In March 2006, the NYSE Group, Inc. (the "NYSE Group") merged with the Archipelago Exchange to create NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx, and the Pacific Exchange) offering smaller public companies an opportunity to list with the NYSE Group. The NYSE Arca is a fully electronic exchange intended to provide an open and fair market for securities of emerging companies. The eligibility requirements ( i.e. , market capitalization, minimum share price and financial criteria) are tailored towards growth companies and offer smaller companies the incentive to initially list on NYSE Arca and to then "graduate" to the NYSE (commonly referred to as the Big Board). Also central to NYSE Arca's market structure is the Lead Market Maker ("LMM"), akin to a specialist on the NYSE, who provides liquidity and trading efficiency to foster issuer growth. This article presents an overview of NYSE Arca and the process for both initial and continued listing.
With NYSE Arca, the NYSE Group attempts to attract companies that would have previously listed with NASDAQ. As an incentive, the NYSE Group markets its multiple listing platforms as an integrated group, with NYSE Arca as the option for emerging growth companies. The NYSE Group waives listing fees for companies that initially list on NYSE Arca and does not charge the original listing fee on NYSE Arca if a firm transfers from NASDAQ. As of January 1, 2007, the new listing platform had attracted a total of 26 exclusive listings since its launch in March 2006, including IPOs, transfers from NASDAQ and AMEX and non-U.S. listed companies.
Unlike many trading systems, including the Over-the-Counter-Bulletin Board, Nasdaq Small Capital Market and Pink Sheets, that do not qualify as exchanges under the Securities Act of 1933, the NYSE Arca shares the stature of the Big Board, NASDAQ and AMEX as full-fledged exchanges, which exempt such listed securities from state blue sky registration requirements. However, the lower quantitative standards applicable to a NYSE Arca-listed issuer make the NYSE Arca much more accessible for small public companies than the Big Board, NASDAQ and AMEX. Listing on the NYSE Arca does, of course, carry some of the burdens associated with trading on a major market, particularly the corporate governance requirements applicable to all NYSE-listed companies.
Process For Listing On NYSE Arca
Application. To begin the process for listing on NYSE Arca, companies must complete a listing application1 and submit various materials to the Equities Qualification Department (the "Qualification Department") of NYSE Arca for review. The initial documentation requirements differ between initial public offerings ("IPOs") and non-initial public offerings ("non-IPOs"). For example, issuers involved in an IPO must submit their latest registration statement and exhibits, as well as SEC comments and responses. In connection with a non-IPO listing, issuers are required to submit their latest Form 10-K and 10-Q, most recent proxy statement and prospectus, in addition to their past six months' of trading history. All issuers (whether for IPOs or non-IPOs) are required to submit a $500 application fee. NYSE Arca retains broad discretion over the listing process, reviewing and evaluating all applications to ensure that issuing companies comply with initial listing criteria and continue to comply with ongoing listing criteria.
Quantitative and Qualitative review. The Qualification Department performs both a quantitative and a qualitative review of the materials submitted by each issuer. The quantitative review focuses on the application to verify compliance with the minimum financial criteria.2 If the issuer meets the relevant listing criteria, NYSE Arca sends the issuer a "comment letter," seeking additional information (typically regarding the issuer's management, operations, plans and financial condition). NYSE Arca then reviews the issuer's compliance with corporate governance requirements (companies listed on NYSE Arca must comply with the corporate governance standards applicable to all NYSE companies as codified in Section 303A of the Listed Company Manual) and reviews biographies of the members of its board of directors. In some instances, the Qualification Department requests a formal "letter of undertaking" from the issuer to ensure compliance with the applicable listing standards.
NYSE Arca also conducts a qualitative review of the issuer's application. This examination focuses on the issuer's financial condition, accounting practices and ability to meet existing obligations. In addition, NYSE Arca reviews the nature and scope of the issuer's operations, the stated purpose of the offering and intended use of proceeds, and the issuer's product development, marketing, licensing and working capital. Finally, NYSE Arca considers the issuer's credit ratings, management experience and reputation, governance policies, competition and industry conditions.
Merit review. The final stage of the review process is the Merit Review. The NYSE Arca staff considers the issuer's overall compliance with listing criteria and the issuer's response to any "comment" letters. If there is an offering associated with the listing, the staff reviews comments received from the SEC regarding the issuer's registration statement.
Equity Securities Qualification Panel. Upon completion of its review, the NYSE Arca staff will make a recommendation to the Equity Security Qualification Panel (the "Qualification Panel"), which then recommends whether an issuer is qualified for listing. Issuers are not entitled to attend or present evidence at meetings of the Qualification Panel. Instead, the issuer is informed by the staff of the Qualification Panel's determination verbally and in writing.
Final Required Documentation. Upon approval, the issuer must submit additional documentation, including making representations that it complies with certain corporate governance listing requirements.3 An issuer must register with the SEC under Section 12(b) of the Securities Exchange Act of 1934 (the "Exchange Act") before being admitted to trading on NYSE Arca as a listed security.4 Issuers previously trading on an exchange must also present evidence of approval by such exchange. Following receipt of all completed documentation, NYSE Arca will certify approval of the listing with the SEC. Trading may commence following the effectiveness of the Exchange Act registration statement. After trading begins, NYSE Arca requires companies engaging in an IPO to submit a distribution schedule, signed by an executive officer, identifying the company's beneficial holders. For exclusive listings, the issuer must submit the schedule within 120 days of the start of trading, and for dual listings within 60 days.
Current Arca Listings
NYSE Arca had two listing tiers: Tier I and Tier II. Each tier had its own set of initial and continued listing requirements. Tier I was designed for large capitalization mature companies and Tier I companies are exempt from "blue sky laws." Some examples of listed companies include: Constellation Energy Partners, LLC, American Dairy, Inc., Darwin Financial Underwriters, Raser Technologies and Southern California Gas Company. Examples of Tier II companies include: Emrise Corporation, Golden Cycle Gold Corporation and JMG Exploration.5 As of November 2006, NYSE Arca discontinued listing new issuers or new classes of securities under Tier II, and all new listings will effectively be Tier I.6
NYSE Arca Model
NYSE Arca's three fundamental operating principles are openness, fairness and strict price-time priority. NYSE Arca states that there are no middlemen allowing buyers and sellers to meet directly in an open electronic environment. On NYSE Arca, buyers and sellers have the unique ability to view a company's open limit order book, which displays orders simultaneously to both buyer and seller. Once orders are submitted, all trades are executed in the manner designated by the party entering the national best bid or offer. The buy and sell offers are posted on NYSE Arca in price order from best to worst and if the prices match up, they are ordered based on the time the buy order or sell order was posted (earliest to latest).
In the NYSE Arca model, issuers can choose an LMM. NYSE Arca does not allow multiple market makers to trade a single stock; only one firm is able to make a market in any given security. LMMs are subject to obligations designed to achieve tight, two-sided markets at all times. To make these conditions appealing to prospective LMMs, NYSE Arca offers certain business incentives to LMMs.7 Transaction fees for LMMs are significantly lower as a result of the merger. In addition, because orders can be sent directly to a particular LMM, the LMMs are able to make their own arrangements involving price and size guarantees with customers, LMMs and other market makers interact completely electronically. They are required to maintain quotes in the securities they trade and can only execute trades with their customers. Although issuers are not required to have LMMs, it is one way issuers can give their shareholders more liquidity for their securities.
NYSE Arca has contracted with NYSE Regulation to provide regulatory services, and ensure that trading activity on NYSE Arca is extensively monitored through the use of highly-sophisticated and fully-electronic surveillance. These regulatory operations are designed to ensure that all aspects of trading on the exchange are conducted in compliance with applicable regulations.
NYSE Arca continues to grow and evolve. As of August 3, 2006, the SEC approved rules allowing NYSE Arca to introduce its new automated trading system for equity options.8 The NYSE Arca Options platform ("OX") replaces the previous platform, PCX Plus, and offers immediate electronic order execution in all of the nearly 2,000 options issues currently traded. The newly developed OX system provides automatic executions for customer and broker dealer orders as well as a low cost venue for both LMMs and market makers to stream quotes from the trading floor or remotely. The options platform was phased in beginning August 7, 2006 with migration of ten options issues from the PCX Plus platform.
The market structure of NYSE Arca OX blends price time priority with LMM participation. Announced at the end of October 2006, three major Wall Street firms joined OX as new options LMM firms.9 These additions bring the number of LMMs to eleven and correspondingly increases liquidity on NYSE Arca. A draw for options traders is the reduced trading fees.10 Transaction fees for LLMs dropped sixty-five percent, from $0.26 per contract to $0.09 per contract, as a result of the merged option market. In addition, the cost of obtaining monthly permits to trade options has increased from $2,250 to $4,000 per options trading permit ("OTP"). Each OTP now enables market makers to trade 100 options issues, up from eight issues prior to the pricing change and for $16,000 per month, market making firms are able to trade all options issues on the OX market.
Recently, NYSE Arca announced that, in late January 2007, it will launch a pilot program quoting options listed for trading on the NYSE Arca options platform in $0.01 increments as opposed to the current industry standard of $0.05 for options quoted under $3.00.11 Similarly, options quoted at $3.00 or greater would be reduced from $0.10 to $0.05 under the new program.
In addition, in June 2006, NYSE and Europe's leading cross-border exchange, Euronext, agreed to combine their organizations in a merger of equals, forming a publicly traded holding company to be known as NYSE Euronext. On December 20, 2006, approximately 99.7% of NYSE Group's shareholders who voted approved the proposed combination with Euronext.12 The approval creates the first truly global exchange group. The single holding company will be able to operate trading that spans seven countries and six markets with the ability to trade a variety of international stocks, bonds, options and derivatives.13 The evolution of a more consolidated and electronic exchange industry offers listed firms more liquidity. The pooling of orders in a large marketplace could potentially increase the competition between orders and lead to better and faster execution of trades.
NYSE Arca has met success since its launch in March 2006, and it will be exciting to continue to monitor the exchange as the new options trading platform is established and the Euronext merger benefits are realized.
1 NYSE Arca Review, information regarding the listing process is available on the NYSE Group website, at www.nyse.com/about/listed/1150366630075.html.
4 All issuers are required to submit an executed listing agreement, certain representations concerning corporate governance, articles of incorporation and bylaws, registrar/transfer agent agreements, specimen stock certificate, balance of the listing fee and Exchange Act registration statement.
5 The principal initial and continued listing standards for common stock available at Listing Standards, www.nyse.com/about/listed/115031724207.html.
6 Common stocks designated as Tier II securities before November 2006 will remain listed, if the issuer so desires, for as long as they meet the maintenance requirements.
7 Every time LMMs add liquidity, the NYSE Arca pays them a "liquidity" rebate. It is only when an LMM removes liquidity from the book that it is charged a transaction fee. Jeanne Cotroneo Darrow, Liquidity Making, NYSE Magazine.
8 NYSE Receives SEC Approval to Launch Options Platform, Wall Street & Technology , at www.wallstreetandtech.com/showArticle.jhtml?articleID=191800160 (Aug. 3, 2006).
9 The three new options LLM firms are: Credit Suisse Securities (USA) LLC, SLK-Hull Derivatives LLC and UBS Securities LLC.
10 News Release , NYSE Arca Options Approves Three New Lead Market Making Firms, at www.nyse.com (follow links About NYSE Group, to News and Events and New Releases) (Oct. 23, 2006).
11 News Release , NYSE Arca Options to Begin Penny Quoting Pilot in 2007, at www.nyse.com (follow links About NYSE Group, to News and Events and New Releases) (Oct. 12, 2006).
12 News Release , NYSE Group Shareholders Overwhelmingly Approve Combination with Euronext , at www.nyse.com (follow links About NYSE Group, to News and Events and New Releases) (Dec. 20, 2006).
13 In addition, NYSE Arca will own the stock exchanges in Amsterdam, Brussels, Lisbon and Paris, as well as Euronext.liffe, the electronic derivatives exchange in London.
M. Ridgway Barker is Chair of the Corporate Finance & Securities Practice Group of Kelley Drye & Warren LLP. Randi-Jean G. Hedin is a Partner in the Corporate Finance & Securities Practice Group. Acknowledgement is given to Kristen A. Hartofilis, an Associate at Kelley Drye & Warren LLP, for her efforts in the preparation of this article.