Forget Facebook’s IPO: Should NYSE’s 4.8% Dividend Yield Tempt? Nasdaq’s Puny PE of 11?
What fun to watch the big U.S. stock exchanges fight over Facebook’s (FB) listing, eh? Nasdaq OMX (NDAQ) chief executive Bob Greifeld must have been gleeful when he edged out NYSE Euronext (NYX) and its chief, Duncan Niederauer, who had to glumly watch Mark Zuckerberg ring Nasdaq’s opening bell from Menlo Park.
It’s a great rivalry, and after the Facebook IPO’s launch was botched, the NYSE, it was reported, even tried some back-channel wooing to get Facebook to switch exchanges.
A value investor dozing in the Barcalounger could be mighty tempted by shares in NYSE and Nasdaq. NYSE’s 4.8% dividend yield, attached to an iconic brand, itself would have some calling their broker. Nasdaq’s PE ratio, below 11, also might seem lip-smacking.
And talk about brand power: NYSE and Nasdaq are photographed and featured in pretty much every news story about the market. That’s free advertising, my friend. But in that sense, the exchanges are like over-the-hill actresses who’re still greeted on the red carpet by blinding camera flashes: all the attention is based on who they were, not who they are.
In recent years, the exchanges turned into technology companies, in an intensely price-competitive industry; a commodity, really. And investors have caught on:
The stock listings business is at the center of the problems. It’s an important business considering that it functions as an engine for the economy and all. When Nasdaq won the Facebook listing in early April, pundits trumpeted Nasdaq’s role historically as the home for tech offerings. Last year Nasdaq reported 2,680 companies listed on its primary U.S. market, and the NYSE boasted 2,947 issuers on its U.S. markets. A listing brings in fees and a good chunk of the day’s trading in that company.
But taking the long view, the listings business is in decline. Fewer companies have been going public. Last year it brought in roughly 10% of both Nasdaq’s $3.4 billion in revenues and NYSE Euronext’s $4.5 billion in revenues, maybe more when trading fees are included.
A nice shared monopoly, it seems, but it’s hardly safe. BATS, little-known to most investors but the third-biggest exchange in the country, planned to build up a listings business this year. Of course, that was put on ice when BATS bungled its own IPO in February. But someone’s bound to take up the challenge of taking on the listings leaders. The insurgents’ pitch to companies will be that it doesn’t matter where a company lists its stock anymore.
An outfit like Facebook or Yelp (YELP) doesn’t need to pay a lot for the privilege of listing its shares and securing the exposure that goes with an IPO. Those companies already have strong brand names and just need to be hooked up to the big cloud of investors, preferably without delays and glitches.
Exchanges now make a far bigger chunk – more like two-thirds -- of their money in trading-related fees, charging for market data and access and the like. That’s a bloody business, made even bloodier by the fact the raw material of companies to trade has been shrinking.
The exchanges aren’t fighting with each other here as much as with dozens of other alternative markets. Most investors still associate the “stock market” with the NYSE or Nasdaq, but a third of trading now takes place away from exchanges on so-called dark pools, trading platforms like Liquidnet and others that exist inside trading firms like Getco and Wall Street houses like Goldman (GS).
When an investor buys or sells a stock, that order may never make it to an exchange. So much for a shared monopoly.
At last NYSE and Nasdaq still have the individual investors. But with every flash crash and bungled offering, more investors are losing faith in the stock market. The high-speed traders whom the exchanges desperately want to retain or win back from the dark pools are part of the reason the stock market looks so scary to individuals these days.
There are a few ways the exchanges can attempt to maneuver out of this mess. They can consolidate and merge their way to lower costs. They can pursue other more lucrative products, like derivatives, though they bump up against established operators such as CME Group (CME). They can try to encourage the growth and offerings of smaller companies – new listings. They can try to get regulators to help steer trading back to the exchanges.
Or they can keep fighting over Mark Zuckerberg and Facebook. One tip: that last option hasn’t been working so well.
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