Whenever someone talks about the stock market as a place to buy and sell equities, what usually comes to mind is the New York Stock Exchange (NYSE) or the NASDAQ. There's no debating why: these two exchanges account for the bulk of stock trading in North America and worldwide. At the same time, the NYSE and Nasdaq differ in the way they operate and the types of equities they list. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind buying and selling stocks.

Location, Location, Location

The location of an exchange refers not so much to its street address but the place where its stocks 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, New Jersey.

The NASDAQ, on the other hand, does not have a physical trading floor. At both data centers, trading takes place directly between investors, seeking to buy or sell, and 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 are transacted between buyers and sellers. The Nasdaq is a dealer market. Market participants do not buy and sell to one another directly. Transactions go through a dealer which, in the case of the Nasdaq, is a market maker.

The NYSE differs in that, at market open and close, the auction method is how NYSE stock prices are set. Before the market's 9:30 a.m. official opening time, market participants can enter buy and sell orders starting at 6:30 a.m. 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., and orders can be cancelled up until 3:58 p.m.

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Market Maker vs. Designated Market Maker

The Nasdaq and NYSE both use market makers to improve liquidity and maintain a fair and orderly market. However, there are differences in how each functions.

At the Nasdaq, market makers maintain inventories of stock to buy and sell from their own accounts in transactions with individual customers and other dealers. Market makers give two-sided quotes, meaning 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. This competition helps ensure 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. The DMM is 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 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

One quality about the NYSE and Nasdaq that must be acknowledged is how each exchange operator is generally perceived by companies and investors. The Nasdaq is known for technology and innovation, and is home to internet, biotechnology and other companies at the cutting edge. As such, stocks listed on the Nasdaq are considered growth-oriented and more volatile. 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.

Whether a stock trades on the Nasdaq or NYSE is not necessarily a determining factor for investors. But it can be for companies when deciding where to list, due to how each exchange is perceived.

Listing requirements can also impact this decision, which for the Nasdaq are more favorable to new companies. The Nasdaq Stock Market has three tiers: the 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 $55,000 to $80,000, depending on how many shares the company intends to issue. After that, companies must pay $43,000 to $77,000 annually. Fees for the Nasdaq Global Select Market and Nasdaq Global Market are set higher. Entry fees run between $175,000 and $320,000, after which companies must pay $46,000 to $159,000 annually.

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 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 entry requirements, it's understandable why growth-companies with less initial capital might prefer the Nasdaq.

Public vs. Private

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

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 OTC Bulletin Board in 2002 under the symbol NDAQ. On February 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 Securities and Exchange Commission (SEC) overseeing the newly formed regulator.

The NYSE was founded on May 17, 1792, when 24 stock brokers gathered at 68 Wall Street to form 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 private company. 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 (ICE), the current parent company of the NYSE.

The Bottom Line

Though the NYSE and 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 works.