Source: International Federation of Stock Exchanges.

currently trading on Nasdaq are Microsoft, Intel, Apple Computer, and Sun Microsystems. Total trading volume in over-the-counter stocks on the computerized Nasdaq system has increased rapidly, rising from about 50 million shares per day in 1984 to 1.8 billion shares per day in 2000. Share volume on Nasdaq actually surpasses that on the NYSE. Table 3.3 shows the trading activity in securities listed on the national exchanges in 2000.

Other new sources of competition to the NYSE have come from abroad. For example, the London Stock Exchange is preferred by some traders because it offers greater anonymity. In addition, new restrictions introduced by the NYSE to limit price volatility in the wake of the market crash of 1987 are viewed by some traders as another reason to trade abroad. These so-called circuit breakers are discussed below.

The Over-the-Counter Market

Roughly 35,000 issues are traded on the over-the-counter (OTC) market, which allows any security to be traded there, but the OTC market is not a formal exchange. There are no membership requirements for trading or listing requirements for securities (although there are requirements to be listed on Nasdaq, the computer-linked network for trading securities of larger OTC firms). Thousands of brokers register with the SEC as dealers in OTC securities. Security dealers quote prices at which they are willing to buy or sell securities. A broker then executes a trade by contacting the dealer listing an attractive quote.

Before 1971, all OTC quotations of stock were recorded manually and published daily. The so-called pink sheets were the means by which dealers communicated their interest in trading at various prices. This was a cumbersome and inefficient technique, and published quotes were a day out of date. In 1971, the National Association of Securities Dealers Automatic Quotation System, or NASDAQ, was developed to offer via a computer-linked system immediate information on bid and ask prices for stocks offered by various dealers. The bid price is the price at which a dealer is willing to purchase a security; the ask price is the one at which the dealer will sell a security. Hence, the ask price is always higher than the bid price, and the difference, the bid-ask spread, makes up the dealer's profit. The system allows a broker who receives a buy or sell order from an investor to examine all current quotes, call the dealer with the best quote, and execute a trade. The system, now called the Nasdaq Stock Market, is divided into two sectors, the Nasdaq National Market System (comprising almost 4,000 companies), and the Nasdaq SmallCap Market (comprising over 1,000 smaller companies). The National Market System securities must meet more stringent listing requirements and trade in a more liquid market. Some of the more important initial listing requirements for each of these markets are presented in Table 3.4. For even smaller firms, Nasdaq maintains an electronic "OTC Bulletin Board," which is not part of the Nasdaq market, but is simply a means for brokers and dealers to get and post current price quotes over a computer network. Finally, the smallest stocks continue to be listed on the pink sheets distributed through the National Association of Securities Dealers.

over-the-counter (OTC) market

An informal network of brokers and dealers who negotiate sales of securities.

Nasdaq stock market

The computer-linked price quotation system for the OTC market.

bid price

The price at which a dealer is willing to purchase a security.

ask price

The price at which a dealer will sell a security.

Part ONE Elements of Investments

Part ONE Elements of Investments

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