For Immediate Release: November 17, 2004

Open-access and technology give NASDAQ competitive advantages

WASHINGTON– The unique control of specialists over the New York Stock Exchange’s floor-based trading system has made it less competitive in relation to the NASDAQ system, according to “Costs for Investors of Trading on the NYSE and NASDAQ,” released today by the Pacific Research Institute (PRI).

The study, authored by former Under Secretary of Commerce for Economic Affairs Dr. Robert Shapiro, finds that the NASDAQ’s open-access, competitive system for market makers enables investors to buy and sell stocks less expensively and more quickly than the non-competitive specialist system of the NYSE. The study also found that the NYSE specialists’ unique control over trading contributed to recent, wide-scale trading violations that increased the specialists’ profits at the expense of investors. The NYSE also charges its listed companies significantly higher fees than the NASDAQ.

“We found that the Big Board is making big profits at the expense of its listed companies and investors,” says Dr. Lawrence J. McQuillan, director of business and economic studies at PRI. “The NYSE should not waste a moment to scrutinize the costs imposed upon investors by human control over stock trades.”

Earlier this year, the NYSE specialist firms paid $89 million in civil penalties for their violations against investors and of NYSE regulations. Specialist firms were also forced to disgorge nearly $160 million in improperly earned profits, the study shows.

Among the study’s other findings:

• At $500,000 per year, the NYSE annual fees can be as much as 733 percent higher than NASDAQ’s, which charges a maximum of $60,000 per year.
  
• Data on average effective spreads show that the NASDAQ gives investors the ability to trade immediately at substantially less cost in stocks of large-cap firms of any price, most mid-cap firms, and less expensive small-cap firms.
  
• Analysis of all market orders in large-cap stocks, weighted for the number of shares traded, found such trades on the NASDAQ executed in about half the time as on the NYSE.

The study also reveals that while larger firms have favored the NYSE, the NASDAQ’s advantages are greatest in trades involving large companies, while the NYSE retains some advantages in trades involving small companies. The market should take heed.

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About PRI For more than two decades, the Pacific Research Institute for Public Policy (PRI) has championed individual liberty through free markets. PRI is a non-profit, non-partisan organization dedicated to promoting the principles of limited government, individual freedom, and personal responsibility.