Increase in De-listings and Decrease in IPOs Cuts into Revenue of U.S. Exchanges

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Since the beginning of the month news of non-compliance notifications being issued to NASDAQand NYSE listed companies has become almost commonplace. Failure to meet minimum listing requirements results in being de-listed, which in turn results in reduced revenue for the two U.S. exchange operators. Add to this the fact that the Initial Public Offering (IPO) market has slowed down dramatically and it stands to reason that NASDAQ and NYSE will be feeling the pinch to some degree.

Since 7 August, NASDAQ has de-listed 54 stocks, in comparison with 48 in 2007 and 52 in 2006. With four months of the year still to go, that number looks set to climb even higher. NYSE data reveals that 11 stocks have been de-listed since 1 July, in comparison with 21 in 2007 and 14 in 2006. This is an indication of how the credit crunch is affecting the operations and liquidity of smaller companies and weaker stocks.

NYSE is losing annual revenue of around $878,000 that it would have collected from IndyMac which was seized by regulators in mid-July and Bear Stearns which was rescued by JP Morgan Chase earlier this year. These are just two high-profile examples that highlight the uncertainty and volatility of the financial sector and with some financial firms breaking a number of standards ranging from investor interest to cash flow, this sector is being carefully monitored by stock exchanges.

Smaller companies tend to be more vulnerable in volatile times and the fact that NASDAQ’s non-compliance de-listings are higher than those of the NYSE is partly due to NYSE’s more stringent listing criterion, one of which is that companies must maintain a market capitalization of over $75 million, as opposed to NASDAQ’s requirement of $35 million. Executive vice president of NYSE’s Global Corporate Client Group, Noreen Culhane, expressed confidence that the negative impact from de-listings is quite manageable. NASDAQ’s chief financial officer expressed similar sentiments, pointing out that listing fees are recognized over an extended period of time and changes in listing activities, either up or down, will even out.

In a less volatile market, de-listings are generally readily replaced by IPOs, but the IPO market is currently experiencing its worst slowdown in five years with Thomson Reuters data reflecting only 28 IPOs totaling $26 billion taking place this year. The 2008 figure represents only about a quarter of the IPOs for the same period last year. Many analysts are taking a positive viewpoint however, that as the economic environment stabilizes and becomes more favorable, there will be a flood of IPOs and new share issuances.

Somewhat offsetting the dearth of IPOs is the launching of secondary share offerings by established stock exchange listed companies as a means of raising additional capital. For example, late in July Merrill Lynch & Co (NYSE: MER) released a statement that it intended to raise $8.5 billion by means of a new stock sale. This will, in turn, lead to increased listing fees payable to NYSE.

With NASDAQ and NYSE each holding thousands of listings, it is to be expected that they won’t all make the grade during tough times, however analysts generally agree that this is no reason for investors to panic as it is all part of the ups and downs of the economic cycle.

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