As it prepares for life as a public company, the New York Stock Exchange is considering getting into the investment research business. The Big Board has retained Holly Stark --formerly head trader at $1.6 billion-in-assets investment firm Kern Capital Management and now a director of New York trading consulting firm Efficient Frontiers -- to explore how it might help listed companies attract analyst coverage, Institutional Investor has learned.
Among the options the exchange is weighing: a new division that would act as intermediary among undercovered small- and midcap companies, research firms and investors. Arch-rival Nasdaq and an independent start-up, the National Research Exchange, have launched similar operations in recent months, brokering coverage that can be paid for either by companies or by investors.
Alternatively, the NYSE may team up with the NRE, which is headed by former Nasdaq listings chief David Weild (exNasdaq CEO Wick Simmons is chairman of the NRE's board), rather than build such a business from scratch, informed sources say. Although the Big Board and the NRE have discussed such a joint venture, a deal is far from imminent. The NYSE is "still in the information collection and internal debate stage," says one person with knowledge of the talks. Neither Weild nor Stark will comment on the matter.
Also on the research front, on January 18 the Big Board will cosponsor an investment conference with independent research firm Prudential Equity Group. According to a promotional page on the NYSE's Web site, the event will follow the format of conferences that are routinely held by sell-side research firms. Senior executives from 20 NYSE-listed small- and midcap companies -- including National Semiconductor, gaming concern Harrah's Entertainment and homebuilder Hovnanian Enterprises -- will make presentations. Steven DeSanctis, Pru's head of small-cap research, will moderate.
It's no surprise that the Big Board is trying to forge closer ties with the companies that pay listing fees. Through its pending merger with electronic exchange operator Archipelago Holdings, the 213-year-old, not-for-profit NYSE will soon become a public company that must maximize profits for shareholders. (NYSE members overwhelmingly approved the deal on December 6.) The exchange gets about one third of its revenues from listing fees.
But its endeavors in research raise serious questions. Most notably, should a major regulatory organization -- the NYSE has fought tooth and nail to retain its rulemaking and enforcement operations even as Nasdaq separates from its regulator, NASD -- be in the business of flogging stocks? And should an exchange compete as a research provider with the very securities firms it relies on as customers for its trading business?
"On the one hand, they want my order flow," says one Wall Street equities executive, "and on the other hand, they're competing with my research department, which is one of the ways I get trading business from my clients. Does that make sense to you?"
Big Board CEO John Thain was on holiday late last month and unavailable for comment. A NYSE spokesman declines to discuss the exchange's plans, saying only, "The NYSE views research as an important service to offer our listed companies, and that will remain true in the future."