NASDAQ – Definition

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National Association of Securities Dealers Automated Quotations (NASDAQ) Definition

NASDAQ is an electronic securities marketplace which is the second largest stock exchange in the world in terms of market capitalization, right behind the New York Stock Exchange.

The acronym NASDAQ originally stood for the National Association of Securities Dealers Automated Quotations, a platform created by the National Association of Securities Dealers (NASD) on February 8, 1971. The NASD established NASDAQ as an alternative to the traditional in-person stock transaction system to enable the investors to trade securities on a computerized transparent system.

A Little More on What is the NASDAQ

NASDAQ began to operate as an independent national securities exchange in 2006, separating itself from the NASD. In the following year, it was merged with the Scandinavian exchange group OMX to form the Nasdaq OMX group. It is the largest exchange company in the world powering 1 to 10 of the world’s securities transaction.

Nasdaq OMX operates 26 markets, three cleaning houses and five central securities depositories in the United States and Europe. 70 exchanges located across 50 countries use the technology of NASDAQ OMX. It is listed on NASDAQ under the symbol NDAQ.
NASDAQ has its headquarter in New York and it doesn’t have a physical trading floor. The trading on this exchange is done over a network or computers and telephones. It trades the shares of various types of companies including consumer durables and non-durables, energy, finance, capital good, public utilities, transportation, and technology.

The companies need to meet certain financial criteria in order to list themselves on the NASDAQ national market. The companies have to maintain a stock price of at least $1 and the value of its outstanding stocks must be at least $1.1 million. The smaller companies can be listed on the NASDAQ small caps market.

In its early days, only the technology giants chose to list themselves on NASDAQ. It lists the shares of the best- known technology and biotech giants including Google, Microsoft, Apple, Amazon, and Oracle. NASDAQ is also referred to as the benchmark index for U.S. technology stocks.

In 2001, NASDAQ purchased the European Association of Securities Dealers Automatic Quotation System (EASDAQ) and formed NASDAQ Europe. The operation of the NASDAQ Europe was shut down as a result of the dot-com bubble burst. It was revived in 2007 as Equiduct and is now being operated under Börse Berlin.
NASDAQ OMX is a founding member of the United Nations Sustainable Stock Exchanges initiative adopted in 2012. Adena Friedman, the CEO of NASDAQ is the first woman to run a major exchange in the United States. She became the Chief Executive Officer of NASDAQ in November 2016.

References for NASDAQ

Academic Research on NASDAQ

Why do Nasdaq market makers avoid odd‐eighth quotes?, Christie, W. G., & Schultz, P. H. (1994). The Journal of Finance49(5), 1813-1840. The multiple dealer markets of NASDAQ is designed to create arrow bid-ask spreads through the competition for the flow of order among dealers. Although, odd-eighth quotes are not available for 70 of 100 actively traded NASDAQ securities which includes Lotus development and Apple computers. The lack of these quotes is unexplainable by negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. The result shows that a lot of NASDAQ spread stock is at a minimum of $0.25 and brings the question of if NASDAQ dealers collude to maintain wide spreads.

Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE, Huang, R. D., & Stoll, H. R. (1996). Journal of Financial economics41(3), 313-357. As measured by the quoted spread, execution cost, the effective spread – which account for inside the quote trade, the spread realized- which measure supplier income of immediacy, the Roll (1984), implied spread and the variability of the post-trade are twice as large to be used as a sample for NASDAQ stock as they apply for matched sample of NYSE stocks. Differences are not based on adverse information difference, in the frequency of even-eighth quotes or market depth. The conclusion is that essential explanation are the preferencing and internalization of order flow and alternative interdealer trading system’s presence.

The pricing of security dealer services: An empirical study of NASDAQ stocks, Stoll, H. R. (1978). The journal of finance33(4), 1153-1172. A very important element in virtually all financial market is the dealer that is ready to trade for his account and also make provisions for the public. This involves the comfort of wanting to trade immediately. Cost is incurred of holding inventory security by the dealer and also the different cost of handling each other and cost incurred because of adverse information by those trading with him. This paper further examines two areas of the behavior of dealers which can affect appropriate structure of market securities.

The accuracy of trade classification rules: Evidence from Nasdaq, Ellis, K., Michaely, R., & O’Hara, M. (2000). Journal of Financial and Quantitative Analysis35(4), 529-551. The use of data keeps increasing by researchers from the Nasdaq market. These researches are used to examine market design, price behavior, and other microstructure phenomena. The validity of the classification of trade as buy or sell relies on the accuracy of the classification method. The usage of Nasdaq proprietary data set identifies the direction of trade and examines the validity of different trade classifications. It is discovered that the tick rule, quote rule, and the Lee and Ready (1991) rule classifies correctly 76.4%, 77.66%, and 81.05% of the trades, respectively.

Was there a Nasdaq bubble in the late 1990s?, Pástor, Ľ., & Veronesi, P. (2006). Journal of Financial Economics81(1), 61-100. Not importantly: the fundamental value of a firm increases with unrealistic future profitability and this uncertainty was high in the late 1990s. The calibration of a stock valuation model is needed to match the observed Nasdaq valuations at its peak. The uncertainty was plausible because it matched the high volatility and also the high level of stock prices. Generally, it is argued that both the level and stock volatility are linked positively through firm-specific uncertainty about average profitability.

Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values?, Phillips, P. C., Wu, Y., & Yu, J. (2011). International economic review52(1), 201-226. As suggested, to use a recursive test to provide a mechanism for testing explosive characteristic, a sampling of date and the origination and collapse of economic exuberance and also provide valid confidence intervals for explosive rates of growth. The method entails the use if the recursive implementation of a right side unit root test and sup test. In practical applications, they are both easy to use and some recent limit theory for mildly explosive processes. Nasdaq stock price index is an empirical application in the 1990s and it gives confirmation of date stamps of the origin of financial exuberance and explosiveness.

Voluntary formation of corporate audit committees among NASDAQ firms, Pincus, K., Rusbarsky, M., & Wong, J. (1989). Journal of accounting and public policy8(4), 239-265. A major recommendation of the National Commission on Fraudulent Financial Reporting (NCFFR) stated that all public firms be expected by Securities and Exchange Commission rules to establish audit committees which will exclusively compose of independent directors. In this study, the reason some companies voluntarily establish audit committees and also why others decide not to do so is investigated. There are six factors that can be linked the formation of voluntary audit committee: (1) reduced percentage and ownership by managers of the firm’s stock; (2) increased leverage; (3) bigger size of firm; (4) larger ration of outside directors to total directors; (5) Eight big auditors; and (6) involvement in the National Market System.

Measuring security price performance using daily NASDAQ returns, Campbell, C. J., & Wesley, C. E. (1993). Journal of Financial Economics33(1), 73-92. The performance of the alternative test is evaluated. The occurrences are in the event of studies which include NASDAQ daily security revenue. There are documentations of different levels of test statistics and misspecification in NASDAQ samples. Particularly, it is commonly discovered that the use of standard test statistics, in most settings, is misspecified. Although not persuasive misspecification is also apparent in the portfolio test, it is estimated, based on statistics, that using the time series of portfolio means abnormal returns. These samples are recommended to be used in the market model.

An investigation of the informational role of short interest in the Nasdaq market, Desai, H., Ramesh, K., Thiagarajan, S. R., & Balachandran, B. V. (2002). The Journal of Finance57(5), 2263-2287. The relationship between the degree of stock returns and short interest and in the Nasdaq market from June 1988 to December 1994 is thoroughly examined in this paper. It is discovered that fils that are heavily shorted experience great negative abnormal returns that range from −0.76 to −1.13 percent monthly after the control of the market, book-to-market, momentum factors, and size. There’s n increase in the negative return with the level of short interest, and this shows that more level of short interest is a more robust bearish signal.

Why did Nasdaq market makers stop avoiding odd‐eighth quotes?, Christie, W. G., Harris, J. H., & Schultz, P. H. (1994). The Journal of Finance49(5), 1841-1860. The various dealer markets of NASDAQ is designed to create arrow bid-ask spreads through the competition for the flow of order among dealers. Although, odd-eighth quotes are not available for 70 of 100 actively traded NASDAQ securities which includes Lotus development and Apple computers. The lack of these quotes is unexplainable by negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. The result shows that a lot of NASDAQ spread stock is at a minimum of $0.25 and brings the question of if NASDAQ dealers collude to maintain wide spreads.

The quality of ECN and Nasdaq market maker quotes, Huang, R. D. (2002). The Journal of Finance57(3), 1285-1319. The quality of quotes that electronic communication networks (ECNs) submit and traditional market makers to the Nasdaq quote montage is compared in this paper. An analysis is also done of the most active Nasdaq stocks, and this reflects that ECNs both post quotes rapidly and also are more often at the inside and only post informative quotes, in comparison to market makers. The suggestion from the evidence stated that the proliferation of other venues for trading like the ECNs should, rather than fragment markets, promote quote quality.

The delisting bias in CRSP’s Nasdaq data and its implications for the size effect, Shumway, T., & Warther, V. A. (1999). The Journal of Finance54(6), 2361-2379. The biasedness in CRSP’s Nasdaq data because of missing returns for delisted stocks is investigated. It is discovered that returns that are missing are both large and negative on average and also, that experience of delisted stock is a substantial decrease in liquidity. Further estimates stated that instead of using a return, corrected, of -55 percent for performance-related that are missing, delisting returns should correct the bias. Previous studies are visited which discovered an effect of size among the Nasdaq stocks. Correcting the delisting bias led to no evidence of size effect on Nasdaq.

The really long‐run performance of initial public offerings: The pre‐Nasdaq evidence, Gompers, P. A., & Lerner, J. (2003). The Journal of Finance58(4), 1355-1392. It has been debated by a financial economist that the performance of IPOs that uses data after the Nasdaq formation needs to be reviewed. This paper enlightens on this debate by going through a large, out of sample duty: the performance of five years after the listing of 3,661 U.S. IPOs from 1935 to 1972. Some underperformance is displayed by the sample when there’s a realization of abnormal returns. Further use of the calendar-time analysis explains that for the whole period, IPOs return as much as the market. CAPM intercepts and Fama-French regressions not so different from zero, and this suggests no abnormal performance.

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