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Why Choice of Trading Market by Company Can Effect Stock Performance
Continuation from Home Page
Article By Roland J. Savage, Jr., Partner, AGS Specialist Partners - A Specialist Firm of The American Stock Exchange.
Public markets are the bedrock upon which our capitalist system is based. The free flow of capital to entities that create wealth through production, service and innovation has enabled this country to achieve levels of prosperity unmatched throughout the world.
However, the level of knowledge of the workings of the various public trading venues is astonishingly low. The exchanges and Nasdaq tend to describe themselves as the home of the blue chips, or the home of high tech, or the home of growth companies; or in some other equally innocuous terms.
These markets have found it difficult to educate the investing public and public companies as to the actual business model of each venue, the mechanism by which stocks are traded in each venue and the use of available technology to enhance the efficiencies of each market.
They tend to define themselves by the companies they trade and in doing so spend lots of time attempting to satisfy the needs of their respective star quality companies.
This is an understandable approach but it tends to lose sight of the needs of small and midrange companies; and virtually ignores micro cap issues.
For these groups, much more than the largest public companies, an understanding of the true dynamics of the various markets is essential in order to maximize the benefits of being public.
Whether a company picks one market or another, it is imperative to understand the market model to understand the trading in its stock. It is imperative to understand the economic interests of all market participants to ensure the fair treatment of the company and its shareholders.
After cutting through all the advertising and promotional materials, there is one basic difference in the major marketplaces. They are either a dealer market or an auction market and therein lies the tale.
Nasdaq (NMS and Small Cap) and the Bulletin Board are dealer markets. The NYSE and Amex are auction markets.
Dealer markets operate through market makers who post bids and asked in the Nasdaq system. The difference in what a customer is willing to bid for a stock and what another customer is willing to ask for a stock is the spread. All customer orders are posted through a market maker acting as a dealer and are entered on the Nasdaq system as the quote of that dealer. That quote is represented along with the quotes of other market makers and the best bid and best asked of the various dealers is posted as the inside spread.
The economic interest of the dealer is to complete a transaction,
earn the spread and end the day with no 'risk' position in the stock.
His business model is based on the completion and profitability of
each trade with a short term horizon of completing the greatest number
of trades at the widest possible spread.
Auction markets operate in an open system where the investor?s broker delivers customer orders directly to the market. The orders interact directly with each other without the automatic intrusion of a market maker. In addition, a single specialist (market maker in an auction market) is responsible for the fair execution and monitoring of public orders and the orderly maintenance of the market on a continuous basis. His responsibility extends to committing his own capital to buy stock in the absence of public buyers and to sell stock in the absence of public sellers.
The economic interest of a specialist rests in his commitment of risk
capital to add to the liquidity and stability of the stock he trades.
His horizon is long term and his business model is based on the belief
that his capital commitment will enable the company's stock to trade
closer to its intrinsic value. If the company feels the stock is reasonably
priced, it will be able to use that stock to raise capital, make acquisitions
and reward employees. As the company grows into a larger company with
the issuance of more stock, the stock will become a much more attractive
issue to trade and the specialists capital commitment will be rewarded.
After reading the previous paragraphs you will understand two things:
1.) Both descriptions can be confusing, and
2.) The differences in the markets are much more important for smaller companies whose cost of capital is more significantly affected by the relative degree of support provided by each structure.
When considering marketplaces and, in many instances, dealing with
the securities industry as a whole, a company's most important tool
is common sense.
In most companies, growth allows them to eliminate the middle man, technology permits them to increase their efficiency and the needs of their business require them to ensure that their partners have a business plan that compliments their own.
These are fundamental factors in dealing with the public markets and, whatever your choices, make sure you understand the basics and the basics support your needs.
Roland Savage joined AGS Specialist Partners in 1996 after an 18-year career in the securities industry. He was a Vice President for Administration, Client Relations, Systems Development and Compliance at Fidelity Capital Markets in Boston between 1994 and 1996. Previously, he spent 15 years in executive capacities at the American Stock Exchange. As Managing Director of Marketing and Director of the Securities Division, he had extensive contact with listed companies as well as companies in the process of deciding upon a marketplace for their shares. Prior to 1978, Mr. Savage was with The Prudential Insurance Company of America and Union Carbide.
He holds Securities Registrations in Series 7, 63, 24, 8, 4, and 27, and is an MBA graduate of The University of Chicago Graduate School of Business (1975) and Fordham University (1968). He served in the United States Navy between 1968 and 1971 and was Communications Officer on the USS Valcour and Administrative Officer at the Naval Communications Station in Puerto Rico
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