NASDAQ

• The Beginning


• The Internet

Identification: Second largest of the United States’ three major stock exchanges
Date: Began operations on February 8, 1971
Significance: As the first computerized stock exchange, the NASDAQ revolutionized the stock market trading system by allowing the easy trade of small stocks by permitting ordinary people to use electronic trading to buy and sell stocks without the need for a broker. During the 1990’s, the NASDAQ became the favored exchange for new Internet companies, though the crash at the start of the twenty-first century diminished the exchange’s relevance.
As the oldest stock exchanges in the country, the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) included mostly large companies that could afford the high fees charged for listing those companies. Smaller companies with lower priced stocks and a low volume of trading were sold onthemore rudimentary over-the-counter (OTC) market. The OTC market was not a single room where brokers and traders bought and sold as if at an auction. Instead,OTCtrading occurred over the phone between brokers and one of scores of traders who held stock. Lacking a central place for trading in small stocks, traders found it nearly impossible to know the exact price of any stock sold over the counter. TheOTCmarket would become the favorite of the new technology companies that would bring the United States into the computer age.
The OTC market went unnoticed by regulators and by most market traders until 1962, when a sudden dive in the market created chaos in OTC trading. Brokers could not keep up with the sudden and massive price declines as they sold stock over the phone. It became apparent that the OTC market had outgrown its origins, and only a change in technology would allow smaller stocks to continue to be traded. On February 8, 1971, stock trading moved into the computer age, as the National Association of Securities Dealers Automated Quotations (NASDAQ) began operations.

The Beginning

Formation of the NASDAQ system raised concerns in the NYSE that the new computerized trading would compete with the stock exchange’s floor trading and eventually replace the NYSE. For that reason, the NASDAQ was limited to selling smaller companies not listed on the New York exchange.
During the 1980’s, the NASDAQ was transformed from a niche exchange, familiar to only a few professional traders, to a market that traded the stocks the public wanted to own. Companies such as Microsoft, Apple Computer, and Oracle—all on the forefront of new technology—traded on the NASDAQ, eventually earning the exchange a reputation as a technology-heavy market.
The exchange also earned the highest form of compliment, as theNYSE imitated some of the electronic trading systems used by its competitor, but, even with these changes, by the late 1980’s the trading volume on the NASDAQ was beginning to approach the levels of the NYSE. By 1987, though, speculation had seized the markets, with stocks becoming overvalued and computerized trading systems setting up investors for a sudden and large fall. October 19, 1987, would expose the weaknesses of technology stocks, as a sudden drop in their value triggered a cascade of computerized sell orders. Because machines rather than people were making trading decisions, when stocks reached a certain price, they were automatically sold, deepening the market’s decline. Unlike other market declines, during which human traders used price declines to scoop up stocks that were oversold and undervalued, the computers ruthlessly sold stocks without regard to such details or to companies’ outlooks. Much of the 1987 crash could be attributed to the computerized sell orders.

The Internet

The NASDAQ would become the star of the stock-buying binge of the 1990’s, as Internet companies dominated the exchange and drew in trillions of dollars in investments. Because the exchange catered to start-up businesses lacking proven track records, new companies such as Google, Amazon.com, eBay, and Yahoo sold their shares on the NASDAQ. Public excitement about the Internet age drew in many small investors, and these companies soon became worth more than established stocks in the NYSE. The rampant speculation drove the NASDAQ to extraordinary highs, as its index value increased nearly 700 percent in less than six years. Speculators’ investments in initial public offerings of NASDAQ technology stocks were responsible for the development of many Internet start-up companies, but the crash of 2000 laid low many of these new companies, leading to bankruptcies and worthless stock. The resulting disaster took some of the shine off the NASDAQ, as the more established stocks on the NYSE suffered fewer losses and became more popular among investors over the next decade.

Further Reading
Dalton, John. How the Stock Market Works. New York: Prentice-Hall, 2001. Amateur stock market investors and those curious about how stocks are bought and sold are the main audience for this book, which explains the differences between the three market exchanges.
Frewles, Richard, and Edward Bradley. The Stock Market. New York: John Wiley & Sons, 1998. Looks at all of the American stock markets and how they trade in stock; includes a detailed analysis of the NASDAQ market.
Ingerbretsen, Mark. NASDAQ. Roseville, Calif.: Forum, 2002. Historical look at the development of the OTC market and the formation and growth of the NASDAQ stock exchange through the latter years of the twentieth century.
Little, Jeffrey B., and Lucien Rhodes. Understanding Wall Street. New York: McGraw-Hill, 2004. Relates the methods of stock trading, including the OTC market and the NASDAQ.
Sobel, Robert. The Big Board. Frederick, Md.: Beard Books, 2000. Written by an economic historian, this work details the history of stock market trading and includes sections on the role of the NASDAQ in developing the modern stock market system.
See also: Black Monday; dot-com bubble.