The NYSE and Nasdaq: How They Work

Whenever someone talks about the stock market, what usually comes to mind is the New York Stock Exchange (NYSE) or the Nasdaq. There’s no debating why. These two exchanges collectively account for the bulk of stock trading in North America and internationally.

The NYSE and the Nasdaq differ in their operations and the types of equities they list. Knowing these differences will help you to better understand the function of a stock exchange and the mechanics behind buying and selling stocks.

Location, Location, Location

Nowadays, given the ubiquity of online trading, the location of a stock exchange refers not so much to its street address as to where its orders are transacted. While the NYSE still retains a physical trading floor on Wall Street in New York City, a significant portion of trade flows through its data center in Mahwah, N.J.

The Nasdaq, on the other hand, operates electronically and does not have a physical trading floor. Trading takes place directly between investors, seeking to buy or sell, and market makers (whose role we discuss below). Market participants connect to a centralized exchange infrastructure to trade.

Dealer vs. Auction Market

The fundamental difference between the NYSE and the Nasdaq is how trades are transacted between buyers and sellers. At the NYSE, at market open and close, the auction method is how NYSE stock prices are set. Market participants transact trades directly with each other. At the Nasdaq, market participants transact trades through dealers.

From open to close at the NYSE, there's continuous trading. Before the market’s official opening at 9:30 a.m. Eastern time (ET), market participants can enter buy and sell orders starting at 6:30 a.m. ET. These orders are matched, with the highest bidding price paired with the lowest asking price. Orders for the closing auction are accepted until 3:50 p.m. ET, and orders can be canceled up until 3:58 p.m. ET.

Market Maker vs. Designated Market Maker

The Nasdaq and the NYSE both use market makers to improve liquidity and maintain a fair and orderly market. However, there are differences in how these professionals function at each exchange.

At the Nasdaq, market makers maintain inventories of stock to buy and sell from their accounts in transactions with individual customers and other dealers. Market makers give two-sided quotes, meaning that they state the bid and ask prices for a security in which they are making a market.

More than 500 market-making firms provide liquidity for Nasdaq-listed stocks. Although it isn't required for trading to occur, this competition helps ensure that buyers and sellers are getting the best prices.

At the NYSE, the job of maintaining markets falls to designated market makers (DMMs), formerly known as specialists. DMMs have more duties than traditional market makers. They are the human point of contact for the listed company on the NYSE trading floor.

DMMs provide stability by taking the other side of the trade when imbalances occur, buying when investors are selling, and vice versa. They run the opening and closing auctions, using human input and algorithms to help promote price discovery when the volume is typically at its highest. According to the NYSE, DMMs provided 17% of liquidity in NYSE trading in 2019 (latest information).

Perception and Cost of NYSE and Nasdaq

The NYSE and the Nasdaq have different images among companies and investors. Whether a stock trades on the Nasdaq or the NYSE is not necessarily a determining factor for investors. It is, however, for companies that care about how each exchange is perceived.

The Nasdaq is known for technology and innovation and is home to digital, biotechnology, and other companies at the cutting edge. As such, stocks listed on the Nasdaq are considered growth-oriented and more volatile. In contrast, companies that list on the NYSE are perceived as more stable and well-established. The NYSE draws blue chips and industrials, some of which have been in business for generations.

However, these perceptions may not be as relevant today as they were in the past. Many corporate giants are listed on the Nasdaq. Think Apple, Google, Microsoft, Meta (formerly Facebook), Amazon, and Intel. And the NYSE has drawn newer tech companies, like Uber and Snapchat, in recent years.

The NYSE is also changing the way companies can access capital and offering the option of direct listings, which differ from initial public offerings (IPO) by allowing companies to sell existing shares to the public directly without underwriters—a less expensive option than an IPO. Both Warby Parker and Spotify went public through direct listings on the NYSE.

Nasdaq's vs. NYSE Listing Requirements

The Nasdaq and the NYSE have listing standards catering to companies of varying sizes and financial health. While the NYSE is often associated with more established companies because of its higher financial thresholds, the Nasdaq is known for being more accessible to younger, higher-growth companies. Let's compare some aspects of these exchanges' standards for listing:

Audit committee: Both the NYSE and Nasdaq require listed companies to have an audit committee consisting entirely of independent directors. This committee oversees the company's financial reporting processes and the independence of its external auditors.

Board composition: The NYSE mandates that a majority of a company's board of directors be independent. Likewise, the Nasdaq requires that independent directors make up most of the board or at least one-third for companies listed in its Capital Market. The Nasdaq also has newer rules for board diversity in place.

Code of conduct: The NYSE requires listed companies to adopt and disclose a code of business conduct. The Nasdaq has a similar requirement, mandating that companies have a code of conduct applicable to all directors, officers, and employees.

Corporate Governance: Standards for these are crucial for ensuring transparency, accountability, and protection of shareholder rights. Both exchanges have set forth guidelines to promote good governance, with standards changing in response to movements for greater environment and social responsibility in the corporate world.

Profitability and earnings: The NYSE requires companies to show profitability, with one of its standards demanding aggregate pretax earnings of at least $10 million over the last three fiscal years. The Nasdaq also has profitability requirements in some of its rules, but it provides alternative paths that do not necessarily require profitability to accommodate startups and growth-oriented companies. For the Nasdaq, the company must have total pretax earnings of at least $11 million in the prior three years or at least $2.2 million in the previous two years, and no single year in the prior three years can have a net loss. Both the NYSE and Nasdaq have additional standards for capitalization with cash flow, assets with equity, and related matters.

Shareholder protection: Both exchanges have rules requiring shareholder approval for certain corporate actions, such as equity compensation plans. These rules are designed to protect the interests of shareholders and ensure that they have a say in significant corporate decisions.

History

History of the Nasdaq

The Nasdaq is a global electronic marketplace for buying and trading securities—the first in the world, in fact. Headquartered in New York, Nasdaq OMX operates 18 markets—primarily equities but also including options, fixed income, derivatives, and commodities. It also runs one clearinghouse and five central securities depositories in the United States and Europe. Its cutting-edge trading technology is used by over 130 organizations in over 50 countries.

The Nasdaq was founded in 1971 as 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, the NASD began a restructuring process and sold shares in the electronic exchange to its members. Those shares began trading on the Over-the-Counter (OTC) Bulletin Board in 2002 under the symbol NDAQ.

On Feb. 9, 2005, the Nasdaq began trading on the Nasdaq Stock Market following a secondary offering of shares. NASD fully divested itself of Nasdaq ownership in 2006. The following year, Nasdaq became fully operational as an independent registered national securities exchange.

Meanwhile, regulatory functions of the NASD and NYSE Regulation combined to form FINRA, with the U.S. Securities and Exchange Commission (SEC) overseeing the newly formed regulator.

History of the NYSE

The New York Stock Exchange (NYSE), located in the city of New York, is the oldest American exchange still in existence and the largest equities-based exchange in the world based on the total market capitalization of its listed securities.

The NYSE was founded on May 17, 1792, when 24 stockbrokers gathered at 68 Wall St. to create what later became known as the Buttonwood Agreement, after the tree under which the pact was signed. In the beginning, there were just five securities. The first company to list on the NYSE was the Bank of New York.

For more than 200 years, the NYSE operated as a member-owned nonprofit corporation. It went public under the symbol NYX on March 8, 2006, following its merger with Archipelago Holdings.

In 2007, the NYSE merged with Euronext, the largest stock exchange in Europe, to form NYSE Euronext. This company was acquired in 2013 by Intercontinental Exchange Inc. (ICE), the current parent company of the NYSE.

The Bottom Line

Though the NYSE and the Nasdaq are the biggest equities markets in the world, these exchanges are by no means the same. While their differences may not affect your stock picks, your understanding of how these exchanges work will give you some insight into how trades are executed and how a market functions.