An overview of the NASDAQ Stock Market

The National Association of Securities Dealers Automated Quotation System (NASDAQ) is an automated, electronic quotation system. NASDAQ is a self-regulatory body that licences brokers and oversees trading practices. It is not a physical location exchange, but a computerized network, with no members and no governing body.

NASDAQ is the largest stock exchange in the world in terms of daily traded volume with 3,200 listed securities. It has historically been known as over-the-counter (OTC) market, which included stocks not formally listed on New York Stock Exchange (NYSE) or American Stock Exchange (AMEX). Over time NASDAQ has grown to become an organized equity market with its own listing requirements and 400 market makers, who market the stock and are responsible for its liquidity.

NASDAQ is a dealer market, which allows multiple market participants to trade through its Electronic Communication Networks (ECNs) structure, in the pre-market trading hours (7:00 - 9:30), market-hours (9:30 - 16:00) and after hours (16:00 - 20:00).  Stocks are traded on NASDAQ as long as there are dealers who indicate a willingness to make a market by buying or selling for their own account.

The NASDAQ system makes all dealer quotes immediately. The quotation system has three levels to serve firms with different needs and interests.

Level 1 provides a single median representative quote for the stocks listed on NASDAQ. These quotes are for firms that do not consistently buy or sell stocks for their customers but they want to be aware of the current quotes on NASDAQ. Level 1 quotes change constantly to adjust for any changes by individual market makers.

Level 2 provides on-the-spot current quotations on the NASDAQ stocks by all market makers in a stock. These quotes are for firms that consistently trade NASDAQ stocks. Given a order to buy or sell, market makers put the highest bid if they sell, the lowest offer if they buy and consummate the deal.

Level 3 is for NASDAQ market makers. These firms want Level 2, but they also need the capability to change their own quotations, which is provided by Level 3.

Not all securities trade through the NASDAQ system. NASDAQ operates the Nasdaq National Market list, where the larger NASDAQ largest stocks are listed (Intel, Microsoft etc), and the Nasdaq SmallCap Market list, where small companies with high growth potential are listed. NASDAQ also operates the OTC Bulletin Board, which lists quotes for stocks registered only at the Securities Exchange Commission (SEC) and not on any exchange. Also, NASDAQ operates the Nasdaq Pink Sheets, for stocks not registered with the SEC.

For initial listing on NASDAQ stockholder’s equity should be $15 million for Level 1 and $30 million for Level 2, while for Level 3 is not required. Publicly held shares should be 1.1 million for all three levels, while their market value should be $8 million for Level 1, $18 million for Level 2 and $20 million for Level 3. Minimum bid price is $5 for all three levels and shareholders of at least 100 shares should be 400 for all three levels. Finally, 3 market makers are required for Level 1 and Level 2, and 4 for Level 3.