Written by Lulav Mustafa

The NASDAQ Stock Market

Although the inner working of the stock market is fascinating, few introductory texts have the space to
describe them in detail. Furthermore, the U.S. stock market has been changing so rapidly in recent years that
many books have not yet caught up with the changes. This quick note provides an up-to-date view of how
the U.S. stock market works today. This note will teach you about: NASDAQ Stock markets in the United
States.

Stock markets in the U.S. :

The two largest stock markets in the United States are The Nasdaq Stock Market, Inc. (Nasdaq) and the New
York Stock Exchange (NYSE). The companies that issue stock to the public choose where they will list their
stock for trading. This means that they apply to have their shares traded on the market and are willing to
abide by the investor protection rules of that market. In addition, they pay a listing fee and prove that they
meet the listing requirements for that market.

Stock markets in the U.S. by

trading volume, 1999

Total Share Volume

MARKET (in thousands of shares)
Nasdaq Stock Market 291,577,886 55.0%
New York Stock Exchange 204,063,545 38.5%
Chicago Stock Exchange 14,398,471 2.7%
American Stock Exchange 8,230,868 1.6%
Pacific Exchange 4,167,452 0.8%
Boston Stock Exchange 4,022,431 0.8%
Cincinnati Stock Exchange 2,267,840 0.4%
Philadelphia Stock Exchange 1,649,333 0.3%
Chicago Board Options Exchange 1,157 0.0%
Total 530,378,983 100.0%

Some companies are not listed on any exchange. These companies either do not qualify for trading on a
stock exchange, or they have decided for other reasons not to apply for listing. Such companies, if they have
filed registration statements with the SEC, can be traded on the OTC Bulletin Board, which carries dealer
quotes for those stocks. Although Nasdaq operates the OTC Bulletin Board, the OTCBB is a distinctly
 Written by Lulav Mustafa

different market. Investors can also trade the shares of companies that are not even registered with the SEC
through the

Pink Sheets, a quotation service that disseminates quotes in those stocks. Investors can and do trade stocks
in a variety of different markets regardless of where the stock is officially listed. Thus, one can trade an
NYSE- listed stock not only on the NYSE, but also through Nasdaq or the regional stock exchanges such as
Boston, Chicago, Cincinnati, Philadelphia, and the Pacific. However, the NYSE and the American Stock
Exchange have chosen to trade only stocks that officially list on their exchanges.

The NASDAQ Stock Market, Inc

The Nasdaq Stock Market, Inc. trades the most stocks and reports the highest share volume of any U.S.
stock market. The basic philosophy of Nasdaq is one of open architecture. Participation is not limited to
any fixed number of participants. Any firm that meets the basic requirements can join. This allows a large
number of firms with widely different business models and trading technologies to plug into the Nasdaq
network and compete on an equal basis. These participants include over 400 market makers, who operate
much like shopkeepers who buy inventory to sell to their customers. Market makers, also known as dealers,
add liquidity by being willing to buy or sell the stock for their own account at all times. Market makers in a
particular stock are required at all times to post their bid and ask prices into the Nasdaq network where they
can be viewed and accessed by all participants. This means that there will always be someone willing to buy
when you want to sell, and someone willing to sell when you want to buy, so that your trades can be filled
quickly and efficiently. The average Nasdaq stock has over 10 market makers.

In addition to traditional market makers, the Nasdaq network also connects other trading systems
such as electronic communication networks (ECNs). ECNs provide electronic facilities for investors to trade
directly with each other without going through a market maker. They operate simply as order-matching
mechanisms and do not maintain inventories of their own. In addition, the flexibility of the Nasdaq network
means that innovators with new trading technologies or strategies can implement them quickly in the
Nasdaq marketplace. Some of these innovators succeed, and some do not.
 Written by Lulav Mustafa

Ten Largest Nasdaq Market Makers

January through September 2000

Market #of Nasdaq Total

Participant Issues Share
MARKET MAKER Identifier Traded Volume (000s)
Knight Securities NITE 5,222 27,979,298
Schwab Capital Markets, L.P. MASH 3,730 24,562,900
Herzog Heine Geduld HRZG 4,475 14,901,039
Spear Leeds & Kellogg SLKC 5,272 14,488,852
Salomon Smith Barney SBSH 1,299 13,455,564
Merrill Lynch Pierce Fenner & Smith MLCO 2,038 12,432,161
Morgan Stanley MSCO 1,883 11,018,919
Goldman Sachs GSCO 1,370 9,875,864
NDB Capital Markets SHWD 4,234 8,260,233
Credit Suisse First Boston FBCO 1,871 7,086,748

Note that Nasdaq does not force investors to trade with any particular person or to go through any
particular market method. Instead, it links up a variety of competitors and lets participants choose with
whom they are going to trade. The Nasdaq Stock Market, Inc. itself does not buy or sell stock. What Nasdaq
does is to provide systems that link all of the liquidity providers in a given stock together where they can
compete with each other. Nasdaq also gathers the trade and quote information from all of these participants
and passes it on to data vendors who ship them out to the investment community. Note that as a fully
computerized market, Nasdaq itself does not have a central trading floor.

It has computer facilities in Trumbull, CT and Rockville, MD, and business offices in Washington DC, New
York, NY, Rockville, MD,Menlo Park, CA, Chicago, IL and several international locations. Nasdaq operates two
market segmentsthe Nasdaq National Market, which trades household-name stocks such as Microsoft and Intel, and
the Nasdaq SmallCap Market for growth companies. Nasdaq was developed by the National Association of Securities
Dealers (NASD) to improve the transparency of what was then known as the over-the-counter market for unlisted
stocks. The name Nasdaq was originally an acronym for National Association of Securities Dealers Automated
Quotation system. Nasdaq began trading in 1971, and by 1995 had surpassed the New York Stock Exchange in
reported trading volume. Nasdaq is now a private for-profit corporation that is owned by its shareholders, who are
mostly major financial service firms along with the NASD. The NASD has been reducing its ownership stake and may
eventually sell all of it.