Uber and Pinterest, two of the most prominent tech start-ups worldwide, have made a significant decision to list their shares on the New York Stock Exchange (NYSE), which is regarded as excellent news for the exchange, surpassing both the NASDAQ and numerous foreign stock exchanges. This achievement highlights the NYSE's remarkable performance and raises intriguing questions about how companies select the stock exchange for their initial listing.
In the past century, global stock exchanges varied significantly in operational performance due to uneven development worldwide. Some exchanges had higher operational charges, while others offered varying levels of liquidity. However, over the past few decades, these differences have largely vanished as stock exchanges have adopted electronic systems, allowing seamless trading experiences for buyers.
As a result, the factors influencing a company's choice of stock exchange have undergone significant changes in recent years. Several key factors now play a crucial role in determining the exchange selection:
1. Shareholder Location: While investors can trade securities worldwide, most still prefer to invest in their home countries. American investors, for example, predominantly allocate their savings to the American market, and the same logic applies to European and Australian investors. Therefore, the choice of stock exchange largely depends on the location of potential investors. Alternatively, companies may also list in markets where their respective industries are well-established. For instance, many international tech companies choose to list in America, while American mining and natural resource companies often list in Canada to attract Canadian investors interested in these industries.
2. Accounting Standards: The chosen stock exchange also dictates the accounting policies a company must follow. Listing in the US requires adherence to US Generally Accepted Accounting Principles (GAAP), whereas listing in another country may necessitate compliance with International Financial Reporting Standards (IFRS). Although the choice of accounting standard may not significantly impact many companies, certain cases, such as those involving substantial fixed assets, can have a significant influence on profitability through depreciation policies. Consequently, some companies prefer listing on specific exchanges that allow them to present more favourable financial results, ultimately contributing to a higher stock price.
3. Type of Exchange: While all exchanges may seem similar, they possess distinct characteristics. For instance, NASDAQ operates as a broker-dealer market, where the exchange acts as the counterparty for every trade, buying shares from sellers even in the absence of immediate buyers. Consequently, NASDAQ may have to hold a certain number of shares until suitable buyers emerge. In contrast, NYSE functions as a facilitator, matching the highest buyer bid with the lowest seller bid to facilitate sales. Under normal circumstances, this distinction may not be significant, but during periods of extreme price volatility, a broker-dealer-driven market like NASDAQ tends to exhibit higher liquidity.
4. Listing and Compliance Costs: Another crucial factor for companies selecting an exchange is the associated listing and compliance costs. For instance, the NYSE charges a listing fee of approximately $225,000, while the NASDAQ only charges around $75,000. Due to the lower listing fee, smaller and mid-size firms often opt for listing on the NASDAQ, leading to the perception that smaller firms predominantly list on this exchange. However, the reality is different, as larger corporations like Apple, Amazon, Microsoft, and Facebook also choose to list on the NASDAQ.
5. Number of Shareholders: Some companies prefer to maintain a closely held shareholding structure, limiting the increase in the number of shareholders. Exchanges like the NYSE and NASDAQ require companies to have at least 300 shareholders to be eligible for listing. In cases where companies have fewer shareholders, they can choose to list on unregulated Over the Counter exchanges, where only accredited investors or high-net-worth individuals can participate.
It is important to note that listing shares on one exchange does not prevent trading on other exchanges. Companies initially choose a specific exchange for their listing,
but over time, shares of major corporations are typically sold on multiple exchanges at nearly the same price. Any minor price differences are quickly exploited by arbitrageurs seeking quick profits.
In conclusion, Uber and Pinterest's decision to list on the NYSE represents a significant milestone, surpassing the NASDAQ and various foreign exchanges. The historical evolution of stock exchanges, along with the changing factors influencing exchange choices, underscores the complexities involved in a company's decision-making process. The choice of exchange depends on factors such as shareholder location, accounting standards, exchange types, listing and compliance costs, and the desired number of shareholders. Despite the initial listing selection, major companies' shares eventually become traded on multiple exchanges, often at similar prices, with arbitrageurs seeking to capitalize on any minor discrepancies.