NASDAQ

NASDAQ revolutionised securities markets by replacing the fragmented, telephone-based over-the-counter dealer system with a centralised electronic quotation network that made competing market maker prices instantly visible to all participants simultaneously. 

Its creation marked the beginning of the transformation of securities markets from physical floor-based auction systems to the fully electronic trading infrastructure that now governs virtually all securities transactions worldwide.

Origins and the SEC Mandate

NASDAQ's creation was not a spontaneous market innovation — it was a regulatory mandate. In 1969, following the paperwork crisis that had overwhelmed Wall Street's manual processing systems and caused widespread settlement failures, the SEC urged the National Association of Securities Dealers to automate the market for over-the-counter securities — those not listed on any national exchange. 

The OTC market of the late 1960s was genuinely opaque: prices were determined through bilateral telephone negotiations between dealers, investors had no visibility into competing quotes, and spreads were wide because the absence of price transparency reduced competitive pressure on market makers.

The NASD contracted with the Bunker-Ramo Corporation of Trumbull, Connecticut, to build an electronic system in which market makers in OTC stocks could electronically update their bid and ask quotes and make those quotes simultaneously visible to all other market participants through networked computer terminals. 

The resulting system — the National Association of Securities Dealers Automated Quotations — launched on February 8, 1971 with 2,500 securities and approximately 500 market makers. 

At inception it was a quotation display system, not a trading execution system — quotes were visible electronically but trades were still arranged by telephone. Electronic order execution was added in 1984 through the Small Order Execution System, which automatically executed retail customer orders up to one thousand shares against the best quoted market maker price.

Gordon Macklin, credited as the father of NASDAQ, served as its first president from 1975 to 1987 and guided the exchange through its formative transition from a quotation display into a credible competitive marketplace. Intel set the tone for NASDAQ's technology identity with its initial public offering in October 1971 — one of NASDAQ's first high-profile listings. 

Apple and Microsoft subsequently listed on NASDAQ, cementing its reputation as the preferred venue for technology and growth companies that would define the exchange's identity for the following five decades.

The Transition From OTC System to National Securities Exchange

For the first three and a half decades of its existence, NASDAQ was not formally registered as a national securities exchange under the Securities Exchange Act of 1934. It operated as an electronic quotation system regulated by the NASD under the national securities association framework of Section 15A of the Exchange Act rather than as an exchange registered under Section 6. 

This distinction had regulatory consequences — NASDAQ market makers operated under different rules from specialists on the NYSE, and the exchange structure itself was governed differently.

As late as 1987 NASDAQ was still commonly referred to as OTC in media reports and Standard and Poor's monthly stock guides. In a series of sales in 2000 and 2001, FINRA — then still the NASD — divested its ownership stake in NASDAQ. 

NASDAQ shares began trading over the counter under the ticker symbol NDAQ in 2002. In January 2006, the SEC granted NASDAQ national securities exchange registration status under Section 6 of the Securities Exchange Act of 1934 — formally transforming it from an OTC electronic quotation system into a registered national securities exchange subject to the full exchange regulatory framework including Regulation NMS. NASDAQ, Inc. — the parent company — is today a publicly traded corporation listed on its own exchange.

The Three Market Tiers

NASDAQ organises its listed companies into three distinct market tiers reflecting different listing standards and company sizes. Understanding these three tiers is directly tested on the SIE and Series 7 examinations.

The Nasdaq Global Select Market is the most exclusive tier, hosting large-capitalisation companies meeting NASDAQ's most stringent financial, liquidity, and corporate governance standards. 

As of December 31, 2024, the Global Select Market listed 1,383 companies including the world's largest technology companies — Apple, Microsoft, Amazon, NVIDIA, Meta, Alphabet, and Tesla. 

Admission to the Global Select Market requires meeting one of four financial standards, each imposing minimum thresholds for earnings, capitalisation, revenue, and cash flow. 

The NASDAQ Listing Qualifications Department reviews the Global Market annually each October to determine whether any listed companies have become eligible for elevation to the Global Select Market.

The Nasdaq Global Market is the mid-tier, hosting mid-capitalisation companies meeting the intermediate listing standards. 

As of December 31, 2024, it listed 1,366 companies. Companies on the Global Market meet substantial but less demanding financial requirements than Global Select Market companies.

The Nasdaq Capital Market is the small-capitalisation tier, designed for smaller growth companies meeting NASDAQ's minimum listing requirements. As of December 31, 2024, it listed 1,326 companies. The Capital Market provides smaller companies with access to the NASDAQ listing and visibility benefits while imposing listing standards calibrated to their stage of development.

All three tiers share common minimum requirements under NASDAQ rules: SEC registration, a minimum of three market makers willing to provide continuous two-sided quotations, and minimum standards for assets, capital, public float, shareholders, and corporate governance including independent directors and audit committee requirements.

The Dealer Market Structure

NASDAQ operates as a dealer market — also called a quote-driven market — in which competing market makers provide continuous two-sided quotations for listed securities, and trades execute against those quotes rather than through a central order-matching mechanism using a single designated specialist as on the traditional NYSE floor.

This dealer market structure was NASDAQ's original distinguishing architectural feature and the primary mechanism through which it introduced price competition into the previously opaque OTC market. 

Multiple market makers in any given NASDAQ security compete simultaneously to provide the best bid and ask prices, with their competing quotes visible to all market participants through the electronic system. 

This competition narrows spreads and improves liquidity by creating market-making incentives — each dealer wants to attract order flow by offering the best price.

The market-making competition model was supplemented and partially transformed by the introduction of electronic communications networks — ECNs — in the 1990s, which allowed institutional and retail investors to enter limit orders directly into NASDAQ's order display system rather than routing through a dealer. 

ECNs provided investors with direct market access, further narrowing spreads and reducing the role of dealers as essential intermediaries. 

The integration of ECN order flow with dealer quotations produced the hybrid market structure that characterises NASDAQ today, in which dealer quotes, ECN orders, and exchange-operated order books coexist within the national market system framework established by Regulation NMS.

The NASDAQ Composite and NASDAQ-100 Indices

Two major equity indices track NASDAQ-listed securities and are widely used as benchmarks for technology sector and broad market performance.

The NASDAQ Composite Index tracks all securities listed on NASDAQ — more than four thousand stocks — weighted by market capitalisation. 

It is the broadest measure of NASDAQ market performance and includes companies across all market tiers and all sectors, though its heavy concentration in technology and growth companies gives it a distinctly growth-oriented character relative to broader indices. 

The NASDAQ Composite peaked at approximately 5,048 in March 2000 during the dot-com bubble before falling approximately eighty percent to 1,139 by October 2002 — one of the most dramatic index declines in United States market history.

The NASDAQ-100 Index tracks the one hundred largest non-financial companies listed on NASDAQ, weighted by modified market capitalisation. It is more concentrated than the Composite — reflecting the outsized representation of the Magnificent Seven technology companies — and is the underlying index for the widely traded Invesco QQQ Trust ETF. 

The NASDAQ-100 was introduced in 1985 and has become one of the most actively tracked equity benchmarks globally, particularly for investors seeking concentrated exposure to large-cap technology and growth companies.

The Dot-Com Bubble and NASDAQ's Defining Crisis

The dot-com bubble of 1997 to 2000 is inseparable from NASDAQ's history because NASDAQ was the preferred listing venue for the technology and internet companies at the centre of the speculative mania. The NASDAQ Composite rose from approximately 743 in early 1995 to approximately 5,048 in March 2000 — a gain of nearly six hundred percent in five years driven by extraordinary speculation in internet-related companies that often had no revenues and sometimes no products.

The collapse was equally dramatic. Between March 2000 and October 2002, the NASDAQ Composite fell approximately seventy-eight percent, erasing trillions of dollars in market capitalisation. Many NASDAQ-listed dot-com companies went bankrupt entirely. 

The crash demonstrated the risks of concentrated index exposure to a single sector during a speculative bubble and fundamentally altered investor attitudes toward technology valuation for the following decade. Despite the severity of the collapse, NASDAQ maintained its position as the primary listing venue for technology companies — Apple, Google, and Amazon all listed or remained listed on NASDAQ through and after the crash.

Examination Relevance and Key Takeaways

NASDAQ is tested on the SIE and Series 7 examinations in the context of market structure, the distinction between dealer markets and auction markets, listing requirements, and the regulatory framework governing national securities exchanges.

The key points to retain are these.

NASDAQ stands for National Association of Securities Dealers Automated Quotations. It launched on February 8, 1971 as the world's first fully electronic stock market, founded by the NASD — the predecessor to FINRA — in response to an SEC mandate to automate the fragmented OTC securities market. NASDAQ operated as an electronic quotation system regulated under the national securities association framework until January 2006, when the SEC granted it national securities exchange registration status under Section 6 of the Securities Exchange Act of 1934. It is today the world's second-largest exchange by market capitalisation behind only NYSE, owned and operated by publicly traded Nasdaq, Inc. listed under ticker NDAQ.

NASDAQ organises listed companies into three tiers: the Global Select Market for large-capitalisation companies meeting the most stringent standards, the Global Market for mid-capitalisation companies, and the Capital Market for smaller growth companies — all requiring SEC registration and a minimum of three market makers. As of December 31, 2024, NASDAQ listed 4,075 companies across the three tiers. 

NASDAQ operates as a dealer market — a quote-driven market with competing market makers providing continuous two-sided quotations — as distinct from the NYSE's auction market structure. 

The NASDAQ Composite tracks all NASDAQ-listed securities by market capitalisation. The NASDAQ-100 tracks the one hundred largest non-financial NASDAQ-listed companies and is the basis for the widely traded QQQ ETF. NASDAQ's defining crisis was the dot-com bubble collapse of 2000 to 2002 during which the Composite fell approximately seventy-eight percent from its March 2000 peak of approximately 5,048.