One of the first decisions which a company has to make after deciding to embark on an IPO is in which market its shares will be listed for trade. There are two main types of securities markets: a stock exchange or over-the-counter (OTC) trading. The main stock exchange in the United States is the New York Stock Exchange (NYSE). Another large stock exchange is the American Stock Exchange (AMEX), and there are also several smaller regional and specialized stock exchanges. The best-known OTC system is the National Association of Securities Dealers Automated Quotation System (NASDAQ), which includes the NASDAQ National Market (NM) and the NASDAQ Small Cap Market. As the differences between the methods from the standpoint of an issuing firm are small, for the sake of convenience, this chapter will often refer to NASDAQ as a stock exchange, even though it is technically a system allowing trades with market makers.
Stock Exchanges Versus Over-the-Counter Trading Systems
Trade on a stock exchange such as the NYSE is performed by way of an auction, with the trade in each share being concentrated in the hands of a stock exchange member who is nominated by the exchange to be the specialist of the share. In OTC trading, each share could be traded by a large number of market makers who are connected both among themselves and with their customers by electronic media. Securities firms choose for which shares they are market makers.
There are many theoretical differences between the methods of trade, but from the points of view of the issuing company, as well as of most investors, there is no significant difference between the methods. The specialists or market makers are always involved in the trade and broker between buy and sell orders for the shares, whether the company's shares are traded in an auction-based system (the stock exchange) or a trader-based system (such as NASDAQ). The specialist in stock exchanges must ensure the continuous trade in the shares of the companies under his charge, and each of the market makers of a share in NASDAQ provide bid and ask prices for given round lots. In the market-maker method, there is no restriction on the number of market-makers for any given share. As a result of the competition among market-makers, the difference between the bid and ask prices of shares may be negligible. In the specialist method, on the other hand, one trader is responsible for bringing together all of the purchase and sale activities on the stock exchange of the share for which he is responsible. Due to concentrated volume, the specialist typically offers a small "spread" (the difference between the bid and the ask quotes) as well. These methods of trading are different from those practiced in most other Western stock exchanges, which usually bring buyers and sellers into direct contact.
In recent years, alternative trading systems (ATS) have emerged, although companies must choose either one of the stock exchanges or NASDAQ for the purpose of registration, even if a material portion of the trade in the share will be carried out through the alternative channels. To a certain extent, the existence of such channels mitigates the importance of the decision of where the share will be listed for trade.
The New York Stock Exchange (NYSE)
The NYSE is the largest securities market in the world, and most of the companies composing the Dow Jones Industrial Index are listed on it. The level of its registration requirements is considered particularly high, as are its annual and registration fees. In the past, it was customary that a company which met the NYSE's registration requirements was listed there, whereas companies which could not meet such requirements turned to regional stock exchanges or the NASDAQ. This was one of the reasons why NASDAQ prospered, since technology companies which could not be listed on the NYSE (due to size, profitability, and track record) when they went public were listed on NASDAQ, and subsequently became large and well-known companies, including companies such as Microsoft, Dell and Intel. In recent years, the NYSE has been courting emerging giants to convince them to switch to the NYSE. Thus, for instance, America Online moved to the NYSE, and the latter has been using this transition as a marketing tool when approaching companies which are considering going public.
In general, as a condition to registration, both the NYSE and NASDAQ require companies, to undertake to report information which is material to shareholders, to have material transactions approved by the shareholders, and to appoint an audit committee and independent directors, as well as other requirements which set a higher standard of corporate governance than in private companies.
NASDAQ now enjoys the reputation of being the leading market for technology firms. Most technology companies are listed on NASDAQ, and in the end of the 1990s its trade volumes resembled those of the NYSE. However, it is important to distinguish between being listed on the NASDAQ National Market and being listed on the NASDAQ Small Cap Market. The former enjoys a vast reputation and bestows on the companies listed on it not only the reputation entailed by being traded on this market, but also an exemption from the requirements of state securities laws (blue sky laws), whereas the latter is intended for small companies and does not enjoy a similar reputation.