How the NASDAQ Stock Exchange Works

NASDAQ, stands for National Association of Securities Dealers Automated

Quotations System. It's the place where people go to buy and sell shares of
stock.

How a stock exchange actually works

It uses remarkable and highly reliable computer systems to handle the

exchange of stocks between buyers and sellers, and to set opening and closing
prices. In this article, we'll take a high-level view of the different services and
techniques that the NASDAQ stock market uses for those transactions. For
starters, where do all of these stock shares come from? The shares of stocks
being bought and sold belong to the companies listed on the NASDAQ
exchange. To take a step back: if a company wants to go public, it chooses the
exchange where it will be listed -- that is, where it will sell its shares. Several
thousand companies have chosen NASDAQ.
Apparently simple act of providing a stock exchange actually has three separate
components:
• The interface -- The place where broker dealers and market
makers gain access to the system.
• The matching engine -- A computer that connects buyers and
sellers when their prices match.
• Quote services -- Data feeding the buy and sell price quotes
that NASDAQ provides.
There are many other services provided inside the exchange, of course,
including MarketSite broadcasting, record keeping, and backup services. But the
three services described above are the most important. Let's look at each of
them in detail.

Of quote services, interfaces and matching engines, quote services are perhaps
the easiest to understand. Every second of every day, the prices of stocks are
fluctuating. And people around the world want to see those prices in real
time: Broker dealers want to provide quotes to their customers, and news
organizations want quotes to display in their shows. To meet this need, NASDAQ
provides up-to-the-minute price quotes through its computers, which can see
what's happening inside the matching engine and then send that data out to the
rest of the world.
Buyers and sellers electronically enter their trades with their broker dealers, and
those trades come into the NASDAQ system through hundreds
of computers (one computer for each broker dealer).
The trades then make their way to the matching engine, which, on the NASDAQ
exchange, is a single, highly reliable computer. It's where the actual trading takes
place.
 • Customer 1: sell 50 shares for $15.40
• Customer 2: sell 200 shares for $15.25
• Customer 3: sell 100 shares for $15.20
Here's a simple way to conceive of the matching engine. Imagine there's a company listed on the
NASDAQ exchange -- call it the ABC company. Inside the matching engine, there's a place to
hold all of the pending trades for ABC. Let's say three people want to sell their shares of stock in
the ABC company. They place their orders as follows:

Now imagine that there are four people who want to buy shares of the ABC company. The list
looks like this:

• Customer A: buy 100 shares for $15.15

• Customer B: buy 200 shares for $15.10
• Customer C: buy 150 shares for $15.00
• Customer D: buy 75 shares for $14.95
Right now there are no matches. The lowest price on the sell side is $15.20, and the highest price
on the buy side is $15.15. The difference between the lowest selling price and the highest buying
price is called the spread. In a widely traded stock, it's usually only a penny or two. In a low-
volume stock, the spread can grow much larger. Because of the spread here, these trades are
going to sit in these lists waiting for a match to come along.
Now let's imagine that Customer A sends in a new sell order. He wants to buy 50 shares for
$15.25. Instead, he'll get the stock for $15.20 from Customer 3, because that's the lowest price
available in the list of sellers. The 100 shares available at the $15.20 sale price will be split -- 50
shares will remain in the list, while the other 50 will complete the transaction. Customer 3 is
happy because he got the price he wanted, and Customer A is happy because he got a small
discount.

The matching engine is doing this kind of thing across thousands of listed stocks, and millions of
matches are handled by the matching engine every day. Once the match is made, information
about the completed transaction flows out of the matching engine and goes back to the broker
dealers of the buyer and seller. Information also flows to the quote servers so that anyone who's
interested can see what happened.

This is a highly simplified explanation, of course, In reality, because of the number of people
trading, the system takes thousands of computers and brokers to implement, and the process
gets very complicated very quickly.

NASDAQ Exchange Description

What Makes Nasdaq Unique?
As the world's largest electronic stock market, Nasdaq® is not limited to one central trading
location. Rather, trading is executed through Nasdaq's sophisticated computer and
telecommunications network, which transmits real-time quote and trade data to more than 1.3
million users in 83 countries. Without size limitations or geographical boundaries, Nasdaq's "open
architecture" market structure allows a virtually unlimited number of participants to trade in a
company's stock.

Today, Nasdaq lists the securities of nearly 4,100 of the world's leading companies and each
year, continues to help hundreds of companies successfully make the transition to public
ownership.

Who Trades Nasdaq Stocks?

Trading on Nasdaq is not limited to any fixed number of participants. This allows a large number
of firms with widely different business models and trading technologies to connect to the Nasdaq
network and compete on an equal basis. Rather than forcing investors to go through a single
financial firm to buy or sell stocks, Nasdaq links up a variety of competitors and lets participants
choose with whom they are going to trade. All firms trading Nasdaq stocks must be certified with
the Securities and Exchange Commission (SEC) and registered with Nasdaq and NASD
Regulation®. Following are examples of the kinds of firms trading Nasdaq stocks:

Market Makers
Key to Nasdaq's market structure are a core group of financial firms called market
makers. More than 500 market making firms trade on Nasdaq, acting as distributors for
Nasdaq-listed securities. Also known as dealers, market makers are unique in that they
commit their own capital to Nasdaq-listed securities — then turn around and re-distribute
the stock as needed. They are required at all times to post their bid and ask prices in the
Nasdaq network where they can be viewed and accessed by all participants. By being
willing to buy or sell stock using their own funds, market makers add liquidity to Nasdaq's
market, ensure that there are always buyers and sellers for Nasdaq-listed securities, and
enable trades to be filled quickly and efficiently.

ECNs
In addition to market makers, the Nasdaq network also connects alternative trading
systems into the market, such as electronic communication networks (ECNs). ECNs
provide electronic facilities that investors can use to trade directly with each other. As
Nasdaq market participants, ECNs display either one-sided or two-sided quotes that
reflect actual orders. Additionally, they provide investors with an anonymous way to enter
orders into the marketplace. Unlike market makers, ECNs operate simply as order-
matching mechanisms and do not maintain inventories of their own.

Order-Entry Firms
Order-entry firms are also Nasdaq market participants. Order-entry firms enter and
execute orders through Nasdaq on behalf of retail and institutional customers and other
broker/dealers, but they do not maintain buy or sell price quotations in Nasdaq-listed
securities. Like ECNs, order-entry firms do not commit capital to stocks, but they do
increase the competition among market participants — helping to keep stock prices
competitive and adding to the market's liquidity.
Related Links:
Nasdaq MarketWatch

How Does Nasdaq's Market Structure Benefit Listed Companies?

Through its unique framework of multiple market participants, Nasdaq provides listed companies'
securities with ready access to investors, visibility in the marketplace, and market conditions that
promote immediate and continuous trading:

Liquidity
Liquidity is best defined as the ease with which stocks can be bought and sold in the
market. By encouraging trading among a virtually unlimited number of market
participants, Nasdaq offers an environment that facilitates greater liquidity.

Depth of Market
Depth of market refers to the total amount of money market makers have invested in a
single security and is related to the number of market participants trading in the security.
However, even a few market participants can provide abundant depth of market by
committing to buy or sell large quantities of a security. Knowing there is depth of market
can reassure investors of a stock's marketability, especially during periods of heavy
trading volume.

Transparency
Transparency, the ability to view investors' buy and sell orders at different price levels, is
crucial to the decision-making process in securities trading. Nasdaq's open market
structure offers a level of transparency not found on other major U.S. markets. On
Nasdaq, all bid and ask quotations in a given security are broadcast over the network. All
Nasdaq market participants — regardless of whether they are professional traders —
can see the same information.

Price Efficiency
In securities trading, as in most industries, competition is one of the most important
factors in creating price efficiencies. The aggressive competition for orders fostered
among Nasdaq's market participants helps to ensure that investors receive the best
prices for the securities they trade.

nasdaq.com
nasdaq.com is one of the most popular financial sites on the Web. Averaging more than seven
million page views per day, nasdaq.com offers unprecedented visibility to listed companies.
Investors can log on to nasdaq.com and see how Nasdaq, Dow Jones, and the S&P 500 are
performing, scan the latest news and fund commentary and get quotes for stocks, mutual funds,
and options on major U.S. markets. With a wealth of investor services, users are encouraged to
visit the following links for an overview of the site or to view the services available.

Nasdaq MarketSiteS
Located in the heart of New York's Times Square, Nasdaq's MarketSite Tower soars seven
stories high and is the largest video screen in the world. CNBC, CNNfn, Bloomberg, CBS
MarketWatch — these and other financial news media broadcast live throughout the day from
the MarketSite's Broadcast Studio, putting Nasdaq listed companies front and center before
millions of investors. Take a peek — view the action from the MarketSiteSM live webcam.

Unparalleled Service
Companies can expect unparalleled service when they list on Nasdaq. Each Nasdaq company
has a single point of contact: their Nasdaq Director, who serves as a link to an extensive portfolio
of services. Directors provide day-to-day assistance and can offer valuable insight on investor
relations, market and industry issues.

Executive Programs
Nasdaq-listed company executives are invited to participate in a variety of programs designed to
present top managers with timely information and networking opportunities. Nasdaq programs
include a wide range of topics — such as industry sector specific seminars and investor relations
forums — that provide companies with the tools they need to be public.

Nasdaq Online
Designed for senior executives at Nasdaq listed companies, Nasdaq Online is a one-of-a-kind
strategic planning tool. It provides market data on all US-traded companies and real-time quotes
for Nasdaq stocks. Plus, there's key information on institutional ownership, research coverage,
performance ratios and more. All data is continually updated and available in a single, integrated
source. And Nasdaq Online is free to listed companies.

Global Vision
Nasdaq is building the world's first truly global stock market — digital and Internet-accessible,
open to anyone anywhere in the world, 24 hours a day. Nasdaq has already broken new ground
in Japan, Europe, Hong Kong, and Canada , with additional plans for Asia, Latin America, and the
Middle East. By reaching out around the globe, Nasdaq is creating new links to additional capital
and an even broader pool of investors.

Today
Today, the Nasdaq OMX Group is the largest exchange company in the world.
Approximately 3700 companies from 50 countries are listed on their exchanges, with
a total market value of more than $4.1 trillion. The Nasdaq is the world's largest
exchange for the technology, biotech and paper products industries, and also boasts
a significant presence in the industrial, healthcare, financial and consumer brands
industries. World-class companies such as Starbucks, Google, JetBlue, Apple and
Costco are some of the familiar names that trade on the Nasdaq each and every day.

In order to enhance its physical presence, Nasdaq has also introduced its Nasdaq
Market Site located in the heart of Times Square in New York City. Viewers of CNBC
and other financial news networks can see daily broadcast live from the Market Site
and millions of people each day walk past its brightly lit windows.