By Saul Sterman
Arcadis announced on May 16, 2007 that it was delisting from the NASDAQ as of June 7th due to low volume and what Arcadis is describing as unnecessary expenses related to being listed on the NASDAQ. Arcadis will maintain public listing on the Euronext.
The NYSE is considered to be a more prestigious exchange, at a price. All exchanges have their rules and regulations. For a long time it was commonly accepted that U.S. exchanges in general and the NYSE and the NASDAQ in particular, offered the investing public a higher degree of protection than non U.S. exchanges. The LSE (London Stock Exchange) is considered a reputable exchange though we can all remember the numerous scandals that ‘the City’ has been through. Lately, investors are beginning to ponder about the price paid for protection. Likewise, companies are noticing the climate change.
Wall Street Has the Power
It is imperative to the U.S. economy that Wall Street maintains its global share, both in percentages and absolute net worth, of the capital markets. Without this, U.S. global influence will start to diminish. Having a strong military is more of a deterrent against inappropriate behavior by heinous leaders and warped societies but can not and should not be a first option in maintaining some sort of sanity on this planet.
The NASDAQ can ill afford to lose companies like Arcadis. Quality companies are hard to come by. Both the NYSE and the NASDAQ should be working towards increasing dual listings and capturing as many quality global companies as possible. There are two issues that all the low (trading) volume companies (hereinafter LVC) contend with. The first is the exchange fees and the second is the rules and regulations of the exchange.
On the first issue, U.S. exchanges are going to have to change their thinking. Not every listed company is going to bring in profits. The exchanges are going to have to waive fees for all LVC. On the one hand, the exchange is supposed to provide a service that essentially is being provided by another exchange. On the other hand if the exchanges do not compete, they will gradually lose ground and risk relinquishing their status on the world markets.
By reducing fees substantially to a flat minimum rate for all LVC, whether dual listed or not, the tide of attrition will be curtailed. The exchanges may not make money off of the LVC, but they definitely will not be losing money either. Should the trading volume increase at a later date, the exchange would be providing a service to the company and higher rates would be justified.
On the second issue there are several aspects that need to be taken into account. First and foremost are the GAAP standards. Currently, these standards are being belittled by the investment community by allowing companies to report non GAAP figures along with the GAAP figures. Market makers, analysts and other parties of interest are all contributing to the demise of the importance of GAAP. Currently the U.S. is trying to reach some sort of globally accepted format. If we allow U.S. companies to bypass the GAAP standards then there is no hope in achieving a global GAAP standard. The investment community should severely penalize any company that attempts to spin its financial results using none GAAP figures. Yahoo! Finance, MarketWatch, Google Finance, Dow Jones, analysts and even the New York Times should cease quoting none GAAP figures. If not, we are shooting ourselves in the leg.
When a company states that it is delisting because of rigid accounting requirements by the exchange, you can rest assured that if the company is in good financial health this is not the real issue. It takes the average company less than a day to convert their non GAAP financial reports to conform to GAAP guidelines. There is no shortage of knowledgeable accountants worldwide to perform this conversion and outsourcing is another option. The cost is minimal.
Climate Change
Another point to consider is the overall perception of the level of protection that the U.S. markets offer. We have had our share of scandals as well, less we forget Enron, Tyco and others.
In the aftermath of recent historical events combined with the relative tranquility and absence of any earthshaking scandals on non U.S. exchanges, the inherent safety factor argument is rapidly evaporating. Furthermore, the proliferation of ETFs concentrating on emerging markets is signaling to the public that foreign exchanges are just as safe as U.S. exchanges. The public is not buying the rhetoric and statements like ‘the Japanese accounting procedures are inadequate’ are getting old.
I distinctly recall the attitude that Detroit took when Toyota and Honda started making inroads in the U.S. market. The resemblance in attitude and false confidence that the exchanges are portraying today is uncanny. Once several none U.S. exchanges reach economy of scale, they will upgrade their regulations, offering the same investor protection that is perceived to be the domain of the NASDAQ and NYSE and eventually surpass both exchanges.
Taking this into account, the U.S. will be hard pressed to compete with foreign exchanges. Non GAAP accounting allows companies to display their financial results in cunning ways highlighting the positive and masking over the negative. Not that GAAP is perfect; apparently though, there is less room to cook the books. In any event, companies listed on foreign exchanges will constantly produce more enticing quarterly reports. In turn this will attract more capital and foreign exchanges will continue to outperform U.S. exchanges. The chain reaction from investors is to follow the course leading to higher profits. This in turn dictates a continuous flow of capital and listings from U.S. exchanges to foreign exchanges. This flow of events needs to be addressed now, not tomorrow.
Maintain Standards and Lower Costs
Like everything else, all are competing on a global basis, capital markets included. Costs need to be reduced and efficiencies increased. There was never any doubt in my mind that eventually the NYSE would move to electronic trading. It was just a matter of time.
The argument that electronic trading is a lower level of trading is hollow. First of all it is factually untrue. Second, the world couldn’t care less. When was the last time you said to yourself, thank goodness for the floor trader or the pit boss!
What is replacing the specialists is a more rigid set of trading regulations. Just like lowering the accounting standards a few years ago would have resulted in an immediate migration to less expensive exchanges, likewise, lowering the perceived trading standards today would result in the same outcome. Once there is no noticeable difference between exchanges, the low cost provider wins outright. Maintaining trading standards is essential for now as the general public is still a bit weary of the trading procedures on foreign exchanges. As electronic trading takes hold and more uniform software and procedure is implemented, this too will no longer be a consideration.
The irony is that lower accounting standards today might attract more companies and capital. This however, is an acute form of myopia (shortsightedness).
The Solution
I have several hypotheses that would render the looming problem null however sharing them publicly would enable the competition to take countermeasures before implementation could be achieved.
To European and Asian readers I wish to make clear that I view all competition as healthy and that I am not advocating a trade war or the likes. What I am stating is that just like Europeans would guard their chemical industry emphatically as it is a cornerstone to the European economy, likewise, the capital markets is the blood supplying oxygen to the U.S. economy. Americans have no choice in this matter. Not to mention that ARCAF does a third of its business in the United States.
Disclosure: No conflicts.
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