This Week In Finance - Nasdaq Turns 40

The Nasdaq likes to advertise itself as "the stock market for the next hundred years," but as the exchange enters its 40th year, this seems like a good time to examine its beginnings and the path it has traveled in becoming one of the largest stock exchanges in the world. Beginnings
Nasdaq was founded in 1971 by the National Association of Securities Dealers (NASD) as a listing system for over-the-counter (OTC) stocks. At its beginnings, Nasdaq simply served as a collection point for over-the-counter stock listings and did not actually bring buyers and sellers together. Over time though, the exchange introduced innovations including listing the "inside" bid-ask spread on stocks, a move that significantly lowered the average cost of trading for many stocks.

In contrast to many other stock markets at the time, Nasdaq did not have an actual physical trading floor, but instead relied upon a series of market makers to execute buy and sell orders over the phone. During the stock market crash of 1987, many of these market makers simply did not answer their phones in order to avoid having to buy stocks that were plunging in value. In response, the Nasdaq began to computerize and automated an increasing share of its trades. Nasdaq also introduced the small order execution system (SOES) to automatically execute smaller trades for individual investors. (Learn more in The NYSE and Nasdaq: How They Work.)

The Go-Go '90s
The Nasdaq really surged to prominence in the 1990s. By 1994, Nasdaq surpassed the New York Stock Exchange (NYSE) in yearly share volume. As the 1990s progressed, stock markets roared higher, and investing became something of a national obsession in the United States. The hottest stocks going were large technology companies such as Microsoft, QUALCOMM and Cisco, as well as fledgling internet companies such as Netscape and Amazon. With its commanding position in technology, Nasdaq grew rapidly during this period and the exchange began to become a household name. By 1999, Nasdaq had become the world's biggest stock market by dollar volume traded.

Mergers and Acquisitions
As with many successful businesses, part of Nasdaq's growth has been fueled by mergers and acquisitions. Nasdaq merged with the American Stock Exchange in 1998, and in 2007 Nasdaq bought the Philadelphia Stock Exchange. As Nasdaq grew and grew, it also became apparent that the exchange should become a publicly-traded company, and in 2000 Nasdaq was spun off from the NASD and went public. Nasdaq is today known as Nasdaq OMX Group as a result of the 2007 merger with OMX, a Swedish exchange operator. The combined company operates exchanges throughout the world and is positioned as one of the world's leading market companies (together with its rival NYSE Euronext). (Learn more in The Basics of Mergers and Acquisitions.)

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.

The Future
As we have seen, Nasdaq has come a long way since its humble beginnings as an over-the-counter bulletin board system. The last 40 years have seen an almost unbelievable evolution of the exchange in terms of its importance to the global capital markets and prominence in people's minds. Given how far it has come over the last four decades, we can only wait and see what future changes are in store for the "stock market for the next hundred years." If the past is any indication, we can expect continued innovation and excitement from both the Nasdaq exchange and the companies that trade on it.

Learn more in Getting To Know The Exchanges.

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