Top News
Check latest news Read →

Securities markets and financial legislation

The history of the New York Stock Exchange (NYSE) dates back to May 17, 1792, when 24 stockbrokers and merchants signed an agreement outside 68 Wall Street, standing under a Buttonwood tree. This became known as the Buttonwood Agreement, and provided for the first five securities being traded in New York City; the first listed company being the Bank of New York. The NYSE grew extensively, and in 2007 merged with Euronext, creating an entity that represents major marketplaces from across Europe to the US – over 55 countries. Today, the NYSE Euronext has 8,000 listed issues and trades in equities, futures, options, fixed-income, and exchange-traded products. It is also the only exchange operator in the Fortune 500 Company overview.
The Nasdaq refers to the electronic stock market, which was the world’s first electronic trading system and came into being 40 years ago. It began with the National Association of Securities Dealers, or NASD, which aimed to eliminate the need for people to facilitate buying and selling of stocks, allowing technology to take over and result in a more efficient and transparent market. It then evolved into the NASDAQ, which stood for National Association of Securities Dealers Automated Quotation. The name is now a proper noun, which signifies the frequent usage and acceptance in our financial jargon of the acronym. The Nasdaq is a business based on computer system which helps facilitate trading of over 5,000 companies without the need of human interaction.
Differences between the NYSE Euronext and the Nasdaq

There are several differences between the NYSE Euronext and the Nasdaq. The first is the fact that while trading in the NYSE Euronext is conducted in a physical location, the New York City trading floor, trading in the Nasdaq takes place electronically via a telecommunication network. Another difference is the way in which sales are made. The NYSE Euronext is an auction market, so the securities and exchanges being sold there will be bid upon. The Nasdaq, on the other hand, is a dealer’s market, so sales are not conducted directly between buyer and seller, but through a dealer.

While both the Nasdaq and the NYSE Euronext have people who help facilitate the dealings between the buyers and sellers, their specific role varies. In the Nasdaq, this market maker is responsible to ensure that trading continues to happen smoothly, while the NYSE specialist matches up sellers with buyers as they see most appropriate. Another difference is in the types of companies traded; the Nasdaq is known for hosting tech companies like Cisco, Intel, and Microsoft, while the NYSE is home to household names such as Citicorp, Wal-Mart, and Coca-Cola. This is due in part to the fees associated with entering and listing on the NYSE and the Nasdaq; to enter the NYSE fees a company can pay can reach $250,000 and yearly listing fees go up to $500,000, while on the Nasdaq, entry fees reach $75,000 and yearly listing fees $27,500 (“The NYSE,” 2009). For these reasons, companies that do not have as much initial capital will prefer listing on the Nasdaq – which brings us to our next difference: perception.

The perception of these companies, and hence the security market, also differs; electronic and tech companies listed on the Nasdaq cause it to be perceived as both growth-oriented and volatile, while the presence of blue-chip companies and industries on the NYSE means it is seen as established and stable. Finally, stocks traded on the Nasdaq are said to be more volatile than those that are available on the NYSE, which means that there is a greater likelihood of fluctuation in the price of a security listed on the Nasdaq, as opposed to those on the NYSE, which are traditionally more stable.
Similarities between the NYSE Euronext and the Nasdaq

There are also similarities between the NYSE Euronext and the Nasdaq. For example, both are publicly traded companies, and very highly regarded in the financial world. The fact that they are publicly traded means that they can both be seen as businesses that are providing a service, shares of both are traded in the market, and they have to adhere to Securities and Exchange Commission guidelines. Both also have a type of traffic controller – called the “market maker” in the Nasdaq and the “specialist” in the NYSE – who help facilitate dealings between buyers and sellers, ensuring that sales are conducted smoothly. These market makers and specialists work to provide for efficient trading and increased liquidity in their securities market. Lastly, both the Nasdaq and the NYSE Euronext offer a forum where securities can be traded, and buyers and sellers interact to do so.

The Public Company Accounting and Investor Protection Act of 2002

The Public Company Accounting and Investor Protection Act of 2002, or the Sarbanes-Oxley Act, is also known as SOX. In years previous to its enactment, there were a series of “major ethical lapses” in US-based firms, such as Enron, WorldCom, and Tyco. Businesses like Enron and WorldCom used faulty accounting to hide actual losses, eventually filing for bankruptcy, to great loss to their shareholders. Some of the practices employed at Enron included reporting profits while at the same time declaring tax losses, and estimating the future value of an asset and calculating present earnings on a current value calculated based on the estimated future value. WorldCom, on the other hand, hid their operating expenses, counting operating expenses as capital improvements and using financial reserves to change earnings numbers. As a result of these and similar lapses becoming known, SOX was enacted.

There are several requirements for companies as laid down in SOX. Of the most important, first, both the CEO and the CFO of a company, as well as other senior management, must attest to the accuracy of the firm’s financial reports. Thus, they can be held responsible for inaccuracies. Second, the company needs to establish and maintain internal methods of controlling and reporting the financials of the company. Lastly, the company must evaluate the efficacy of these methods over the recent fiscal year. Control of the company’s auditors is given to board audit committees instead of the company’s CEO or CFO, although, as mentioned earlier, they must attest to the financial report. Penalties for inaccurate reports  can go up to $5 million in fines, 20 years in jail, or both. SOX also provides for the Public Company Accounting Oversight Board. This Board sets independent standards that must be adhered to by auditors when they are auditing the financials of a company.

As a result of SOX, companies have needed to spend on making their financial systems compliant; creating and installing new software, hiring compliance executives, and compensating board audit committees. As a consequence of being given more comprehensive and accurate financial information, shareholders also can make more informed decisions about the way their companies should be run, for example, voting against excessive compensation. So while the effects of SOX will take many years to turn around the financial systems of huge corporations, we are already seeing positive changes as an outcome of this legislation.

In conclusion, it is important to familiarize oneself with the NYSE and Nasdaq when one is looking to understand financial management. Between the two of these, the majority of the world’s significant brands are bought and sold.

While similarities exist related to the essential nature of the securities market, each has its own methods of conducting business. The Sarbanes-Oxley Act, as well, is an Act that has been enacted in recent memory as a result of financial fraud, the effects of which are still being felt. We are in a unique position to view the results of SOX’s implementation as corporations strive for greater transparency and accountability in their financial reports and fiscal dealings.

Leave A Reply