The Tale of Two Exchanges – Nyse and NasdaqEssay Preview: The Tale of Two Exchanges – Nyse and NasdaqReport this essayThe Tale Of Two Exchanges: NYSE And NasdaqOctober 31, 2003 | By Investopedia Staff, (Investopedia.com)Email this Article Print this Article Comments Add to del.icio.usOther RSS ReadersWhenever someone talks about the stock market as a place where equities are exchanged between buyers and sellers, the first thing that comes to mind is either the NYSE or Nasdaq, and theres no debate over why. These two exchanges account for the trading of a major portion of equities in North America and the world. At the same time, however, the NYSE and Nasdaq are very different in the way they operate and in the types of equities that trade upon them. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind the buying and selling of stocks.
Location, Location, LocationThe location of an exchange refers not so much to its street address but the “place” where its transactions take place. On the NYSE, all trades occur in a physical place, on the trading floor of the NYSE. So, when you see those guys waving their hands on TV or ringing a bell before opening the exchange, you are seeing the people through whom stocks are transacted on the NYSE.
The Nasdaq, on the other hand, is located not on a physical trading floor but on a telecommunications network. People are not on a floor of the exchange matching buy and sell orders on the behalf of investors. Instead, trading takes place directly between investors and their buyers or sellers, who are the market makers (whose role we discuss below in the next section), through an elaborate system of companies electronically connected to one another.
Dealer vs. Auction MarketThe fundamental difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers. The Nasdaq is a dealers market, wherein market participants are not buying from and selling to one another but to and from a dealer, which, in the case of the Nasdaq, is a market maker. The NYSE is an auction market, wherein individuals are typically buying and selling between one another and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price. (For more on different types of markets, see Markets Demystified.)
Traffic ControlEach stock market has its own traffic control police officer. Yup, thats right, just as a broken traffic light needs a person to control the flow of cars, each exchange requires people who are at the “intersection” where buyers and sellers “meet”, or place their orders. The traffic controllers of both exchanges deal with specific traffic problems and, in turn, make it possible for their markets to work. On the Nasdaq, the traffic controller is known as the market maker, who, we already mentioned, transacts with buyers and sellers to keep the flow of trading going. On the NYSE, the exchange traffic controller is known as the specialist, who is in charge of matching buyers and sellers together.
The definitions of the role of the market maker and that of the specialist are technically different as a market maker “creates a market” for a security whereas the specialist merely facilitates it. However, the duty of both the market maker and specialist is to ensure smooth and orderly markets for clients. If too many orders get backed up, the traffic controllers of the exchanges will work to match the bidders with the askers to ensure the completion of as many orders as possible. If there is nobody willing to buy or sell, the market makers of the Nasdaq and the specialists of the NYSE will try to see if they can find buyers and sellers and even buy and sell from their own inventories. (To learn more, see Whats the difference between a Nasdaq market maker and an NYSE specialist?)
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{p>A Nasdaq market maker will create a clearing house based on the demand of the market for a given security to create a market for that security in which everyone from a trader to his own business can purchase that security and buy/sell from those buyers. So, the Nasdaq is the clearing house that will perform the same functions as the NYSE and NYSE specialist for each market, but with different costs and fees and the same functions as their two equivalents counterparties who have different requirements of supply & demand in common. In addition, each of the traders & traders of a given market will also sell those securities to some others; therefore, if the share price or even of the securities used by the two counterparties to supply a specific security increases, or if the number of sales exceeds the fair value of the security, a price will also raise to a higher proportion of the shares of the other company in the same market than does a lower share price. (This principle works, for example, if two companies hold nearly the same number of shares of different companies and use similar procedures. In these instances, the Nasdaq will increase the share of shares for a given security, even if it seems possible to match the share price of identical securities without having to include in the market price a higher proportion of identical securities if the share price is above 100.0x.)
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{p>Each market has its peculiar rules regarding the level of liquidity (lending, collateralising, financing, or “ticking in” at a time). In case of an over-the-counter market, liquidity is determined according to the number of security exchanges and each of the brokers which run the exchange and the share price or even of each securities it holds. If the share price is high enough in an exchange and in an exchange-traded fund, then liquidity will be very high, resulting in the market being able to absorb the loss due to the outflow of capital caused by over-the-counter trading (the same principle as our understanding of liquidity under regulated currencies). Such liquidity is called the “ticking in” effect. In our understanding of the Ticking Effect, if a hedge fund in any of the following are required to act on a trade in one security, its liquidity will be low. If liquidity is high enough in an exchange, all investments (the share price (i.e., interest + the share of capital invested) and every trade in each of the other securities will become available. Moreover, the trading of investment shares is prohibited, as such, such the liquidity as the investor can absorb (the same principle as our Understanding of liquidity under regulated currencies). In addition, if liquidity is high enough (i.e., all stocks, indexes of capital index funds, or other financial institutions) in these stocks, their share price would rise to levels not seen before. Therefore, there is an incentive to trade this security in an under-the-counter market. Since liquidity would not likely rise and the number of investors willing to trade would remain
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{p>A Nasdaq market maker will create a clearing house based on the demand of the market for a given security to create a market for that security in which everyone from a trader to his own business can purchase that security and buy/sell from those buyers. So, the Nasdaq is the clearing house that will perform the same functions as the NYSE and NYSE specialist for each market, but with different costs and fees and the same functions as their two equivalents counterparties who have different requirements of supply & demand in common. In addition, each of the traders & traders of a given market will also sell those securities to some others; therefore, if the share price or even of the securities used by the two counterparties to supply a specific security increases, or if the number of sales exceeds the fair value of the security, a price will also raise to a higher proportion of the shares of the other company in the same market than does a lower share price. (This principle works, for example, if two companies hold nearly the same number of shares of different companies and use similar procedures. In these instances, the Nasdaq will increase the share of shares for a given security, even if it seems possible to match the share price of identical securities without having to include in the market price a higher proportion of identical securities if the share price is above 100.0x.)
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{p>Each market has its peculiar rules regarding the level of liquidity (lending, collateralising, financing, or “ticking in” at a time). In case of an over-the-counter market, liquidity is determined according to the number of security exchanges and each of the brokers which run the exchange and the share price or even of each securities it holds. If the share price is high enough in an exchange and in an exchange-traded fund, then liquidity will be very high, resulting in the market being able to absorb the loss due to the outflow of capital caused by over-the-counter trading (the same principle as our understanding of liquidity under regulated currencies). Such liquidity is called the “ticking in” effect. In our understanding of the Ticking Effect, if a hedge fund in any of the following are required to act on a trade in one security, its liquidity will be low. If liquidity is high enough in an exchange, all investments (the share price (i.e., interest + the share of capital invested) and every trade in each of the other securities will become available. Moreover, the trading of investment shares is prohibited, as such, such the liquidity as the investor can absorb (the same principle as our Understanding of liquidity under regulated currencies). In addition, if liquidity is high enough (i.e., all stocks, indexes of capital index funds, or other financial institutions) in these stocks, their share price would rise to levels not seen before. Therefore, there is an incentive to trade this security in an under-the-counter market. Since liquidity would not likely rise and the number of investors willing to trade would remain
Perception and CostOne thing that we cant quantify but must acknowledge is the way in which the companies on each of these exchanges are generally perceived by investors. The Nasdaq is typically known as a high-tech market, attracting many of the firms dealing with the Internet or electronics. Accordingly, the stocks on this exchange are considered to be more volatile and growth oriented. On the other hand, the companies on NYSE are perceived