NASDAQ, electronic trading pioneer

NASDAQ may become a stock exchange later this year, a status the pioneer electronic stock market had applied for in 2000 but whose approval has been held up by complex market structure questions and pending regulatory reforms.

An important change would be to extend a revamped trade-through or “best-price” rule to NASDAQ-listed issues, which are currently traded under broker-dealers’ best-execution obligation.

Since its modest 1971 debut as NASD’s Automated Quotation system for over-the-counter (OTC) trading, NASDAQ owed much of its development to regulatory changes and to Congress, which supports the right to trade away from organized exchanges.

However, lawmakers and regulators wanted transparency and fair access in the OTC market, which led NASDAQ, over the past three decades, to launch several trading platforms: the Small Order Execution System or SOES, SuperSOES, SelectNet and SuperMontage.

Today, NASDAQ’s high-capacity platform is its Market Center, a seamless environment to trade securities listed on NASDAQ or the New York Stock Exchange. Market Center also is a trading hub for popular exchange-traded funds, such as the QQQQ, that tracks the Nasdaq-100 index, or other ETFs listed on the American Stock Exchange.

The open-model NASDAQ Market Center offers:

  • a fully integrated order display as well as trade execution and trade reporting
  • the ability for market participants to enter as many orders at they want at multiple price levels
  • an automated trade reporting and reconciliation system
  • with the acquisition of the Brut ECN in September 2004, NASDAQ also added smart-routing capability
  • multiple order types, such as pegged or fill-or-return
  • multiple market participant IDs
  • Opening Cross and Closing Cross, or electronic auctions that execute all shares for each stock at a single price
  • multiple connectivity options, including FIX, private network, CTICI or NASDAQ WorkStation II

One milestone in NASDAQ’s history was the SEC’s Order Handling Rules of 1996 that spurred the growth of the ECNs. To stand up to its technology-savvy, less-regulated rivals, NASDAQ recently adopted some ECN features and slashed fees.