Over the years, Nasdaq has welcomed thousands of new companies to our market. However, not all of these companies started life on Nasdaq at the time of their initial public offering (IPO). Many companies joined Nasdaq by switching their stock exchange listing from other listing venues, and experienced better trading quality as a result.
Nasdaq has won 76% of all switches among U.S. equities exchanges since 2005. Some of the household names that switched to Nasdaq include PepsiCo, Sanofi, T-Mobile, Kraft Foods, Walgreens Boots Alliance, Exelon, Workday, and recently announced AstraZeneca and Keurig Dr. Pepper.
We've shown before that stocks listed on Nasdaq experience less volatility, tighter spreads and more depth. But it can be hard to compare apples-to-apples when the underlying companies are different.
For the Nasdaq Economic Research team, exchange listing switches are a unique and unbiased means of comparing listing venues. Gone are stock-specific factors that drive volatility, spreads, or closing volumes differences. It is the exact same ticker symbol, at the same price, but with a primary listing on two different markets, mere weeks apart.
Data shows that once a stock has switched from the New York Stock Exchange (NYSE) to Nasdaq, the amount of shares on the best price improve, spreads contract, and volatility improves. We also see more liquidity in these symbols during closing auctions.
Improved NBBO Spreads and Size
Tighter spreads and more depth at the inside quote decrease costs to investors. This is unchallenged. More liquidity at a tighter spread reduces the costs for investors to build large positions.
Data shows that for companies that switched to Nasdaq, the average spread decreased 0.3 basis points (bps).
Chart 1: Spreads fell after switching to Nasdaq
Source: Nasdaq Economic Research. Duration-weighted NBBO spread from 9:30AM-4PM averaged daily on a symbol level.
We also found that after the switch to Nasdaq, depth in these companies increased 8.5%, measured as the dollar value at the best quote.
In addition to tighter spreads making it cheaper to trade, this also makes it easier for investors to get larger trades done.
Chart 2: Value on the best quote increased after switching to Nasdaq
Source: Nasdaq Economic Research. Duration-weighted NBBO dollar size from 9:30AM-4PM averaged daily on a symbol level.
Reduced Intraday Volatility
One of the key differences between Nasdaq markets and its competitors is the way we incentivize multiple market makers, rather than just creating obligations for a single one. That brings many different views to the market and tends to result in more competitive quotes and two-sided flow.
Switch data confirms that Nasdaq's market structure helps lower short-term volatility. This result is in stark contrast to the oft-stated view that a single firm should be better at minimizing volatility. This is a misnomer debunked by the Wall Street Journal.
Chart 3: Intraday volatility decreased after switching to Nasdaq
Source: Nasdaq Economic Research. 5 minute high/ low volatility from 9:30AM-4PM averaged daily on a symbol level.
A Better Close
The closing auction is the largest daily liquidity event in the U.S. stock markets. The quality of price discovery in the auction directly affects index providers and the official prices used to calculate portfolio performance, stock returns and volatility.
Nasdaq's closing auction operates very differently from that of the New York Stock Exchange. Our closing auction is more transparent and equal for all. After 3:55 PM ET we don't allow traders to change their mind about market-on-close orders, but traders can provide additional liquidity into the close to offset imbalances. Academic studies that mathematically account for different stock characteristics have shown our close has more transparency and less price deviation.
Exchange switching data confirms this analysis.
Following the exchange transfer to Nasdaq, the company's stock garnered more liquidity and achieved increased price stability heading into the close. We saw the same improvements looking at closing auction price dislocation and spreads in the last five minutes of the day, after all imbalance news from both primary exchanges had been made public.
Chart 4: Closing auction dislocations decreased after switching to Nasdaq
For exchange switches to Nasdaq, we also found that liquidity increased at the close. In fact, the average closing volume increased to about 6.6% of total volume from 5.83% before the switch.
That means that following the stock listing switch to Nasdaq, not only did daily consolidated volumes increase, but the closing cross volumes increased even more.
Larger auctions with less price dislocations are important to investors. The close is an optimal time to invest cash, as it is a large pool of cheap liquidity that also minimizes portfolio risk (tracking error). More volume allows larger trades to be executed at, or very close to, the closing auction price.
Chart 5: Closing auction volumes increased after switching to Nasdaq
Source: Nasdaq Economic Research. Total Closing Cross Volume as % of Total Consolidated Volume averaged daily.
How Did We Do This?
Our analysis focused on large companies with market capitalizations of $5 billion or more that switched stock exchange listings from NYSE to Nasdaq in the past 10 years. We removed exchange switches associated with M&A deals, spin-offs, and large rebranding events, as these events can change the fundamentals of the underlying stock and/or index membership, making direct comparisons less valid.
That left 29 switches in total. We then computed changes in overall market volatility, spreads, liquidity and depth for the two months immediately before and after the switch.
What Does This All Mean?
Although we've conducted other studies that show our market quality is superior to our competitors, comparing different stocks is sometimes challenging, because spreads, liquidity and volatility can vary due to stock-specific factors rather than market factors. Our exchange switching analysis gives us true apples-to-apples comparisons: the exact same stock ticker on two different markets separated by just weeks.
The results show that stocks that have switched to Nasdaq see improvements in intraday volatility, spreads, liquidity and the close.
For companies looking to make the switch to Nasdaq from the NYSE, this data should make the decision to “flip the switch” that much easier.
