New York Stock Exchange and Nasdaq: How they work

Whenever someone talks about the stock market as a place to buy and sell stocks, they usually think of the New York Stock Exchange (NYSE) or Nasdaq. The reason is unquestionable: these two exchanges account for the majority of North American and global stock trading. At the same time, the New York Stock Exchange and the Nasdaq Stock Exchange operate differently and the types of listed stocks are also different. Understanding these differences will help you better understand the functions of stock exchanges and the mechanisms behind buying and selling stocks.

Key points

  • The New York Stock Exchange (NYSE) is located in New York City. It is the oldest exchange in the United States and the largest stock-based exchange in the world. It is calculated by the total market value of listed securities.
  • Nasdaq is a global electronic market for buying and trading securities, and many world technology giants-including Apple and Google-are listed here.
  • The New York Stock Exchange is an auction market that uses experts (designated market makers), while the Nasdaq is a dealer market where many market makers compete with each other.
  • Today, the New York Stock Exchange is part of the Intercontinental Exchange (ICE), and NASDAQ is part of the publicly traded NASDAQ company.

Location, location, location

The location of an exchange is not so much its street address as it is the place where its stocks are traded.Although the NYSE still maintains its physical trading floor on Wall Street in New York City, a large portion of the transactions flow through its data center in Mahwah, New Jersey

On the other hand, Nasdaq does not have a physical trading floor. In these two data centers, transactions are conducted directly between investors seeking to buy and sell and market makers (we will discuss their roles in the next section). Market participants connect to the centralized exchange infrastructure to trade.

Dealers and auction markets

The fundamental difference between the New York Stock Exchange and the Nasdaq exchange lies in the way securities are traded between buyers and sellers. The difference of the New York Stock Exchange is that at the opening and closing of the market, the auction method is the way the New York Stock Exchange stock price is set.

The time period from the opening to the closing is continuous trading. Before the market officially opens at 9:30 a.m. Eastern Time (ET), market participants can enter buy and sell orders from 6:30 a.m. Eastern Time. These orders are matched, and the highest bid is matched with the lowest asking price. Orders for the closing auction are accepted before 3:50 PM Eastern Time, and orders can be cancelled before 3:58 PM Eastern Time.

Market Makers and Designated Market Makers

Both Nasdaq and the New York Stock Exchange use market makers to improve liquidity and maintain fairness and order in the market. However, the method of each function is different.

On Nasdaq, market makers maintain stock inventories so that they can buy and sell from their accounts in transactions with individual customers and other traders. Market makers give bilateral quotes, which means that they state the buying and selling prices of the securities they are making the market. More than 260 market-making companies provide liquidity for NASDAQ-listed stocks. Although they are not necessary for trading, this kind of competition helps to ensure that buyers and sellers get the best prices.

At the New York Stock Exchange, the job of maintaining the market falls on designated market makers (DMM), who were formerly known as experts. Compared with traditional market makers, DMM has more responsibilities. DMM is the human contact for companies listed on the trading floor of the New York Stock Exchange. DMM provides stability by taking the other side of the transaction when imbalance occurs, buying when investors sell, and vice versa. They run opening and closing auctions, using manual input and algorithms to help facilitate price discovery when volume is usually highest. According to NYSE data, in 2019, DMM provided 17% liquidity for NYSE transactions.

Cognition and cost of New York Stock Exchange and Nasdaq

One characteristic that the New York Stock Exchange and Nasdaq must recognize is the company’s and investors’ general view of each exchange operator. Nasdaq is known for technology and innovation, and it is home to the Internet, biotechnology, and other cutting-edge companies. Therefore, stocks listed on the Nasdaq are considered growth-oriented and more volatile.

Companies listed on the New York Stock Exchange are considered more stable and mature. The New York Stock Exchange has attracted blue chip and industrial stocks, some of which have been in business for generations. However, as evidenced by the current listing requirements of the New York Stock Exchange, these views may not be as important today as they were in the past.

Whether the stock is traded on the Nasdaq or the New York Stock Exchange is not necessarily the determining factor for investors. However, due to the opinions of each exchange, the company may do so when deciding where to list.

Listing requirements will also affect this decision, which is more conducive to the new company for Nasdaq. The Nasdaq stock market is divided into three layers: Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital Market.

Among them, the Nasdaq capital market has the lowest access requirements. The initial cost of listing is between US$55,000 and US$80,000, depending on the number of shares the company intends to issue. After that, the company must pay between US$43,000 and US$77,000 annually. The NASDAQ Global Select Market and NASDAQ Global Market have higher fee settings. The registration fee ranges from US$175,000 to US$320,000, after which the company must pay US$46,000 to US$159,000 per year.

To be listed on the New York Stock Exchange, the company should be prepared to pay a minimum of $150,000 and a maximum of $295,000 in fees. The New York Stock Exchange charges an application fee of US$25,000, a one-time fee of US$50,000 and a listing fee of US$0.004 per share. The company pays up to $295,000. The annual fee is calculated per share. The company must pay US$0.00113 per share or US$71,000 per year, whichever is higher.

Given the lower entry requirements, it is understandable why growth companies with less initial capital may prefer Nasdaq.

Public and private

Nasdaq and the New York Stock Exchange were private companies until their shares were publicly listed in 2002 and 2006, respectively.

Established in 1971, Nasdaq is a wholly-owned subsidiary of the Financial Industry Regulatory Authority (FINRA), which was then known as the National Association of Securities Dealers (NASD). In 2000, NASD began the reorganization process and sold shares of the electronic exchange to its members. These stocks began trading on over-the-counter (OTC) bulletin boards in 2002 under the symbol NDAQ.

On February 9, 2005, Nasdaq shares began trading on the Nasdaq stock market after the secondary issuance. NASD completely divested the ownership of Nasdaq in 2006. The following year, Nasdaq became fully operational as an independently registered national stock exchange.

At the same time, the regulatory functions of NASD and the New York Stock Exchange regulatory agency merged to form FINRA, and the US Securities and Exchange Commission (SEC) is responsible for overseeing the newly established regulatory agency.

The New York Stock Exchange was established on May 17, 1792, when 24 stockbrokers gathered at 68 Wall Street and named the agreement later known as the “Plane Tree Agreement” after the name of the tree that signed the agreement. In the beginning, there were only five types of securities. The first company listed on the New York Stock Exchange was the Bank of New York.

For more than 200 years, the New York Stock Exchange has been operating as a member-owned non-profit company. After merging with Archipelago Holdings, it went public on March 8, 2006 under the stock symbol NYX. In 2007, the New York Stock Exchange merged with Euronext, the largest stock exchange in Europe, to form the New York Euronext. The company was acquired by the Intercontinental Exchange (ICE), the current parent company of the New York Stock Exchange in 2013.

Bottom line

Although the New York Stock Exchange and Nasdaq are the largest stock markets in the world, these exchanges are by no means the same. Although their differences may not affect your stock selection, your understanding of how these exchanges work will give you a deep understanding of how transactions are executed and how the market works.


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