When someone talks about the stock market, this is what usually comes to mindNew York Stock Exchange (NYSE)of die eneNasdaq. There is no discussion about why. These two exchanges together account for the majority of stock trading in North America and internationally.
The NYSE and Nasdaq differ in their activities and the types of stocks they list. Knowing these differences can help you better understand the workings of a stock exchange and the mechanics of buying and selling stocks.
Key learning points
- The New York Stock Exchange (NYSE), based in New York, N.Y., is the oldest surviving U.S. stock exchange and the largest equity-based exchange in the world, based on the total market capitalization of its listed securities.
- Nasdaq is a global electronic marketplace for securities trading where many of the world's technology giants – including Apple and Google – are listed.
- The NYSE is an auction market that uses specialists (designated market makers), while the Nasdaq is a dealer market where many market makers compete with each other.
- Today, the NYSE is part of the Intercontinental Exchange (ICE) and the Nasdaq is part of the publicly traded company Nasdaq, Inc.
- Both exchanges were privately held until they went public in the 2000s.
Location, location, location
Given the ubiquity of online trading, the location of an exchange today is less about its address and more about where orders are executed. Although the NYSE still has a physical trading floor on Wall Street in New York City, a significant portion of its trading flows through its data center in Mahwah, N.J.
Nasdaq, on the other hand, operates electronically and has no physical trading floor. Trading takes place directly between investors who want to buy or sellmarket makers(whose role we discuss below). Market participantsconnect to a centralized exchange infrastructureat handle.
Dealer versus Auction market
The fundamental difference between NYSE and Nasdaq is the way transactions occur between buyers and sellers. The market opens and closes on the NYSEauction methodis how NYSE stock prices are determined. Market participants trade directly with each other.On Nasdaq, market participants trade through dealers.
There is continuous trading from open to close on the NYSE. Before the official market opening at 9:30 AM Eastern Time (ET), market participants can enter buy and sell orders starting at 6:30 AM ET. These orders are matched, with the highest bid price paired with the lowest ask price. Orders for the final auction will be accepted until 3:50 p.m. ET, and orders can be canceled until 3:58 PM. A.
Market maker versus designated market maker
Nasdaq and NYSE both use market makers to improve liquidity and maintain a fair and stable priceorderly market. However, there isdifferences in the way these professionals workwith every exchange.
On Nasdaq, market makers hold inventory to buy and sell through their accounts in trades with individual customers and other dealers. Market makers provide double-sided quotes, meaning they quote bid and ask prices for a security in which they are creating a market.
More than 500 market-making companies provide liquidity to Nasdaq-listed stocks. While not necessary for trade to occur, this competition ensures that buyers and sellers get the best prices.
On the NYSE, the job of maintaining the markets is eliminateddesignated 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 arise, buying when investors sell, and vice versa. They manage the opening and closing auctions, using human input and algorithms to drive price discovery when volume is typically at its peak.According to the NYSE, DMMs provided 17% of liquidity in NYSE trading in 2019 (latest information).
Perception and costs of the NYSE and Nasdaq
The NYSE and Nasdaq have different images among companies and investors. Whether a stock trades on Nasdaq or NYSE is not necessarily a deciding factor for investors. However, it is for companies that carehow each exchange is perceived.
Known for technology and innovation, Nasdaq is home to digital, biotech and other cutting-edge companies. As such, stocks listed on the Nasdaq are considered growth-oriented and more volatile. Companies listed on the NYSE, on the other hand, are seen as more stable and established. NYSE pullsBlue chipsand industries, some of which have been around 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 of Apple, Google, Microsoft, Meta (formerly Facebook), Amazon and Intel.And the NYSE has backed newer tech companies, such as Uber and Snapchat, in recent years.
The NYSE is also changing the way companies access capital and providing the opportunity to do sodirect placement, which differ from initial public offerings (IPOs) in that companies can sell existing shares directly to the public without underwriters – a cheaper option than an initial public offering.BothWarby ParkerInSpotifywas listed via direct listings on the NYSE.
Nasdaq vs. Requirements for Listing on the NYSE
Nasdaq and NYSE have listing standards that suit companies of different sizes and financial health. While the NYSE is often associated with more established companies due to its higher financial barriers, the Nasdaq is known to be more accessible to younger, fast-growing companies. Let's compare some aspects of these exchanges' standards for listing:
Audit committee: Both the NYSE and Nasdaq require publicly traded companies to have an audit committee composed entirely of independent directors. This committee oversees the company's financial reporting processes and the independence of its external auditors.
Composition of the board: NYSE requires that a majority of a company's board of directors must be independent. Similarly, Nasdaq requires that independent directors constitute a majority of the board, or at least one-third for companies listed on the capital markets. Nasdaq also has newer rules for board diversity.
Code of conduct: NYSE requires publicly traded companies to adopt and publish a code of conduct. Nasdaq has a similar requirement that requires companies to have a code of conduct that applies to all directors, officers and employees.
Business management: Standards for this are essential to ensure transparency, accountability and protection of shareholder rights. Both exchanges have established guidelines to promote good governance, with standards changing in response to movements for greater environmental and social responsibility in the business world.
Profitability and profitThe NYSE requires companies to demonstrate profitability, with one of the standards requiring total pretax profits of at least $10 million over the past three fiscal years. Nasdaq also imposes profitability requirements in some rules, but offers alternative paths that do not necessarily require profitability to accommodate startups and growth-oriented companies. For Nasdaq, the company must have total pretax profits of at least $11 million in the previous three years or at least $2.2 million in the previous two years, and no year in the previous three years can have a net loss. Both the NYSE andNasdaq has additional standardsfor capitalization with cash flows, equity assets and related matters.
Shareholder protection: Both exchanges have rules that require shareholder approval for certain corporate actions, such as stock compensation plans. These rules are intended to protect the interests of shareholders and ensure that they have influence over important corporate decisions.
Nasdaq and NYSEwere private companiesuntil their shares became publicly available in 2002 and 2006.
History
Nasdaq's history
Nasdaq is a global electronic marketplace for buying and trading securities – actually the world's first. Headquartered in New York, Nasdaq OMX operates 18 markets – primarily equities, but also options, fixed income, derivatives and commodities. It also operates a clearinghouse and five central securities depositories in the US and Europe. Its advanced trading technology is used by more than 130 organizations in more than 50 countries.
Nasdaq was founded in 1971 as a wholly owned subsidiary ofFinancial Industry Regulatory Authority (FINRA), which was then known asNational Association of Securities Dealers (NASD).In 2000, the NASD began a restructuring process and sold shares in the electronic stock exchange to its members. These stocks started tradingOver-the-Counter (OTC) message boardin 2002 under the symbolAND.
On February 9, 2005, Nasdaq began trading on the Nasdaq stock exchange following a secondary offering of shares.NASD completely divested itself of Nasdaq ownership in 2006. The following year, Nasdaq became fully operational as an independent registered national securities exchange.
Meanwhile, the regulatory functions of NASD and NYSE regulation combined to form FINRA, with the U.S.Securities and Exchange Commission (SEC)supervision of the newly established supervisory authority.
The History of the NYSE
The New York Stock Exchange (NYSE), located in New York City, is the oldest surviving U.S. stock exchange and the largest equity-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 met on Wall St. to create what became known asButtonwood-deal, after the tree under which the covenant was signed. In the beginning there were only five effects. The first company to list on the NYSE was the Bank of New York.
For more than 200 years, the NYSE operated as a nonprofit organization owned by its members. It went public on March 8, 2006 under the symbol NYX, following its merger with Archipelago Holdings.
In 2007, NYSE merged with Euronext, Europe's largest stock exchange, to form NYSE Euronext.This company was purchased in 2013 byIntercontinentale Exchange Inc.(IS), the current parent company of the NYSE.
Can you buy on NYSE and sell on Nasdaq?
If a stock is listed on both the NYSE and Nasdaq, it can be bought on one and sold on the other. If it is not dual-listed, the transaction must be executed on the exchange.
Is the NYSE more prestigious than the Nasdaq?
For many investors, the NYSE has more prestige because of its history, traditional trading floor operations and stock offerings. For others, prestige is irrelevant. The NYSE is the world's largest stock exchange and is known for listing shares in well-known, established companies. Nasdaq closely follows the market as the second largest exchange in the world, but shows less stable growth stocks and shares of technology giants.
Why switch from Nasdaq to NYSE?
Companies can switch from Nasdaq to NYSE for many reasons, including involuntary ones. For example, the exchange may request a move if its membership criteria are violated. Companies can choose to be associated with the prestige of the NYSE and/or be associated with the established companies on the exchange. The NYSE may also offer features and benefits that the Nasdaq does not. For example, the NYSE offers a physical auction, while the Nasdaq is completely electronic.
In short
Although the NYSE and Nasdaq are the largest stock markets in the world, these exchanges are certainly not the same. While their differences may not impact your stock selection, understanding how these exchanges work will give you insight into how trades are executed and how a market works.
