Listing levels: what admission to trading means

A listing level is neither an assessment of the quality of a business nor a reliability rating, but the place a security holds in the structure of the exchange's rules: it tells you how strict the requirements on disclosure, corporate governance and tradability are that the issuer has agreed to meet so that its security trades in the main trading mode. Quite practical things follow from the level — who is entitled to hold the security in a portfolio, whether you have to pass a test with your broker before buying it, and how quickly the exchange learns of problems at the company. What does not follow from the level is that the security will rise in price or that the issuer will not default.

How the ladder is built

The exchange divides all admitted securities into a quoted part and a non-quoted part. The quotation list consists of the first and second levels; everything else falls into the third level, meaning it is formally admitted to trading but not included in the quotation lists. Moving up the ladder means tougher requirements; moving down means a failure to meet them.

The difference between the first and second levels is quantitative rather than qualitative: the criteria are of one type, but the thresholds on the upper rung are higher. So a second-level security is not a "bad security"; more often it belongs either to a younger company or to a company with a smaller share of its stock in free float. The third level works differently: here the exchange mainly checks that the issue is lawful and that trading is technically possible, while the issuer's substantive obligations are minimal.

The criteria the exchange uses to sort securities

For shares, the set of criteria is roughly as follows: the share of stock in free float and its absolute size, how long the issuer has existed, the availability of financial statements under international standards for the required period, requirements on the composition of the board of directors and on the presence of independent directors, an adopted dividend policy, audit and remuneration committees, a corporate secretary, a risk management system and internal audit.

For bonds the logic is different. There the exchange looks at the size of the issue, at whether it has a credit rating from an accredited agency not below a set level, at the absence of past defaults, at the age of the issuer and at the disclosure of financial statements. That is why, in the bonds section, different issues of one and the same issuer may end up on different rungs — the criterion is tied to the issue, not only to the company. OFZ are a separate story: government securities land in the upper part of the listing by the very nature of the issuer.

I deliberately do not give specific threshold values here: they are set by the exchange's Listing Rules, are revised periodically, and should be looked up in the current version of the document, not in a journal article.

What the level changes for you in practice

First, access. Securities not included in the quotation lists are closed to a non-qualified investor until a test has been passed with the broker. This is not a ban but a filter: the exchange wants to make sure you understand what sets apart an issue with no rating and no mandatory disclosure.

Second, the make-up of demand. Regulatory restrictions on institutional portfolios — pension savings, insurers' reserves, some unit investment funds — are tied precisely to the quotation lists. Hence the mechanism that a retail investor sees as a jump in price: including a security in a quotation list opens it up to a whole class of buyers obliged to hold only "listed" assets, while exclusion shuts that class out. This also applies to instruments from the funds section, whose investment declaration may refer directly to the listing level of the underlying assets.

Third, the quality of information. An issuer on a quotation list is obliged to disclose more and faster, so it is easier to piece together its history: financial statements in the reports section, corporate events in the events calendar, declared payouts in the dividend calendar. For a third-level security the flow of information may be thin — and that is not a shortcoming of the exchange but a consequence of what the issuer signed up to.

Fourth, liquidity and price behaviour. The free-float requirement does not exist for its own sake: it screens out issues where the market price is set by a handful of trades. Relying on chart patterns for an illiquid security is deceptive, and this is worth keeping in mind when you read about support and resistance levels — in a thin order book they break more often.

Transfers between levels and delisting

A level is not assigned for good. The exchange regularly checks compliance with the criteria, and when they are breached the security is moved lower — usually to the third level to begin with, and then, in the case of gross or prolonged breaches, it is removed from trading. For the investor these are two different events. A transfer to a lower rung preserves the ability to trade but narrows the circle of buyers. Delisting deprives the security of an exchange market: it can then be sold only off-exchange, and for shares a right to demand a buyback from the issuer arises in a number of cases.

The reverse procedure — an upgrade — is application-based: the issuer comes to the exchange itself once it has met the requirements. Hence a practical observation: an application to raise the listing level usually means that the company has put its corporate governance and reporting in order, which is exactly why such news is tracked in the news section on a par with financial results.

Depositary receipts and foreign securities

A separate logic applies to depositary receipts and to the securities of foreign issuers: the exchange relies, among other things, on the status of the security in its home market and on the terms of the depositary receipt programme. More on how this works can be found in the glossary entry on ADR levels. The same entry shows why a receipt and its underlying share may sit on different rungs: formally they are different instruments with different obligations to the exchange.

How to use this

A listing level should be read as the first question to ask about a security, not as an answer. If you see the third level on a stock's page, do not discard the issue — find out why it is there: a young issuer, a small free float, no international reporting, or less pleasant reasons such as a recent downgrade. If you see the first level, do not relax: it guarantees disclosure, not a result. The level is shown on the page of every instrument in the stocks section, and definitions of related concepts are in the glossary.

And one more distinction, the place where people stumble most often: a listing level has nothing whatsoever to do with the "levels" spoken of in technical analysis. The shared word is an accident of translation into Russian, nothing more.