Doors Swing Open on Nasdaq's Death Row

Citing "extraordinary market conditions" in the wake of the terrorist attacks, the Nasdaq this morning said it would stop delisting shares whose bid price falls below $1.

Last week's plunge relegated reams of tech stocks to the under-$1 bin; close to 670 issues, or 15% of all Nasdaq-listed stocks, now trade below that level. Companies had faced delisting if they spent 30 business days under $1, with 90 days to regain compliance once proceedings began. Nasdaq has now suspended that rule through Jan. 2, 2002, saying it wanted to "provide more stability to the marketplace in these times of uncertainty."

"The delisting rules are designed to be company-specific, but the current market is feeling the impact of a worldwide crisis," said Rob Matlin, a New York-based lawyer who has acted as general counsel for many tech firms. "It's been a good 10 years since we've faced such hard economic times."

The action is the latest precaution aimed at maintaining market integrity in a time of crisis, measures that also include the suspension of buyback regulations and, more generally, the Fed's infusion of liquidity. But it is also likely to be viewed in certain circles as part of a trend some have perceived in which the Nasdaq has grown reluctant to issue walking papers to its once-darling IPOs.

"I think it's a terrible idea myself. I don't understand the logic," says Michail Shadkin, lead trader at TraderPulse.com, who says the move will only delay the inevitable. "Why pull along all these companies that are eventually going to go bankrupt? The SEC and other market institutions are trying to do whatever they can to artificially inflate the market. But whenever you have intervention on anybody's part, it only works for a day or two. Then the natural trend takes over, and more people lose more money," he said.

With tech stocks faltering and the Nasdaq Composite Index 72% below its April high of last year, some see wolves at the Nasdaq's door. Several stocks already have defected to the New York Stock Exchange. All this has to make it harder for Nasdaq to banish the very companies it welcomed like wealthy relatives back in the days of the bubble.

"Companies trading on Nasdaq are definitely hurting on the whole right now. It's hard for good performing companies to stand out," said Matlin. "Most companies right now are paying attention to their businesses and are less concerned about what exchange they are traded on. But come the end of the year, they might re-evaluate where they are."

Nasdaq reported net income of $19.6 million for the quarter ended June 30, a steep decrease of 56.7% from the previous year's $45.3 million. The company has three primary revenue streams: fees from transactions, market data, and listing. Transaction fees accounted for about half of the company's revenues in the second quarter of this year, while market data fees accounted for 25%. Listing fees were responsible for another 18% of second quarter revenues.

Fallen Angels Some of these penny stocks were once high-flying IPO's

It's hard to calculate exactly how much income the Nasdaq gets from the 670 companies now trading under $1. In addition to a one-time listing fee, companies must pay yearly listing fees, which are calculated according to the number of outstanding shares. Meanwhile, the Nasdaq charges between 10 cents and $2.50 a trade, depending on how much volume a trader does, whether the trade is more than 2,000 shares, and how it's executed.

Just because a share's price is down doesn't mean it doesn't do a lot of volume. BroadVision (BVSN Quote), which currently goes for about 93 cents, traded more than 3 million shares Thursday, while Metromedia Fiber (MFNX Quote) traded about 17 million shares.

"The more companies that are listed on the Nasdaq, the better it is for them," said Shadkin. "Now that they're thinking of an IPO, people will be looking at their bottom line even more."