Why More Than 500 Listings Have Switched to Nasdaq

Most of you already know that Nasdaq is home to some of the most innovative companies in the world, and we’ve seen in the past that our market quality is better for companies, helping to reduce volatility and costs of capital. So, it’s probably no surprise that Nasdaq recently saw its 500th listing switch.

In celebration of the milestone, we decided to update our research on listing market quality, comparing spreads, liquidity and volatility right before and after a stock switches from one listing exchange to another.

Switches are by far the best way to compare different listing market quality, allowing us to compare the exact same stock across two different marketplaces just days apart. That reduces distortions based on sector, market capitalization and single stock events, providing the cleanest comparison between listing venues.

The results probably aren’t that surprising for the 500 companies that have successfully switched already.

Tighter spreads make trading costs are lower

Crossing the bid-offer spread represents a cost for an investor when they enter (and if they exit) a position. Consequently, tighter spreads should lead to lower costs to trade. That increases returns to investors, which can improve a stocks valuation, thereby reducing the costs of capital with future capital needs.

When we look at the average cost of crossing the bid-offer spread around a switch, we see that when the same stock is listed on Nasdaq, it has tighter spreads than when it was listed on NYSE. In fact, spreads for symbols that either switched between NYSE or Nasdaq had spreads about 12% lower while listed on Nasdaq.

Chart 1: Nasdaq listings have relatively tighter spreads than NYSE listings

Deeper liquidity makes it easier to increase trade sizes

Another important factor for mutual fund investors, especially with their larger trade sizes, is the depth of shares on the bid and offer. This helps complete larger trades faster with less price impact, which also reduces transaction costs and can help investors accumulate larger positions.

When we look at switches between NYSE and Nasdaq, we see corporates had approximately 35% more depth at the NBBO while listed on Nasdaq.

Chart 2: Switches to and from NYSE to Nasdaq had 35% more depth at the NBBO while listed on Nasdaq

Volatility is lower at all parts of the trading day

Tighter spreads with larger depth at those spreads should result in prices moving less during the day – and that’s exactly what we find. The average high-low price move in each 5-mintute period decreased by 11% for stocks listed on Nasdaq.

But often, companies find low auction volatility more important. That’s especially true on the close because most “volatility” calculations used close-to-close returns.

Our calculations show that companies listed on Nasdaq also have lower open and close volatility, with Nasdaq having:

Opening auction volatility lower by 3%.
Closing auction volatility lower by 17%.

Chart 3: Switches to Nasdaq see reduction in volatility during continuous trading and auctions

One reason why Nasdaq auctions likely have lower volatility is that Nasdaq treats all market makers more equally, which we think attracts both buyers and sellers and gives more market makers a level playing field for providing liquidity.

Dislocation in auctions costs investors money

It’s not just us though. Even academics have talked about how the Nasdaq’s closing process is more predictable and less volatile. It helps that we have special order types designed to offset imbalances and reduce volatility. These contrast to NYSE order types that allow traders to do cancellations, which can affect the balance of buyers and sellers in the closing auction with just seconds left in the day.

Closing volatility can impact investors returns. If a new buyer is well-matched in the auction, prices shouldn’t move up much at all. However, if a seller cancels at the last minute, that could cause prices to gap higher – hurting the investors’ entry price and returns.

The data shows that Nasdaq has more predictable auctions, with switches from NYSE to Nasdaq seeing a 6% reduction in opening auction dislocation and a decline of over 28% in closing auction dislocation.

Chart 4: Switches to Nasdaq experienced improvement in price stability for opening and closing auctions