The NYSE and Nasdaq: How They Work

Whenever someone talks about the stock market, what usually comes to mind is the New York Stock Exchange (NYSE) or the Nasdaq. There’s no debating why. These two exchanges collectively account for the bulk of stock trading in North America and internationally.

The NYSE and the Nasdaq differ in their operations and the types of equities they list. Knowing these differences will help you to better understand the function of a stock exchange and the mechanics behind buying and selling stocks.

Location, Location, Location

Nowadays, given the ubiquity of online trading, the location of a stock exchange refers not so much to its street address as to where its orders are transacted. While the NYSE still retains a physical trading floor on Wall Street in New York City, a significant portion of trade flows through its data center in Mahwah, N.J.

The Nasdaq, on the other hand, operates electronically and does not have a physical trading floor. Trading takes place directly between investors, seeking to buy or sell, and market makers (whose role we discuss below). Market participants connect to a centralized exchange infrastructure to trade.

Dealer vs. Auction Market

The fundamental difference between the NYSE and the Nasdaq is how trades are transacted between buyers and sellers. At the NYSE, at market open and close, the auction method is how NYSE stock prices are set. Market participants transact trades directly with each other. At the Nasdaq, market participants transact trades through dealers.

From open to close at the NYSE, there's continuous trading. Before the market’s official opening at 9:30 a.m. Eastern time (ET), market participants can enter buy and sell orders starting at 6:30 a.m. ET. These orders are matched, with the highest bidding price paired with the lowest asking price. Orders for the closing auction are accepted until 3:50 p.m. ET, and orders can be canceled up until 3:58 p.m. ET.

Market Maker vs. Designated Market Maker

The Nasdaq and the NYSE both use market makers to improve liquidity and maintain a fair and orderly market. However, there are differences in how these professionals function at each exchange.

At the Nasdaq, market makers maintain inventories of stock to buy and sell from their accounts in transactions with individual customers and other dealers. Market makers give two-sided quotes, meaning that they state the bid and ask prices for a security in which they are making a market. More than 260 market-making firms provide liquidity for Nasdaq-listed stocks. Although it isn't required for trading to occur, this competition helps ensure that buyers and sellers are getting the best prices.

At the NYSE, the job of maintaining markets falls to designated market makers (DMMs), formerly known as specialists. DMMs have more duties than traditional market makers. They are the human point of contact for the listed company on the NYSE trading floor.

DMMs provide stability by taking the other side of the trade when imbalances occur, buying when investors are selling, and vice versa. They run the opening and closing auctions, using human input and algorithms to help promote price discovery when the volume is typically at its highest. According to the NYSE, DMMs provided 17% of liquidity in NYSE trading in 2019.

Perception and Cost of NYSE and Nasdaq

The NYSE and the Nasdaq have different images among companies and investors. Whether a stock trades on the Nasdaq or the NYSE is not necessarily a determining factor for investors. It is, however, for companies that care about how each exchange is perceived.

The Nasdaq is known for technology and innovation, and it is home to digital, biotechnology, and other companies at the cutting edge. As such, stocks listed on the Nasdaq are considered growth-oriented and more volatile. In contrast, companies that list on the NYSE are perceived as more stable and well-established. The NYSE draws blue chips and industrials, some of which have been in business for generations.

However, these perceptions may not be as relevant today as they were in the past. Many corporate giants are listed on the Nasdaq. Think Apple, Google, Microsoft, Meta (formerly Facebook), Amazon, and Intel. Also, the NYSE is trying to appeal to younger or smaller firms with its direct listings (a less-expensive option than an IPO).

Listing Requirements

Still, the listing requirements for the Nasdaq are more favorable to new companies. The Nasdaq Stock Market has three tiers: Nasdaq Global Select Market, Nasdaq Global Market, and Nasdaq Capital Market.

Of these, the Nasdaq Capital Market has the lowest entry requirements. The initial fee to list is $50,000, including a $5,000 application fee, up to 15 million shares. After that, companies must pay $45,000 to $81,000 annually. Fees for the Nasdaq Global Select Market and the Nasdaq Global Market are set higher. Entry fees are $150,000 to $295,000 annually, including the $25,000 application fee; subsequent annual fees range from $48,000 to $167,000.

To list on the NYSE, companies should be prepared to pay $150,000 minimum and $295,000 maximum. The NYSE charges a $25,000 application fee, a $50,000 one-time fee, and $0.004 per share to list. The most that a company will pay is $295,000. Annual fees are calculated on a per-share basis. Companies must pay $0.00113 per share or $71,000 annually, whichever is greater.

Given the lower cost of entry, it’s understandable why growth companies with less initial capital might prefer the Nasdaq.

Public vs. Private

The Nasdaq and the NYSE were private companies until their shares became publicly available in 2002 and 2006, respectively.

History of the Nasdaq

The Nasdaq is a global electronic marketplace for buying and trading securities—the first in the world, in fact. Headquartered in New York, Nasdaq OMX operates 29 markets—primarily equities but also including options, fixed income, derivatives, and commodities. It also runs one clearinghouse and five central securities depositories in the United States and Europe. Its cutting-edge trading technology is used by 100 exchanges in 50 countries.

The Nasdaq was founded in 1971 as a wholly-owned subsidiary of the Financial Industry Regulatory Authority (FINRA), which was then known as the National Association of Securities Dealers (NASD). In 2000, the NASD began a restructuring process and sold shares in the electronic exchange to its members. Those shares began trading on the Over-the-Counter (OTC) Bulletin Board in 2002 under the symbol NDAQ.

On Feb. 9, 2005, the Nasdaq began trading on the Nasdaq Stock Market following a secondary offering of shares. NASD fully divested itself of Nasdaq ownership in 2006. The following year, Nasdaq became fully operational as an independent registered national securities exchange.

Meanwhile, regulatory functions of the NASD and NYSE Regulation combined to form FINRA, with the U.S. Securities and Exchange Commission (SEC) overseeing the newly formed regulator.

History of the NYSE

The New York Stock Exchange (NYSE), located in the city of New York, is the oldest American exchange still in existence and the largest equities-based exchange in the world based on the total market capitalization of its listed securities.

The NYSE was founded on May 17, 1792, when 24 stockbrokers gathered at 68 Wall St. to create what later became known as the Buttonwood Agreement, after the tree under which the pact was signed. In the beginning, there were just five securities. The first company to list on the NYSE was the Bank of New York.

For more than 200 years, the NYSE operated as a member-owned nonprofit corporation. It went public under the symbol NYX on March 8, 2006, following its merger with Archipelago Holdings. In 2007, the NYSE merged with Euronext, the largest stock exchange in Europe, to form NYSE Euronext. This company was acquired in 2013 by Intercontinental Exchange Inc. (ICE), the current parent company of the NYSE.

The Bottom Line

Though the NYSE and the Nasdaq are the biggest equities markets in the world, these exchanges are by no means the same. While their differences may not affect your stock picks, your understanding of how these exchanges work will give you some insight into how trades are executed and how a market functions.