What Is Nasdaq and How Does it Benefit Traders and Investors?

The Nasdaq Stock Market (National Association of Securities Dealers Automated Quotations) is a significant American stock exchange headquartered in New York City. It is the most active trading venue in the United States by trading volume and is ranked second in terms of market capitalization of shares traded, trailing only the New York Stock Exchange. The platform is operated by Nasdaq, Inc., which also oversees the Nasdaq Nordic stock market network and several stock and options exchanges located in the United States.

Although the Nasdaq encompasses stocks from a range of sectors, including healthcare, finance, media, entertainment, retail, hospitality, and food services, its primary emphasis is on technology stocks. The exchange comprises both American and international firms, with China and Israel identified as the largest sources of foreign listings.

The term “Nasdaq” is an acronym for the National Association of Securities Dealers Automated Quotations. It was established in 1971 by the National Association of Securities Dealers (NASD), which is now known as the Financial Industry Regulatory Authority. On February 8, 1971, the Nasdaq stock market commenced operations as the world’s first electronic stock market. Initially, it functioned solely as a quotation system and did not facilitate electronic trading.

Over time, the Nasdaq Stock Market came to dominate the majority of major trades that were previously executed through the over-the-counter (OTC) trading system. Nevertheless, a significant number of securities continue to be traded in this manner. As recently as 1987, the Nasdaq exchange was frequently referred to as “OTC” in media reports and within the monthly Stock Guides published by Standard & Poor’s Corporation.

As the market evolved, Nasdaq enhanced its operational framework by incorporating trade and volume reporting, as well as automated trading systems. In 1981, Nasdaq comprised 37% of the total U.S. securities market, representing 21 billion shares; this share increased to 46% by 1991. Furthermore, in 1992, the Nasdaq Stock Market established a partnership with the London Stock Exchange, thereby creating the first intercontinental linkage of capital markets.

In 1996, the Securities and Exchange Commission (SEC) issued a report alleging that Nasdaq market makers engaged in price manipulation by avoiding “odd-eighths” quotes, which were used at the time to represent stock prices in increments of one-eighth of a dollar. This practice was said to artificially widen the price spreads. Consequently, the report prompted the implementation of a new regulatory framework governing order processing on the Nasdaq.

In 1998, Nasdaq distinguished itself by becoming the first stock market in the United States to facilitate online trading, adopting the slogan, “The stock market for the next hundred years.” The Nasdaq Stock Market garnered substantial interest from numerous companies during the dot-com bubble.

The Nasdaq’s primary index is the NASDAQ Composite, which has been published since its inception. Additionally, the QQQ exchange-traded fund tracks the large-cap NASDAQ-100 index, which was introduced in 1985, alongside the NASDAQ Financial-100 Index, which monitors the largest 100 companies by market capitalisation.

The twenty-first century till now:

During the dot-com bubble of the late 1990s, the NASDAQ Composite index experienced a significant increase; however, it subsequently declined sharply as the bubble burst. On March 10, 2000, the NASDAQ Composite stock market index reached its peak of 5,132.52, only to fall to 3,227 by April 17. In the ensuing 30-month period, the index experienced a staggering decline of 78% from its peak value.

The Financial Industry Regulatory Authority (FINRA) sold its stake in NASDAQ in a series of divestitures during 2000 and 2001. On July 2, 2002, NASDAQ Inc. became a publicly traded company through an initial public offering (IPO). In 2006, the NASDAQ Stock Market transitioned from a stock market to a licensed national securities exchange. The following year, NASDAQ merged with OMX, a prominent exchange operator in the Nordic region, thereby expanding its global reach and rebranding itself as the NASDAQ OMX Group.

To be eligible for listing on the exchange, a company must be registered with the United States Securities and Exchange Commission (SEC), maintain at least three market makers—financial firms that act as brokers or dealers for specific securities—and meet the minimum requirements concerning assets, capital, public shares, and shareholders.

In February 2011, following the announcement of a merger between NYSE Euronext and Deutsche Börse, speculation emerged that NASDAQ OMX and Intercontinental Exchange (ICE) might mount a competitive bid for NYSE. At that time, NASDAQ OMX was believed to be exploring the acquisition of the American exchange’s cash equities business, while ICE targeted its derivatives business. NYSE Euronext had an estimated market value of $9.75 billion, while NASDAQ and ICE were valued at $5.78 billion and $9.45 billion, respectively. Subsequent reports indicated that NASDAQ was considering inviting either ICE or the Chicago Mercantile Exchange to participate in what would likely become an $11 to $12 billion counterbid.

In December 2005, NASDAQ acquired Instinet for $1.9 billion, retaining the Inet electronic communication network while divesting the agency brokerage business to Silver Lake Partners and the management of Instinet.

The European Association of Securities Dealers Automatic Quotation System (EASDAQ) was established as a European counterpart to the NASDAQ Stock Market. Following its acquisition by NASDAQ in 2001, EASDAQ was rebranded as NASDAQ Europe. However, operations were terminated in 2003 due to the repercussions of the dot-com bubble’s collapse. In 2007, NASDAQ Europe was revived under the name Equiduct and was subsequently acquired by Börse Berlin later that year.

On June 18, 2012, NASDAQ OMX became a founding member of the United Nations Sustainable Stock Exchanges Initiative, coinciding with the United Nations Conference on Sustainable Development, known as Rio+20.

In November 2016, Adena Friedman was appointed as the Chief Executive Officer of NASDAQ, marking her as the first woman to lead a major exchange in the United States. During that same year, NASDAQ reported earnings of $272 million in revenue related to listings.

In October 2018, the U.S. Securities and Exchange Commission (SEC) determined that both the New York Stock Exchange (NYSE) and NASDAQ had failed to substantiate the ongoing price increases associated with the sale of market data.

In December 2020, NASDAQ announced its decision to remove four Chinese companies from its indexes in compliance with an Executive Order.

In September 2024, the European Commission conducted an unannounced inspection of NASDAQ’s offices to investigate potential anti-competitive practices.

Comparison Between NYSE and NASDAQ

After the NYSE, NASDAQ ranks as the second-largest stock exchange in the United States, possessing a market capitalization of $19 trillion, which is approximately $5.5 trillion less than that of the NYSE as of 2021. NASDAQ is a relatively younger organization, having been established in 1971. The following are key distinctions between the two exchanges:

Exchange Systems

Prior to the COVID-19 pandemic, the NYSE operated both an electronic trading system and a traditional trading floor staffed by live professionals to facilitate auctions. In contrast, NASDAQ has functioned as an entirely electronic exchange since its inception.

Market Types

The NYSE employs an auction market strategy to set prices, wherein buyers and sellers submit competitive bids simultaneously. A transaction is executed when a buyer’s bid aligns with a seller’s asking price. Conversely, NASDAQ operates as a dealer market, with prices determined by dealers who maintain continuous updates to bid (sell) and ask (buy) prices throughout the trading day.

Listing Fees

There exists a significant disparity in listing fees between the two primary stock exchanges. NASDAQ’s listing fees range from $55,000 to $80,000 for the lowest tier of the capital market, while the NYSE imposes a minimum listing fee of $150,000.

Sector Characteristics

Investors typically perceive the NYSE as a platform for older, more established companies, whereas the NASDAQ is often viewed as a venue for newer firms that prioritize technology and innovation. This leads some investors to regard NASDAQ listings as inherently riskier.

Sources: Wikipedia