Over the years, electronics technology has revolutionized virtually every securities market, most notably The Nasdaq Stock Market Inc. Nasdaq, a trademarked name, was the world's first market to handle trading not on an exchange floor but through a computer network linking display screens. But since its advent in 1971, changes in telecommunications and computer technologies have been ongoing, profound, and complex.
As a screen-based market, Nasdaq (which originally stood for National Association of Securities Dealers' Automated Quotations) has striven to stay on top of those developments. It is in the process of completing a US $180 million systems migration program--the largest single telecommunications and computer project undertaken by a U.S. stock market. The effort has involved replacing the entire Nasdaq system with a standards-based, client-server network, while moving from analog to digital network technology and upgrading the core systems to process 500 transactions a second--a rate that enables the market to handle at least a billion shares a day. With these systems, Nasdaq has the flexibility to constantly improve operational efficiency and regulatory oversight.
Technology breeds innovation
In light of Nasdaq's ongoing growth, that transaction capacity is critical. But in the long run, the value of technology lies not in being able to do more work more quickly, but in the opportunity to innovate. Nasdaq's history is in itself an example of how technology can drive innovation. At its most basic level, screen-based trading eliminates physical limits on who can be in the market. Investors and brokers in New York City, London, Singapore, or anywhere else can have access to the same trading information at the same time. The result is a kind of democratization of markets because no one gains an advantage by being in a certain location.
This decentralized approach makes it possible to have multiple market makers--the name for dealer firms that put their own capital behind a stock. At the traditional exchanges, where buyers and sellers meet on a trading floor, each company's stock has a single specialist making a market in that stock. On Nasdaq, however, there are virtually no limits to the number of market makers. The average Nasdaq stock has 11 market makers, and some of the largest companies' stocks--such as Microsoft or MCI--may have more than 50 vying for investors' orders.
This competing network of dealers is a central strength of a screen-based market. Open competition is the key to efficient pricing and to ensuring that investors get the best possible price and execution for their orders. In addition, academic studies have shown that Nasdaq's multiple market-maker system increases liquidity (that is, the dollar volume of trading that can occur without affecting the price of a stock). With a number of dealers committing capital to a given security--and thereby spreading any risk--the market has the capacity to absorb large increases in volume without the need for trading halts.
The open, competitive nature of Nasdaq will be enhanced by its implementation of the new order-handling rules that the U.S. Securities and Exchange Commission (SEC) has set to take effect Jan. 20. Under these rules, market makers must display investors' limit orders in their quotes when the orders are priced better than the market maker's quote. Also under the new SEC rules, market makers must display their most competitive quote publicly, not merely in a proprietary trading system. These rules make things better for investors. They give investors access to the best possible price and permit investors to have their interest in buying or selling shown to the entire world on some 300 000 Nasdaq terminals. Technology will be the key to the implementation of the new SEC rules, and Nasdaq is working with market participants to interface its systems and theirs so that this comprehensive quotation display can take place. Concurrently, Nasdaq is completing work on a proposed trading system called NAqcess that will automate the processes required by the SEC's rules.
Technology is not only an enabler of competition--it is also an effective tool for ensuring that competition remains fair. A screen-based market is really an open, electronic community. It tends to be very transparent--anyone on the network can see precisely what is taking place, as it takes place.
This transparency is enhanced by an array of computer systems that monitor the market and act as powerful complements to on-site compliance visits. For example, a system called StockWatch Automated Tracking (SWAT) uses sophisticated statistical models to continuously compare real-time market activity with historical trading patterns. If the SWAT system spots any discrepancies in prices or volumes, it flags that information for market surveillance analysts. At the same time, the system pulls up relevant stories from the Associated Press and Reuters newswires to help analysts determine if the cause is something in the news.
A new generation of technology is also at work in the market regulation performed by Nasdaq's sister subsidiary, NASD Regulation. Now in operation, for instance, is a recently completed system called Research and Data Analysis Repository (Radar). When the SWAT system detects an unusual movement in a stock, Radar rapidly pinpoints which securities firms are responsible for that trading, the precise time of each trade, how much was bought or sold, and the account involved.
Nasdaq has taken advantage of the Web technology to launch an Internet site that offers an array of current market data and index tracking (www.nasdaq.com) to investors worldwide. Quotations for all Nasdaq stocks are offered on a 15-minute delay and a glossary of financial information explains market terminology and concepts. There are also hot links to the World Wide Web sites of some 2200 Nasdaq companies.
With its new technology, Nasdaq is in a position to develop new information-based products and services. The data routinely generated by trading activity can be analyzed to yield information targeted to the market's customers. For instance, Nasdaq can give companies on-line reports that compare their stocks with others like them, or that track who is most active in their securities.
A key element of this new technology is Nasdaq Workstation II. Through it, brokerage firms may access Nasdaq quote and execution services, may merge Nasdaq data with feeds from in-house systems and outside vendors, or may rework that data with in-house software tools.