Often referred to as the pulse of the New Economy, the Nasdaq Stock Market, operated by the National Association of Securities Dealers (NASD), is divided into two separate markets: the Nasdaq National Market, comprised of over 4,000 of the largest and most heavily traded Nasdaq securities and featuring heavy financing, capitalization, and corporate governance standards for listed companies; and the Nasdaq SmallCap Market, which caters to smaller, emerging companies and maintains more relaxed listing requirements. The general course of stock movement is to graduate from the SmallCap Market to the National Market. Nasdaq's listings are comprised most notably of companies operating in various sectors of high technology, including Internet companies and others devoted to aspects of the Internet architecture.
Nasdaq began trading in 1971, ten years after the U.S. Securities and Exchange Commission (SEC) charged the NASD with implementing a solution to what the U.S. Congress called a fragmentation in the over-the-counter securities market. Only in the closing decade of the 20th century, however, did Nasdaq truly emerge as a major benchmark by which the U.S. economy was monitored. Between 1997 and 2000, Nasdaq brought 1,649 companies public, according to NASD. With the Internet producing profound changes in economic life and the high-tech sector in which Nasdaq specializes leading the dramatic U.S. economic growth, the Nasdaq Stock Market became one of the most-watched stock indexes, alongside that of the New York Stock Exchange and major benchmarks like the Standard & Poor's 500 Index and the Dow Jones Industrial Average. It was on Nasdaq more than the others, moreover, that the hotshots of the Internet age were listed and on which New Economy investors focused their attention.
Nasdaq, like the New York Stock Exchange, runs trades through market makers, middlemen who work on the trading floors—or, in Nasdaq's case, at computer terminals that receive instantaneous market information and on which they place buy and sell bids—and are generally backed by major securities firms such as Merrill Lynch and Goldman Sachs. When a stock finds no buyer, market makers use their own capital to purchase it. Later, they turn around and sell the stock at a higher price, and the spread between the buy and sell price constitutes their profit.
In addition to the market makers, Nasdaq allows electronic communications networks (ECNs) to implement electronic orders from their own diverse clientele. With these two brands of market participants, Nasdaq purports to increase the opportunities for its listed companies to have their stock bought and sold, thereby granting them greater access to capital and greater market visibility.
Prior to 1997, Nasdaq stocks were listed by quotations. In other words, stock prices listed on the screen represented the buy and sell bids of the market makers. Investors brought a class-action lawsuit against Nasdaq after a study reported that Nasdaq market makers were in the habit of stretching their profit margins by conspiring to keep the trading spreads-the difference between the buy and sell prices-artificially wide. Although collusion was never proven and the market makers settled out of court, the Securities and Exchange Commission (SEC) ordered Nasdaq to alter their order-handling rules so as to require market makers to list ECN quotes that beat the market maker's prices.
In spring 2001, Nasdaq switched its price listings to decimals, eliminating the fractions it had always employed. Immediately, and as expected, the spreads between the market makers' buy and sell bids diminished, particularly for the most heavily traded stocks. However, not all traders were eager to jump to decimalization; in the weeks before the proposed switch, the 7,700-member Security Traders Association (STA) petitioned the Securities and Exchange Commission (SEC) to postpone the deadline by at least three months, claiming that the tighter schedule would leave them unprepared and unduly upset their businesses.
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