David Waring

In our last lesson we continued our video course on the logistics of stock trading, with a look at the process a trade goes through to be executed on the New York Stock Exchange. In today's lesson we are going to continue our discussion of the US Stock Exchanges, with a look at the New York Stock Exchange's main competitor in the United States, the NASDAQ.

NASDAQ is short for National Association of Securities Dealers Automated Quotations, the entity which founded the NASDAQ as a way to increase trading in over the counter stocks, which were not able to meet the requirements to have their stocks listed on larger exchanges such as the NYSE. These over the counter stocks were previously traded over the phone, and because information on the stock had to be obtained from a dealer who specialized in the stock directly, it was difficult for the public to trade these stocks. The NASDAQ exchange was thus founded in 1971 giving dealers the ability to post their quotes electronically, and therefore streamlining the process and opening up trading in these stocks to a much wider audience.

The new market was an instant hit, and in 1975 the NASDAQ released its own listing requirements, essentially separating out larger companies from the smaller over the counter companies it had been trading up to that point, and putting it on the path to compete with larger exchanges such as the New York Stock Exchange. While the NYSE is the largest stock exchange by market capitalization, the success of the NASDAQ's all electronic model has allowed it to grow to be the largest exchange by trading volume.

Unlike the NYSE which has a physical location in New York where all trades take place, the NASDAQ has no physical location. In addition to this major difference, the other primary difference between the NYSE and the NASDAQ is the way the market is quoted. The NYSE is an auction market, where buyers and sellers trade directly with one another, and a specialist facilitates that process. The NASDAQ on the other hand is a dealer market, where buyers and sellers trade with someone known as a market maker.

A market maker is someone who works at a registered broker dealer, and tries to attract trades by posting a price where they are willing to buy the stock that they are making a market in (referred to as the bid) and the price where they are willing to sell it (referred to as an offer). The primary difference between a specialist on the NYSE and a market maker on the NASDAQ, is that the specialist's job is to match existing buy and sell orders in an orderly manner, where a market maker's job is to "create a market" by posting their own buy and sell orders. The goal of the market maker is to earn "the spread" or the difference between the rate where they will sell a stock to the public vs. where they will buy a stock from the public.

There are multiple market makers in each NASDAQ stock, with an average of 14 competing against one another to provide the best pricing which will attract the most customer orders. It is this element of competition that drives transaction costs down and helps the NASDAQ with its goal of creating the most efficient marketplace for traders.

That's our lesson for today, in our next lesson we will look at a relatively new method of trading which many traders are now using to by pass the exchanges through something which is known as an ECN so I hope to see you in that lesson.

As always if there are any questions or comments please leave them in the comments section below, and good luck with your trading!

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My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Unregistered

Thanks David for putting such great educational topics together......If you have not entertained some input from your readers already (I'll be surprised if you haven't), then please consider doing some training on:

1. Disciplined Investing and Trading (Stocks)
2. Money Management Criteria for many situations (Stocks and Options)
3. Before and After Hour Trading Rules (Do's and Don'ts)
4. ETF Trading with Technicals
5. Creation of a Trading Systerm
6. Perfection of a Trading System to achieve 60:40 Profitable-Losing Trades or Better
7. Etc

Thanks much......My 2nd posting on InformedTrades!

Kenny Patel

jhayworth

+1 to the 3rd Suggestion in the list (if the readers get a vote )

- Why do exchanges allow after hours trading?

- Who gets to trade during those time frames?

- Why is it considered so dangerous to hold your money overnight (Swing Trading) vs. Closing your position before the end of the day (Day Trading)?

David Waring

Hi Kenny,

Glad to hear from you and thank you for the recommendations I am always interested to hear what people want to learn about so I can tailor my courses accordingly.

I have some lessons on some of the things that you have mentioned below which I have included links to and the rest I will put in the lesson Q.

For more information on these topics check out modules 5, 6, and 7 of our basics of trading course:

InformedTrades: Free Stocks, Forex, Gold Trading Learning & Education - Basics of Trading Course

Below are a few videos on this which were put together by System Programmer Shaun Overton.

Lesson of the Day: How to Develop a Trading System Part 1 - The Inspiration Moment

Lesson of the Day: How to Develop a Trading System Part 2 - Creating Entry/Exit Rules

Lesson of the Day: How to Develop a Trading System Part III, Backtesting

Hope that helps. If there are any other questions or comments on this one please feel free to post as always.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

David Waring

Hi jhayworth,

Glad to hear from you. You are in luck as my next video is actually on ECN's which will answer the first two questions above so I will post that here as soon as it is finished.

It is considered more risky by some to hold positions overnight because there is no way of knowing what is going to happen from a news standpoint overnight when the markets are closed. This puts traders in a position where they cannot define their risk with 100% certainty, because the price at which the market opens the next day may be significantly different from where it closed.

Hope that helps. If there are any other questions or comments on this one please feel free to post as always.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.