US Stock Markets: NYSE and NASDAQ Compared
Stock markets exist to provide an arena for public companies to list their stock or shares for trading, with the primary aim of raising capital. The stock market not only provides the physical infrastructure but also the legal, financial, administrative and other related support for the various players to trade and invest in these financial instruments. The major players in the stock market consist of not only individuals trading and investing their own personal accounts, but also professionals like Corporate Pension Funds dealing with stock investments, Money Managers, Mutual Funds, Charitable and legal trusts and Insurance Funds.
US Stock Markets
In the United States, the primary markets for stock trading and investment are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the NASDAQ Stock Market. Stocks that are traded on the NYSE and AMEX are normally called "listed stocks". Listed stocks can usually be identified by their 1 to 3 letter ticker symbols e.g. C (Citicorp), KO (Coca Cola) and BAC (Bank of America Corporation), although recently there have been 4 letter ticker symbols included e.g. YOKU (Youku.com Inc.). NASDAQ ticker symbols normally consist of 3, 4 or 5 letters e.g. AAPL (Apple Inc.), MSFT (Microsoft) and INTC (Intel).
The New York Stock Exchange (NYSE)
Trading on the NYSE and AMEX is still primarily floor based with a specialist controlling the order book for each listed stock, although there are plans afoot to speed up the move towards more computerization and online stock trading. The NYSE specialist gets to see all buy and sell orders and has the responsibility to ensure that the stock is traded at a fair value and in an orderly manner. The specialist also has the unenviable task of dealing with any sudden order imbalances by buying or selling from his own inventory in order to maintain stability in the stock price. Order imbalances can be created by external events such as unexpected earnings outlook, upgrade/downgrade by analysts or catastrophic geopolitical incidents like 9/11.
The NASDAQ Stock Market
The NASDAQ Stock Market, on the other hand, is a completely screen based electronic market which facilitates online stock trading. NASDAQ was originally an acronym for "National Association of Securities Dealers Automated Quotations" but the finance industry solely uses the acronym "NASDAQ" in almost all references. Liquidity on the NASDAQ is provided by "market makers" like Goldman Sachs (GSCO) and Merrill Lynch (MLCO), among others. These market makers can be viewed as the NASDAQ versions of the NYSE specialist, although there are significant differences in how they execute their respective roles.
Due to the NASDAQ's electronic nature, it is made up of many different "Electronic Communications Networks" or more commonly known as ECNs. Think of ECNs as many different mini exchanges with their own bid & offers and all these are linked together to provide the overall bid & offers for a particular stock on NASDAQ. At this stage, it would suffice to know that you can trade a NASDAQ stock online on any ECN that your stock broker's trading platform allows you to have access e.g. Interactive Broker's Trader Workstation (TWS) platform.
Trading on the NYSE and NASDAQ compared
As you can imagine, a totally screen based system (NASDAQ) and a human order filler approach (NYSE) will have plenty of differences. The NYSE specialist does have computers to help him carry out his role but the decision making process is still primarily in the hands of a human. This requires a trader to undertake different order entry and exit strategies in order to get the best stock price. The element of negotiation, when dealing with large orders, is very apparent in the human based system as a specialist may give a trader a better price if the specialist has inventory that he needs to clear and the trader can accommodate the size offered. The NASDAQ system, on the other hand, offers traders Level 2 quotes where the buy and sell orders of the various market makers can be seen by those who subscribe to this functionality. Although not totally foolproof and Level 2 quotes do have an element of "spoofing", where market makers or other participants display sizable orders which they have no intention of dealing in at that price, they do however allow a trader to gain intelligence on what is the demand and supply of a stock at a certain level.