and where they might have a higher chance of IPO success.
Header image by lo lo on Unsplash