NASDAQ

Originally started in the 1970s as an association of dealers, NASDAQ grew to be one of the largest exchanges in the world.

Unlike the auction market status of the NYSE, NASDAQ is considered a negotiated market. Instead of a centralized designated market maker (DMM) facilitating all trades in a stock, there are dozens of market makers trading with the public. The market makers with the best prices get the most business.

Market makers trade only in a principal capacity, similar to used car dealerships. People sell their used cars to the dealership at a marked down price. The dealer places the car into its inventory, then aims to re-sell the car back to the public at a marked up price. If a sale occurs, they make the spread (difference between the price the car was purchased for versus what it was sold for). Now, assume there are dozens of these dealerships for purposes of this analogy. Replace the used car dealership with a market maker and the cars with stocks, and you basically have the NASDAQ system.

NASDAQ is considered an over-the-counter (OTC) market due to the fact that it lacks a physical trading floor. If you recall from the common stock chapter, an OTC trade is one that does not take place on a physical exchange. However, NASDAQ is still considered as having “exchange status,” and all of its stocks are treated as if they’re exchange listed. Just like the NYSE, NASDAQ has high standards for stocks being listed on its platform.

The NYSE and NASDAQ used to regulate their own markets as self-regulatory organizations (SROs). SROs are granted regulatory power and oversee the participants in their markets. In 2007, NYSE’s and NASDAQ’s regulatory arms formed into FINRA, which is the SRO that now supervises both markets. Although FINRA is not a governmental entity, it has the power to control who operates in the financial markets and how financial firms interact with the investing public.