Everyone who has ever heard financial reports on the news, or personally traded in stocks, knows that there are places called exchanges. One of the most famous of them is NASDAQ. Here people buy and sell their shares in the capital of companies registered on it.
However, few people think about how the stock exchange works. Highly reliable computer systems are used to exchange securities between buyers and sellers. Opening and closing prices are also set here. This article attempts to give a general idea of the various services and methods by which these transactions are carried out on the NASDAQ stock market.
Where do stocks come from? They are owned by companies listed on the Nasdak exchange. If a joint-stock company wants to become public, it chooses a trading platform on which it will sell its shares. Several thousand companies have chosen NASDAQ.
What it is?
NASDAQ (Nasdak) is a stock exchange that allows investors to buy and sell shares using an automatic, transparent and fast computer network. The abbreviation that makes up its name originally referred to the National Stock Dealers Association automatic quote, created in 1971. NASD offered an alternative to its own cash transaction system, which burdened investors with inefficient trading and delays.
Composition
NASDAQ currently has about 3,200 publicly traded companies and is the second largest stock exchange (in terms of securities) and the largest electronic stock market. It trades in stocks of enterprises of various types, including those that produce industrial goods, consumer durables and short-term goods, produce energy, finance, healthcare, technology, transport and the provision of public services. But most of all, the exchange is known for its high-tech stocks.
To be listed on the NASDAQ, companies must meet specific financial criteria. They are required to maintain a stock price of at least $ 1, and their volume in circulation should be at least $ 1.1 million. For small companies unable to meet these financial requirements, there is NASDAQ Small Caps. The stock exchange transfers participants from one market to another in accordance with changes in their status.
Trade
NASDAQ does not offer any real trading platforms. It is a market for dealers, so brokers buy and sell shares through a market maker, and not directly from each other. A market maker owns and operates a specific stock of securities held on his exchange accounts. When a broker wishes to acquire shares, he does this directly with the market maker.
When the NASDAQ was just starting out, trading was done using the electronic bulletin board and over the phone. Today, purchases and sales on the exchange are carried out using automated trading systems that offer complete reports on trading and the volume of daily operations. Automated trading also offers automatic execution of transactions based on parameters set by the trader.
Trading volume
The quotation fee on the Nasdak exchange is much lower than on other stock markets. The maximum commission is 150 thousand US dollars. Such a low cost allows you to trade many new, rapidly growing and volatile stocks.
Although the New York Stock Exchange is still considered larger because its market capitalization is much higher, trading volume on the NASDAQ is higher than on any other American stock exchange and amounts to about 1.8 billion transactions per day.
Information display
Without a physical trading platform, the Nasdak exchange built MarketSite in Times Square in Manhattan to create a tangible presence. The large outdoor electronic display on the tower provides current financial information 24 hours a day. NASDAQ is open Monday through Friday, from 9:30 a.m. to 4:00 p.m. EST, excluding major holidays.
Indices
Like any stock exchange, Nasdak uses an index or set of stocks that are used to create a snapshot of the market. The NYSE offers the Dow Jones Industrial Average (DJIA) as the main index , while the NASDAQ offers the NASDAQ Composite and NASDAQ 100.
If the composite index reflects a change in the value of more than 3,000 traded shares, the DJIA reflects the peaks and falls of the 30 largest companies. The first of these is often simply referred to as exchanges and is most often quoted by financial journalists and reporters.
The NASDAQ 100 is a capitalization-weighted modified index of the 100 largest companies whose shares are traded on the NASDAQ. They cover a number of market sectors, although the largest of them are typically technology-related. Each year, companies can join and leave the NASDAQ 100 depending on their value.
Both indices include both US enterprises and those registered outside the United States. This sets them apart from other major indices, as the DJIA does not account for foreign companies.
NASDAQ History
Founded by the National Association of Securities Dealers, NASDAQ opened on February 8, 1971. The world's first electronic stock market began with the trading of more than 2,500 interest-free securities. At that time, the NASDAQ was an electronic newsletter. Initially, no real trade occurred between buyers and sellers. Instead, the stock exchange equalized the odds of traders, narrowing the spread between offer and demand.
Due to its high-tech nature, the NASDAQ Composite was hit hard by the dot-com bubble in the late 1990s, falling from more than 5,000 to less than 1,200 points. Other important dates in the history of the exchange are as follows:
- 1975 - NASDAQ invents a state-of-the-art IPO (initial public offering) by registering companies supported by venture capital and allowing underwriting syndicates to trade as market makers.
- 1985 - NASDAQ-100 Index was created.
- 1996 - the first website www.nasdaq.com appeared.
- 1998 - NASDAQ merged with the American Stock Exchange, forming the NASDAQ-AMEX market group. AMEX was acquired by NYSE Euronext in 2008, and its data has been integrated into the NYSE.
- 2000 - Exchange participants voted for its restructuring and transformation into an open joint stock company NASDAQ Stock Market, Inc.
- 2007 is the year the Swedish financial company OMX was acquired and the name changed to the NASDAQ OMX Group. Then the Boston Stock Exchange was bought.
- 2008 - Acquisition of the oldest US Philadelphia Stock Exchange.
- 2009 is the year of the industry's first mobile web version of nasdaq.com.
Key Services
In general, the operation of the stock exchange requires 3 separate components:
- interface - this is why brokers and market makers get access to the trading system;
- Search for counter orders - a computer system that connects buyers and sellers when their prices match;
- quotation services - providing data on stock purchase and sale quotes.
Of course, there are many other services provided internally by the exchange, including MarketSite broadcasting, record keeping and backup. But the three services described above are the most important. They should be discussed in more detail.
Secrets of the NASDAQ American Stock Exchange
Of the three main exchange services, the simplest is the quotation service. Daily and every second stock prices fluctuate. And people all over the world want to follow them in real time. Brokers want to provide quotes to their clients, and news companies - to show during their programs. To satisfy this need, Nasdak collects data on the latest prices announced in the exchange computer system, which allows you to see what is happening inside the search engine for counter orders, and then sends this information around the world.
Buyers and sellers make deals with their brokers electronically. Data from hundreds of computers (one for each broker) enters the NASDAQ system. Then, the transactions are processed by the counter-bid search program, which on the Nasdak exchange is designed as one highly reliable computer. This is where the real trade takes place.
Work example
The easiest way to present the features of the NASDAQ exchange is to consider the following example. Suppose ABC is registered on it. The search system stores all unsatisfied applications relating to it. Let's say 3 customers want to sell their stock. They place their applications, which indicate how many shares and at what price they want to sell them:
- Client 1: selling 50 shares at $ 15.40.
- Client 2: selling 200 shares at $ 15.25.
- Client 3: selling 100 shares for $ 15.20.
Suppose another 4 people want to acquire a stake in ABC. They place their applications indicating the number and price of shares.
- Client A: I will buy 100 shares for $ 15.15.
- Client B: buy 200 shares for $ 15.10.
- Client B: buy 150 shares for $ 15.00.
- Client G: buy 75 shares at $ 14.95.
There are no matches now. The lowest selling price is $ 15.20 and the highest buying offer is $ 15.15. The difference between the minimum sale price and the maximum purchase price is called the spread. As a rule, for popular stocks it is 1-2 cents. When securities are traded in small volumes, the value of the spread can be much larger. Due to the difference in prices, these applications will be active until they are satisfied.
Suppose customer A registers a new offer. He wants to buy 50 shares for $ 15.25. Instead, he will receive client securities of 3 for $ 15.20, because this is the lowest price available on the sellers list. 100 shares that sell for $ 15.20 will be split - 50 will remain on the list and the remaining 50 will close the transaction. Client 3 is happy because he received the desired price, and client A is satisfied because he received a small discount.
Finally
The counter bid search system does similar things for thousands of registered NASDAQ stocks and millions of transactions are processed every day. As soon as a suitable offer is found, information about the completed transaction from the search engine will be returned to the brokers of the buyer and seller. Data is also sent to quote servers so that anyone interested can see what happened.
Of course, this is a very simplified explanation. In fact, due to the huge number of people participating in the auction, thousands of computers and brokers are required to maintain the system, as a result of which the processes become very complicated.