What does NASDAQ stand for?

If you run through different sources on the Web that offer the definition of ‘NASDAQ’ term you will likely encounter such explanation as “National Association of Securities Dealers Automated Quotations”. Yet the official site of NASDAQ itself objects this definition as a term to be relevant only as of 1971. They say: “But this automated quotation system quickly matured far beyond its original quote-service roots, evolving into what it is today—a major world stock market.” So, what do we know about the roots of this stock market? What are the requirements for those companies who wish to be listed with NASDAQ? And what is NASDAQ Composite?

‘For the next hundred years’

The stock exchange founded by the National Association of Securities Dealers (NASD) began trading on February 5, 1971. It became the first electronic stock market in the world. Initially NASDAQ was just a computer bulletin board system and did not actually connect buyers and sellers. The system was used to lower the spread which is the difference between the bid price and the ask price of the stock. Brokers however were not very happy with it as they capitalized on the spread.

Though NASDAQ was the successor of the over-the-counter (OTC) and the "Curb Exchange" systems of trading actually it is not the OTC as such. It somewhat differs from OTC inasmuch as over-the-counter refers to markets other than the organized exchanges and as it was already mentioned in our article dedicated to the NYSE OTC markets generally list small companies, and often (but not always) these companies have "fallen off" to the OTC market because they were de-listed from NASDAQ. Yet as late as 1987, the NASDAQ exchange was still commonly referred to as the OTC in media and also in the monthly Stock Guides issued by Standard & Poor's Corporation.

In the course of its development NASDAQ evolved more and more looking like a stock market. It added trade and volume reporting along with automated trading systems. NASDAQ was really innovative stock market in the history of the US. Being the first electronic it also became the first to advertise to the general public, highlighting NASDAQ-traded companies (usually in technology) and closing with the declaration that NASDAQ is "the stock market for the next hundred years."

Most trading on the stock markets occurred via the telephone up to 1987. When stock market crashed during October 1987 market makers often didn’t answer their phones. As a counteractive action the Small Order Execution System (SOES) was established, which provides an electronic method for dealers to enter their trades. Now NASDAQ requires market makers to honor trades over SOES.

Having established a relationship with the London Stock Exchange in 1992 NASDAQ formed the first intercontinental linkage of securities markets. In 1998 NASDAQ merged with the American Stock Exchange and formed the NASDAQ-Amex Market Group. Thus by the beginning of the 21st century it had become the largest electronic stock market (in terms of both dollar value and share volume) in the United States.

In December 2005 Macquarie Bank offered a takeover of the London Stock Exchange for £1.6 billion. The offer was accepted by the LSE as “derisory”. In March 2006 NASDAQ offered to the LSE a bid of £2.4 billion but the offer was also rejected. Then NASDAQ pulled its bid and on April 11, 2006 closed a deal with LSE's largest shareholder, Ameriprise Financial's Threadneedle Asset Management unit, to acquire all of that firm's stake, consisting of 35.4 million shares, at £11.75 per share. In addition, NASDAQ purchased 2.69 million additional shares, resulting in a total stake of 15%. The seller of those shares was undisclosed but interestingly it took place simultaneously with a sale of 2.69 million shares by Scottish Widows. This move was regarded as an effort to force LSE to negotiate either a partnership or eventual merger, as well as to block other suitors such as NYSE Group. Subsequent purchases increased NASDAQ's stake to 29%, holding off competing bids for several months. Still, the LSE formed no merger with NASDAQ.

On November 8, 2007, NASDAQ bought the Philadelphia Stock Exchange (PHLX) for US$652 million. PHLX is the oldest stock exchange in America, having been in operation since 1790.

On May 25, 2007 NASDAQ agreed to buy the Swedish-Finnish financial company that controls 7 Nordic and Baltic stock exchanges OMX for USD 3.7 billion to form NASDAQ OMX Group. On February 27, 2008, the deal was completed.
 
Today the NASDAQ OMX Group, Inc. is the world’s largest exchange company delivering trading, exchange technology and public company services across six continents. It is the premier choice for over 3,900 industry-leading companies from 39 countries representing $5.5 trillion in total market value. NASDAQ OMX offers multiple capital raising solutions to companies around the globe, including its U.S. listings market, NASDAQ OMX Nordic, NASDAQ OMX Baltic and U.S. 144A.

NASDAQ OMX Group technology supports the operations of over 70 exchanges, clearing organizations and central securities depositories in more than 50 countries.

NASDAQ Corporate Governance Rule 4420

Being one of the major reputable stock exchanges and thus being an exclusive club NASDAQ builds its reputation on the companies it trade. Thereby it is obvious that any company won’t be admitted to the NASDAQ exchanges. It only wants the blue-chip companies with a solid history and top-notch management behind them.

There are three basic requirements NASDAQ imposes on the companies to be listed on the exchange. A company applying for the participation with the NASDAQ should meet at least one of these three requirement sets along with the main rules for all companies.

Listing Requirements for All Companies Rule 4420
Each company must have a minimum of 1.1 million publicly-traded shares upon listing, excluding those held by officers, directors or any beneficial owners of more then 10% of the company. The minimum bid price of the stock upon listing must be at least $5. Each listing firm is also required to follow NASDAQ Corporate Governance rules 4350, 4351 and 4360. Companies must also have at least 400 shareholders. A shareholder is defined by NASDAQ as a holder of over 100 shares.

• Requirement Rule 4420 (a)
The company must have a minimum shareholder equity of $15 million. The operating income from either the last fiscal year, or two of the last three years, must total a minimum of $1 million. The company must have a minimum of three market makers that will provide liquidity to the trading of their stock. The market value of the publicly-held shares upon trading must be worth at least $8 million.

• Requirement Rule 4420 (b)
The company must have a minimum shareholder equity of $30 million. The market value of the shares traded must be at least $18 million upon listing. The company also has to have a minimum operating history of two years. It is also required to have three market makers. What can be seen here is that if a company did not earn enough to meet the operating income minimum, they need to have greater shareholder equity and a larger market value. 

• Requirement Rule 4420 (c)
Under this requirement companies must have at least $75 million in total assets, total revenue, or listed securities. Listed securities as defined by the NASDAQ are securities listed on either a NASDAQ or another national exchange. The market value of the shares upon listing must be worth at least $20 million. They are also required to add an additional market maker for a total of four market makers.

Still, this is not all. If the company chanced to get listed on the market it is required to maintain certain standards to continue trading. In case the company fails to meet the specifications set out by the stock exchange it will be delisted as a result. Falling below the minimum required share price, or market capitalization, is one of the major factors triggering a delisting. Again, the exact details of delisting depend on the exchange.

The maximum listing fee you can pay on the NASDAQ is $150,000 which much less than you would pay with the NYSE. To be listed with the New York Stock Exchange a company should pay $250,000. The maximum continual yearly listing fee with NASDAQ is $60,000 while the NYSE charges $500,000. On the other hand, the companies on NYSE are perceived to be more well established. Its listings includes many of the blue chip firms and industrials that were around before our parents, and its stocks are considered to be more stable and established.

NASDAQ Composite and others

The NASDAQ Composite is a stock market index of all of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock market. It is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. Since both U.S. and non-U.S. companies are listed on the NASDAQ stock market, the index is not an exclusively U.S. index.

Launched in 1971 with a base value of 100 points, the NASDAQ composite Index is a broad based index which is calculated under a market capitalization weighted methodology. To be eligible for inclusion in the Composite, a security's U.S. listing must be exclusively on the NASDAQ Stock Market (unless the security was dually listed on another U.S. market prior to 2004 and has continuously maintained such listing), and have a security type of either:
• American Depositary Receipts (ADRs)
• Common Stock
• Limited Partnership Interests
• Ordinary Shares
• Real Estate investment Trusts (REITs)
• Shares of Beneficial Interest (SBIs)
• Tracking Stocks

Closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities are not included. If at any time a component security no longer meets the above criteria, the security becomes ineligible for inclusion in the Composite Index and is removed.

What is the difference between NASDAQ Composite and DJIA? While the DJIA tracks the performance of 30 different companies that are considered major players in their industries the NASDAQ Composite, on the other hand, tracks approximately 4,000 stocks, all of which are traded on the NASDAQ exchange. The DJIA is composed mainly of companies found on the NYSE, with only a couple of NASDAQ-listed stocks.

On July 17, 1995, the index closed above the 1,000 mark for the first time. The all-time low for the index had been reached in October 1974 around 54 points, representing a market drop of more than 45% from the time of its introduction. On March 10, 2000, the index peaked at an intra-day high of 5,132.52, and closed at an all-time high of 5,048.62; the decline from this peak signaled the beginning of the end of the dot-com stock market bubble.

The index declined to half its value within a year, and finally found a bear market bottom on October 10, 2002 with an intra-day low of 1,108.49 after a close of 1,114 the previous day. While the index gradually recovered since then, it did not trade for more than half of its peak value until May 2007. The index opened the fourth quarter of 2007 with new 80-month highs, closing above the 2,800 point mark on October 9, 2007. The intraday level of 2,861.51 on October 31, 2007 was the highest point reached on the index since January 24, 2001.

On September 29, 2008, the NASDAQ dropped nearly 200 points, the most since the tech bubble burst, losing 9.14% (third largest in history) to fall beneath the 2,000 level. On October 13, the NASDAQ recorded a gain of nearly 200 points (more than 11%), continuing record levels of market volatility. Extending a two-month slide, the index recorded fresh 5 1/2-year lows on November 20, 2008, closing at 1,316.12 near its intraday low, almost 55% below its cyclical bull market peak.

Other NASDAQ indices include NASDAQ-100 and NASDAQ Biotechnology Index 6:00-9:45.

The NASDAQ-100 is a stock market index of 100 of the largest domestic and international non-financial companies listed on the NASDAQ stock exchange, it is a modified market value-weighted index; the companies weight in the index are based on their market capitalization, with certain rules capping the influence of the largest components. It does not contain financial companies, and does not include companies incorporated outside the United States; both of these factors differentiate this index from the S&P 500 and the Dow Jones Industrial Average.

The NASDAQ-100 began on January 31, 1985 as a way for the Nasdaq Stock Market to support enhanced media coverage for itself. The index was introduced the same day as the NASDAQ Financial-100 Index and as a result, financial companies were, and still are, excluded from the NASDAQ-100. The base price of the index was initially set at 250, but when it closed near 800 on December 31, 1993, the base was reset at 125 the following trading day, leaving the halved NASDAQ-100 price below that of the more commonly known NASDAQ Composite.

The NASDAQ-100 is frequently confused with the Nasdaq Composite Index; the latter index (often referred to simply as "the NASDAQ") includes the stock of every company that is listed on NASDAQ (more than 3,000 all together) and is quoted more frequently than the NASDAQ-100 in popular media.