The NYSE and NASDAQ

The two most important stock exchanges are the New York Stock Exchange and the NASDAQ. These are both considered secondary markets where stocks are traded among investors. The NYSE, also known as the “Big Board”, located on Wall Street in Manhattan, New York. Based on dollar volume and value of shares listed, it is the largest stock market in the world. It can be traced back to the Buttonwood Agreement that occurred in 1792. A group of twenty-four signed this agreement in an effort to set a floor commission rate charged to clients. At this point, the securities most commonly traded were War Bonds from the Revolutionary War. Around 1817, brokers operating in New York under the Buttonwood Agreement worked on reorganizing themselves, and they became the New York Stock and Exchange Board. The New York Stock Exchange trades stocks in a continuous auction format and is generally open 5 days a week between 9:30 am and 4:00 pm. Traders, gather around a specialist broker, who acts as an auctioneer in an effort to bring buyers and sellers together. In 1995, all trades were processed on wireless hand-held computers, which ended a 203 years process of paper trades. Originally a gavel was used to signal the opening and closing of trading. However, in the 1800’s a gong was used. Today a bell is used, and it is quite common for a “VIP” to do the ringing of the bell. Some notable bell ringers include Joe DiMaggio, Michael Phelps, Nelson Mandela and Rudy Giuliani. Even Mickey Mouse had a turn ringing the bell. The NYSE, prior to 2006, had 1366 members. A member is the owner of a trading license on the NYSE, and the term seats came from the fact that members actually sat in chairs to trade. Seats are very valuable and have reached prices up to $4 million, also becoming a publicly traded company. Now, the NYSE sells one-year licenses to trade on the exchange and are available for $40,000. It is not resalable but can be transferable during the ownership. Most members of the NYSE are registered as commission brokers. These brokers execute customer orders to buy and sell stock transmitted to the exchange floor. They typically work for brokerage companies such as Merrill Lynch. Other members are called specialists. They are considered specialists because they only trade a small number of securities. These members post bid and ask prices and act as dealers for their own accounts. Next, there are floor brokers. These are members who execute orders on a fee basis. They are sometimes called $2 brokers because they were once paid $2 for their service. The smallest group of members are known as floor traders. They independently trade from their own accounts. They try to account for price differences by buying low and selling high. It is not uncommon for over a billion shares to change hands in a single day. The way floor activity works is a phone clerk receives an order to sell a certain number of shares of a specific stock and turns this over to the broker. From there, the broker would walk over to the specialist trading terminal. It is tempting to sell the stock right there, but it is the brokers jobs to get the best price. He would then try to find another broker willing to buy at a better price. One can imagine this would be a difficult task. Sometimes you have to be willing to take a lower price so that you don’t receive an even lower price later. Shares move fast on the floor and time is everything. The NASDAQ is also a stock exchange and is the second largest exchange in the United States. It is fairly young compared to NYSE as it was founded in 1972. The name originally stood for The National Association of Securities Dealers Automated Quotations system because it started as merely a quotations system and did not perform trades. It was the world’s first electronic stock market. It helped lower the spread between the bid price and the ask price of the stock. This made it quite unpopular with brokers because they made money on the spread. Eventually, more over-the-counter trades were executed on the NASDAQ than any other market. So much so that the media commonly referred to it as the “OTC”. Today its actual name is NASDAQ. In order for a company to be listed on the exchange, they must be registered with the US Securities and Exchange Commission, also known as the SEC. They must also have at least three market makers, which are financial firms that acts as brokers or dealers for specific securities. Lastly they must meet minimum requirements for assets, capital public shares, and shareholders. There are currently about 3200 companies listed on the NASDAQ system. It originally started with small companies that moved to the NYSE once they were large enough, but today big companies such as Amazon and Microsoft have chosen to remain on the exchange. There are two key differences between the NASDAQ and the NYSE. The NASDAQ is 100 % computer network and does not have a physical location unlike the NYSE, that is based on Wall Street. The second difference is that the NASDAQ has a multiple market maker system rather than a specialist system, which means there is no direct trading in the crowd. The NASDAQ operates with three levels of information access. The first level, provides timely and accurate source of price quotations, which are available on the internet. Level two allows users to view price quotes from all the NASDAQ market makers, allowing access to inside quotes. These type of quotes are the highest bid quotes and the lowest asked quotes, and are also available on the internet for a small fee. The last level, Level three is for market makers only. THE NASDAQ is made up of three separate markets. These are the NASDAQ Global Select Market, the NASDAQ Global Market and the NASDAQ Capital Market. The Global Select lists about 1200 companies with some very large companies such as Microsoft. The Global Market lists smaller sized companies totaling about 1450. Lastly, the Capital Market has about 550 companies listed. As these companies grow in size, they can move up to the larger Global Market and the Global Select Market.