Stock Exchange

The Tale Of Two Exchanges: NYSE And Nasdaq

October 31, 2003 | By Investopedia Staff, (Investopedia.com)

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Whenever someone talks about the stock market as a place where equities are exchanged between buyers and sellers, the first thing that comes to mind is either the NYSE or Nasdaq, and there's no debate over why. These two exchanges account for the trading of a major portion of equities in North America and the world. At the same time, however, the NYSE and Nasdaq are very different in the way they operate and in the types of equities that trade upon them. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind the buying and selling of stocks.

Location, Location, Location

The location of an exchange refers not so much to its street address but the "place" where its transactions take place. On the NYSE, all trades occur in a physical place, on the trading floor of the NYSE. So, when you see those guys waving their hands on TV or ringing a bell before opening the exchange, you are seeing the people through whom stocks are transacted on the NYSE.

The Nasdaq, on the other hand, is located not on a physical trading floor but on a telecommunications network. People are not on a floor of the exchange matching buy and sell orders on the behalf of investors. Instead, trading takes place directly between investors and their buyers or sellers, who are the 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 but to and from a dealer, which, in the case of the Nasdaq, is a market maker. The NYSE is an auction market, wherein individuals are typically buying and selling between one another and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price. (For more on different types of markets, see Markets Demystified.)

Traffic Control

Each stock market has its own traffic control police officer. Yup, 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 specialist, who is in charge of matching buyers and sellers together.

The definitions of the role of the market maker and that of the specialist are technically different as a market maker "creates a market" for a security whereas the 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 bidders with the askers 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. (To learn more, see What's the difference between a Nasdaq market maker and an NYSE specialist?)

Perception and Cost

One thing that we can't quantify but must acknowledge is the way in which the companies on each of these exchanges are generally perceived by investors. The Nasdaq is typically known as a high-tech market, attracting many of the firms dealing with the Internet or electronics. Accordingly, the stocks on this exchange are considered to be more volatile and growth oriented. On the other hand, the companies on NYSE are perceived