The NYSE and NASDAQ: How They Work

Whenever someone talks about the stock market as a place to buy and sell equities, what usually comes to mind for most people is the New York Stock Exchange (NYSE) or the NASDAQ. There’s no debating why: these two exchanges account for the bulk of stock trading in North America and worldwide. At the same time, the NYSE and NASDAQ differ in the way they operate and the types of equities they list. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind buying and selling stocks.

Location, Location, Location

The location of an exchange refers not so much to its street address but the “place” where its stocks are transacted. While the NYSE still retains a physical trading floor on Wall Street in New York City, the vast majority of exchanges occur in Mahwah, New Jersey, at the NYSE’s data center.

The NASDAQ, on the other hand, does not have a physical trading floor at all. At both telecommunications centers, trading takes place directly between investors, seeking to buy or sell, and market makers (whose role we discuss below in the next section), through an elaborate system of companies electronically connected to one another.

Dealer vs. Auction Market

The fundamental difference between the NYSE and NASDAQ is in the way securities on the exchanges are transacted between buyers and sellers. The NASDAQ is a dealer’s market, wherein market participants are not buying from and selling to one another directly but through a dealer who, in the case of the NASDAQ, is a market maker. The NYSE differs in that, at market open and close, it functions as an auction market, wherein individuals are typically buying and selling between one another, and there is an auction occurring where the highest bidding price will be matched with the lowest asking price.

Traffic Control

Each stock market has its own traffic control police officer. (Yep, that’s right.) Just as a broken traffic light needs a person to control the flow of cars, each exchange requires people who are at the “intersection” where buyers and sellers “meet”—or place their orders. The traffic controllers of both exchanges deal with specific traffic problems and, in turn, make it possible for their markets to work. On the NASDAQ, the traffic controller is known as the market maker, who, we already mentioned, transacts with buyers and sellers to keep the flow of trading going. On the NYSE, the exchange traffic controller is known as the Designated Market Maker (formerly called a specialist), who is in charge of matching up buyers and sellers.

The definitions of the role of the market maker and that of the specialist are technically different. A market maker creates a market for a security, whereas a specialist merely facilitates it. However, the duty of both the market maker and specialist is to ensure smooth and orderly markets for clients. If too many orders get backed up, the traffic controllers of the exchanges will work to match the bids with the offers to ensure the completion of as many orders as possible. If there is nobody willing to buy or sell, the market makers of the NASDAQ and the specialists of the NYSE will try to see if they can find buyers and sellers and even buy and sell from their own inventories.

Perception and Cost of NYSE and NASDAQ

One quality about the NYSE and NASDAQ that must be acknowledged is how each exchange is generally perceived by companies and investors. The NASDAQ is known as a market for technology and innovation. It attracts electronics, internet, biotech and other companies at the cutting edge. As such, NASDAQ-listed stocks are considered growth-oriented and more volatile. Companies that list on the NYSE, on the other hand, are perceived as more stable and well-established. The NYSE draws blue chips and industrials, some of which have been in business for generations.

Whether a stock trades on the NASDAQ or NYSE is not necessarily a determining factor for investors. But it can be for companies when deciding where to list, due to how each exchange is perceived.

Listing requirements and costs can also impact this decision. Listing requirements for the NASDAQ are generally less cost prohibitive. The initial fee to list on the Nasdaq Capital Market is $55,000 to $80,000, depending on how many shares the company intends to issue. After that, companies must pay $43,000 to $77,000 annually. Fees for the Nasdaq Global Select Market and Nasdaq Global Market are set higher. Entry fees run between $175,000 and $320,000, after which companies must pay $46,000 to $159,000 annually.

At the NYSE, a company must be prepared to pay $100,000 and $150,000 to list on the NYSE Arca, depending on how many shares it plans to issue, followed by a maximum of $250,000 in annual fees. Yearly listing fees are also a big factor: on the NYSE, they are based on the number of shares of a listed security, and are capped at $500,000. So we can understand why the growth-type stocks (companies with less initial capital) would be found on the NASDAQ exchange.

Public vs. Private

Before March 8, 2006, the final major difference between these two exchanges was their type of ownership: the NASDAQ exchange was listed as a publicly-traded corporation, while the NYSE was private. This all changed in March 2006 when the NYSE went public after being a not-for-profit exchange for nearly 214 years. Most of the time, we think of the NASDAQ and NYSE as markets or exchanges, but these entities are both actual businesses providing a service to earn a profit for shareholders.

The shares of these exchanges, like those of any public company, can be bought and sold by investors on an exchange. (Incidentally, both the NASDAQ and the NYSE trade on themselves.) As publicly traded companies, the NASDAQ and the NYSE must follow the standard filing requirements set out by the Securities and Exchange Commission (SEC). Now that the NYSE has become a publicly traded corporation, the differences between these two exchanges are starting to decrease, but the remaining differences should not affect how they function as marketplaces for equity traders and investors.

The Bottom Line

Both the NYSE and the NASDAQ markets accommodate the major portion of all equities trading in North America, but these exchanges are by no means the same. Although 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 works.