EVENTS

Date:	Thursday, September 9, 2004
Time:	2:00 PM -- 4:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

September 2004

How NASDAQ's Electronic Market Works

On September 9, 2004, AEI continued its conference series on the structure of securities markets with a live demonstration of how NASDAQ's electronic market works. In the last decade, the majority of the world's stock markets have converted to electronic platforms. The NASDAQ market is an electronic platform made of multiple market makers who trade over a network of computers.  Two NASDAQ officers demonstrated how shares are traded on NASDAQ using the actual screens, servers, and software that are used every trading day in the NASDAQ market.

Frank Hatheway and Peter Martyn
NASDAQ

NASDAQ was established in 1971 as a subsidiary of the National Association of Securities Dealers (NASD). The original purpose was to electronically disseminate quotes for stocks not listed on exchanges, hence the name "National Association of Securities Dealers Automated Quotation System" (NASDAQ). Quotes were disseminated by paper copy, newspapers, and several private electronic systems.
 
The first trading day on NASDAQ occurred February 8, 1971, with quotes on 2,500 securities. Today, approximately 3,300 securities are traded on NASDAQ. Real time trade reporting and the creation of the NASDAQ national market followed in 1982. Over the next nine years, the Small Order Execution System (SOES), which automatically executes small orders against the best quotations leading to increased volume, followed, along with the NASDAQ 100 Index, and Automated Confirmation Transactions (ACT), providing same-day trading comparisons. In 1991, NASDAQ became a public part of the U.S. financial market structure when it launched its first television advertising campaign. Ten years later, NASDAQ spun-off from its NASD counterpart, and shortly after in 2002 it introduced Super Montage, now known as the NASDAQ market center. In 2004 the dual listing initiative, NASDAQ Market Center and the NASDAQ Closing and Opening Cross, was launched.

NASDAQ is a screen-based electronic market platform, which features competing market makers and additional electronic communications networks (ECNs). It has a firm capital commitment from multiple firms. It is a quote- and order-driven market with continuous order flow, allowing for a stock to trade without any delay. Market participants have direct interaction with the buy-side community--this is not a fixed or exclusive market. Alternatively, an auction market, like the NYSE, is floor-based and features a single specialist in particular stocks. This is exclusively an order-driven market where the order is placed and the market pauses and waits for a response to that specific order. This can cause order imbalances and trade halts.

NASDAQ's inclusive structure includes market maker firms, ECNs, regional stock exchanges, and order entry firms. There are over 265 market-making firms, linked electronically, that provide capital support to the trading of NASDAQ securities. This unique structure brings competing market makers together to create greater risk capital, which facilitates order flow. In turn, NASDAQ offers speed of order execution, certainty of execution and market liquidity even at times of duress. There is no limit to the number of participants. ECNs cooperate with NASDAQ to provide order matching, institutional access, and additional competition.

Today NASDAQ has over 2 million users in eighty-three countries. It processes 14,000 transactions per second and fills 5.2 million orders a day. The operations centers include data centers in Connecticut and a back-up site in Maryland. The official market hours are from 9:30 a.m. to 4:00 p.m. EST. NASDAQ offers an early trading session from 8:00 a.m. until the official market opening. Although systems remain open until 6:30 p.m., the closing price represents the price at the official close of 4:00 p.m.

In support of its critical role in the nation's financial infrastructure, NASDAQ has created contingency plans, encouraged by the recent events of September11, 2001 and the blackout of August 14, 2003. The mid-Atlantic backup site has been functional for seventeen years. In addition, disaster recovery testing is conducted bi-monthly with both market participants and external exchanges. In the event that the NYSE is not operational to trade its securities for an extended period of time, NASDAQ has the capability to trade all NYSE securities concurrent with all NASDAQ securities.

AEI research assistant Jessica Browning prepared this summary.