Other Places Stocks Are Traded -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business.
A hundred years ago, there were many stock exchanges in the United States besides the big two, the NYSE and the American. Milwaukee had one, and so did San Francisco, Philadelphia, Des Moines, and Dallas. A stock fan could spend vacations riding around the country visiting the action, the way a baseball fan sees games at different ballparks. But the smaller exchanges gradually lost their importance. Most have disappeared.
Today’s big two are the NYSE and the NASDAQ, which is pronounced “nazzdack.” NASDAQ stands for the National Association of Securities Dealers Automated Quotations System. You could stump a lot of people on this one— What does NASDAQ stand for? —because many professionals on Wall Street couldn’t tell you. It’s a mouthful, which is why you never hear anybody use the full name.
It used to be that companies that were too small to be listed on the regular stock exchanges sold their shares in neighborhood stock shops, where the deals were done across a counter. A buyer in Detroit might pay 10 to 20 percent more for the same stock purchased the same day in San Antonio because there was no tickertape where people could track the latest prices. The over-the-counter market was a favorite with gamblers and wild speculators, but the average investor was smart to stay away from it.
The managers of the over-the-counter market were among the first to see how computers could revolutionize stock trading. They realized they didn’t need a gigantic trading floor like the one at the NYSE. They didn’t need a fancy building, or hundreds of traders in lab coats running around waving their arms. All they needed was a few computer terminals and enough people to sit in front of the terminals and make the trades on their screens. Presto, NASDAQ had its own electronic trading floor. Technically, it’s not an exchange. It’s a computer network.
When you want to buy shares of a company that trades on NASDAQ, say Microsoft, your broker sends your order into the NASDAQ computer system, where it shows up on the screen with all the other orders from people who want to buy or sell Microsoft. The NASDAQ “market maker” sits at a terminal in his or her own office, which could be anywhere in the country, and puts the transactions together.
Whereas a specialist at the NYSE has to stand at his post all day and may get cramps in his legs, the NASDAQ market maker can work from an easy chair. And whereas the NYSE specialist plays the role of matchmaker, the NASDAQ market maker puts himself in the middle of every stock trade. He buys the shares from the seller and turns right around and sells those shares to the buyer, at a slightly higher price. The difference is his profit, called the “spread.”
In the twenty-five years since it was created, the NASDAQ system has grown very fast, and today it is the major rival of the NYSE and the second-busiest stock market in the country. Many tiny and obscure companies that got their start on the NASDAQ exchange in the 1970s and the 1980s—Microsoft, Apple Computer, MCI, Intel, and so forth—have become corporate giants that employ thousands of workers, sell billions of dollars’ worth of products, and are famous around the world. They still trade on NASDAQ.