After about three decades of remarkable growth by the stock exchange "for a digital age," the stage is set for a brutal battle between Nasdaq and the Big Board. Nasdaq is now far too big and far too noisy to be ignored. The battle will be waged on many fronts–in the fight for listings, on the web and in many places outside of the United States.
The acquisitions of market making firms by significant Wall Street players – market makers that include starlets such as Herzog, Heine Geduld; Spear, Leeds & Kellogg; PaineWebber Inc. – is one indication that Nasdaq is no longer the obscure exchange for OTC stocks.
"Today, everybody wants to buy these [market-making] franchises," said Bernard Madoff, chairman of Bernard L. Madoff Investment Securities, a Nasdaq dealer and third market firm.
Although the market capitalization of its firms, $16 trillion last year, makes it larger than the Nasdaq (where the market capitalization of its firms was about $5 trillion in 1999), Nasdaq has become much better known with the general public in the U.S. and the U.K. than the 200-year old Big Board.
That's according to a survey conducted for Nasdaq by Response Analysis Corporation, a market research company in Princeton, N.J.
In a relatively short time, Nasdaq has greatly benefited from America's dizzying shift to an information economy. All of a sudden, the once dinky little exchange has some 5,100 companies.
But, more importantly, are the kinds of the companies it has – Microsoft, Cisco Systems, Intel, Starbucks – companies few investors or traders had ever heard of a decade or two ago.
The NYSE, for its part, dismisses Nasdaq's bragging as childish and unfounded. A spokesman noted that a survey conducted by Opinion Research Corporation in Princeton, N. J., shows "exactly the opposite by a wide margin" – that the Big Board is actually better known among investors.
Nasdaq's success is no accident, says a former regulator, who explains how Nasdaq raised fees on listed companies, then plowed much of the added revenues into retention programs.
"Nasdaq smartly put this money into people and programs that gave special attention to their top 100 companies," according to Patrick Healy, former director of financial policy and strategy at the National Association of Securities Dealers.
"That caused these companies to stay with Nasdaq," added Healy, who now runs the Issuer Network a company based in Chevy Chase, Md., that advises companies on what exchange to list.
But although Nasdaq and the NYSE are not going to use the pages to detail this trading civil war, both exchanges are doing their best to outdo each other. For instance, although AOL, Gateway, Nordstrom and Coors were originally with Nasdaq, the NYSE persuaded them to move.
But Nasdaq, which mainly was concerned with playing offense in its first few years as a David, has also learned to protect its gains, persuading Microsoft, Cisco Systems and Intel to stay.
"Those firms could go anytime they want and anywhere they want, but they elected to stay because Nasdaq made an extra effort to keep their business," Healy added. This competition was heightened last year with the end of Rule 500, which practically chained and bound companies that were with the Big Board. No more.
Last year, after the demise of the rule, Nasdaq reminded companies that listing with an exchange is not like marriage in a country without divorce laws.
"Nasdaq," according to John Tognino, executive vice president, global sales and member affairs for Nasdaq, "began a concerted campaign to make sure that every company, whether it was on the Nasdaq or the NYSE, had the true option of picking the marketplace that was in their best interest."
Once again, the pushy exchange's efforts paid immediate dividends. Aeroflex (Nasdaq: ARXX) moved from the NYSE to Nasdaq. Nasdaq is also pushing to outflank the Big Board outside of the U.S.
Nasdaq's goal is to "be able to say when you list with Nasdaq, you list with the world," Frank Zarb, chairman and chief executive of the NASD, said in a speech last summer. "Your investor pool will have no national boundary, your liquidity will grow in a significant way, your brand will be shown in stock tables in many different languages."
Madoff says that Nasdaq's digital advantages make it attractive in Europe. "The dealer marketplace is something that Europeans now understand. The rest of the world looks at Nasdaq as a very advanced, high-tech market that's well suited for the future," he added.
Indeed, Nasdaq was considered in the running to takeover the London Stock Exchange after the collapse of its merger with Deutsche Borse. (Nasdaq had an earlier deal with London and Deutsche Borse to run an advanced electronic market in Frankfurt.)
Across the globe, Nasdaq is forming alliances and is in talks. "Two years ago not many people [in London] ever heard of Nasdaq," said Mark McCutchenson, head trader at Greig Middleton, a brokerage firm in London. Now it is fast becoming a household name in London, he added.
Tognino said it recently reduced spending on advertising in the U.K. But that was for good cause. "We began to get the story out that Nasdaq is a global market," he said.
In the U.S., NASD spending on advertising and marketing grew from $47 million in 1998 to about $70 million last year. In the first half of this year, spending on advertising climbed to $15.4 million, compared with $5.7 million in the same period last year, according to Competitive Media Reporting, a New York-based firm that tracks advertising spending.
Nasdaq is once again comfortable enough to tout its own horn, both in print and on television. "Nasdaq is the Stock Market For a Digital World," says the line in its current campaign created by New York-based advertising agency, Messner Vetere Berger McNamee Schmetterer/Euro RSCG.
Only a while ago, Nasdaq was embarrassed by an earlier campaign with the memorable line, "The Stock Market For the Next 100 Years." The Nasdaq price-fixing scandal did not quite fit that image.
Nasdaq, as of mid-September, listed some 480 non-U.S. companies with a market capitalization of about $1 trillion, according to a Nasdaq spokesman. He adds that, so far this year, the exchange has added 89 non-U.S. companies. Nasdaq's overall capitalization is now some $5 trillion plus.
But it isn't all beer and skittles for Nasdaq's success. In its battle for supremacy, it has made some enemies. Its push to expand through demutualization has bred a group of critics who contend it is the cat's-paw of a few big firms.
"Their market is focused on large issuers, primarily the New York Stock Exchange large issuers. They are not focused at all on small or medium companies," said Alan Davidson, president of Zeus Securities in Smithtown, N. Y.
The war between the NYSE and Nasdaq – declared or otherwise – must stop, he says.
"This conflict between the NYSE and Nasdaq is really counter-productive. Because members of the NASD are members of the NYSE and members of the NYSE are members of the NASD," Davidson said.
Will the lions and lambs lie down together anytime soon? Not likely. There's every indication that Nasdaq, along with a dot.com economy that is here to stay, is going to continue to push and that NYSE officials are going to have to rethink their place in the trading universe. The battle has been going on for three decades, but the intense, mano-a-mano, combat has just begun, some observers say.
