NASDAQ: Full Form, Working and Requirements

What is NASDAQ?

NASDAQ is the second largest stock exchange situated in the world based in the United States of America, and was established in the year 1971. NASDAQ Inc. has the Ownership of NASDAQ, headquartered in New York. NASDAQ holds a market capitalisation of more than $24 billion, which is higher than many nation’s economies. The full form of NASDAQ is the National Association of Securities Dealers Automated Quotations.

NASDAQ eliminated the traditional way of doing trading in person as NASDAQ was the first exchange in the world that introduced electronic trading systems. NASDAQ stock exchange is also known all around the world because of its focus on big tech firms. NASDAQ is popular among leading tech-oriented businesses, including giants like Apple, Microsoft, Cisco, Amazon, Nvidia, Tesla, Meta and Alphabet. With its electronic trading system and focus on out-of-the-box new-age technology, Nasdaq is not only home to several largest and most influential technology companies, but it also has several big giants listed in the fields of consultancy, hospitality, real estate, etc.

NASDAQ has gained importance in the global economy as they have involved the active participation of market makers, creating a transparent and efficient framework for investors, companies, and other stakeholders. The NASDAQ Composite Index represents a stock market index that includes stocks of all companies that are traded on the NASDAQ stock exchange. NASDAQ has two primary indexes NASDAQ composite and NASDAQ 100. Although the New York Stock Exchange is the biggest stock exchange in the world, the volume of trade is higher on NASDAQ.

History of NASDAQ

NASDAQ was founded in the year 1971 by the National Association of Securities Dealers (NASD), it began its first operation on 8 February 1971 and the main highlight of NASDAQ was that this was the world’s first electronic stock market. However, no online trading took place rather it was a quotation system. After a while, NASDAQ’s trading was done by over a counter system of trading and as time passed on, volume and trading increased many forth, by 1991 NASDAQ was trading approximately 46% of the total securities in the U.S. market. In the year 1996, NASDAQ launched their website for the first time.

In the year of 1998, NASDAQ was the first stock market to trade online in the United States of America. NASDAQ also saw a record market high in the rise of the dot com bubble but when the world faced dot com bubble burst, NASDAQ’s index faced a huge hit and dropped to 1,200 points from a record market high of 5,000 points. In the year 2006, NASDAQ got separated from NASD, and they resumed their business as a national securities exchange. In the year 2008, they came together with OMX to become Nasdaq OMX Group. The company also changed their name to NASDAQ Inc. in 2015. In the year 2016, Adena Friedman became the first woman CEO of NASDAQ and was also the first woman CEO to run a major exchange in the United States. As of today, NASDAQ has over 6,500 employees and NASDAQ has reported revenues of over 623 crores USD in 2022.

How does NASDAQ Work?

As NASDAQ is an electronic exchange, it doesn’t have any trade floors. The exchange itself plays the role of a dealers’ market. Rather than buying from each other, brokers buy directly from the market maker. A market maker holds specific stock and holds a certain amount of that stock in their books. When a broker wants to purchase shares, they approach the market maker for that purchase. The buyers and sellers will electronically enter the trades they require with their broker-dealers, and those trades will come into the NASDAQ system through hundreds of computers, now with the matching engine which on the NASDAQ exchange is a single and highly reliable computer will execute the trade.

NASDAQ also features a price/time priority model where the execution is fair and transparent for all market stakeholders. All displayed limit orders are treated equally and executed in the exact order in which they were actually received at the same price. Non-displayed shares are executed after the execution of all displayed shares in the order in which they were received at that exact same price. NASDAQ offers popular orders and functionality to market participants such as Minimum Quantity, Mid-Point Peg and Post Only orders, Self Match Prevention and Order Modify functionality, which is a robust suite of innovative routing strategies and framework. NASDAQ’s equity order types are designed to help market participants comply with regulations and execute a range of trading strategies.

How to Get Listed on NASDAQ?

NASDAQ is an elite club for corporates, several corporates try to enter this club as it is a matter of great reputation to get listed on NASDAQ, but the eligibility criteria for NASDAQ is not that straightforward. NASDAQ has strict listing guidelines which every corporate is required to follow, the brand image of NASDAQ depends upon the companies which are traded on their platform. Companies which have proven a track record of performance and follow applicable regulatory and statutory requirements are allowed to get listed on NASDAQ. Corporates are required to follow certain financial, liquidity and corporate governance requirements to be approved for listing on any of these market tiers (Global market, Capital Market and global select market).

Listing requirements which are similar for all companies:

• All the companies which desire to get listed on NASDAQ must follow the guidelines as prescribed by the U.S. Securities and Exchange Commission also called SEC. Along with these corporates must also adhere to NASDAQ initial listing requirements as prescribed.

• Companies are required to have a number of minimum 12,50,000 publicly traded shares outstanding upon listing.

• Companies must also have a minimum of 450 round lot (100 shares or more) shareholders along with 2,200 total shareholders, or 550 total shareholders who should have a 1.1 million average trading volume over the past 12 months.

• A minimum regular bid price of $4.00 is required to be maintained at the time of listing.

NASDAQ’s Financial Requirements:

• Standard 1 – Earnings: Listing rule 5315(e) and 5315(f)(3)(A) is required to follow. The company should have an aggregate pre-tax earning in the prior three years of at least $11 million, in the previous two years a minimum of $2.2 million, and in the prior three years company should not have reported a net loss.

• Standard 2 – Capitalisation with Cash Flow: Listing rule 5315(e) and 5315(f)(3)(B) is required to be followed. The company must have at least $27.5 million of aggregate cash flow for the past three fiscal years, and no negative cash flows should have been reported in any of those three years. Another requirement to be followed is in regards to market capitalisation, the company should have at least $550 million average market capitalisation over the last 12 months, and revenues reported in the previous fiscal year must be at least $110 million.

• Standard 3 – Capitalisation with Revenue: Listing rule 5315(e) and 5315(f)(3)(C) is required to be followed. In case the company is not able to comply with the requirements of cash flows as mentioned in Standard 2, it should have a minimum of $850 million as average market capitalization over the last 12 months and report a minimum of $90 million in the last fiscal year.

• Standard 4 – Assets with Equity: Listing rule 5315(e) and 5315(f)(3)(D) is required to follow. In case the company is not able to comply with the requirements of cash flow as mentioned in standard 2 and the requirement of revenue as mentioned in standard 3, they will be eligible for lower criteria of market capitalisation which the company should have a minimum of $160 million of market capitalisation if the total assets have a valuation of $80 million and a minimum $55 million of shareholder’s equity is required.

Apart from the above prescribed parameters, companies are also required to pay listing application fees, and annual NASDAQ fees.

NASDAQ Trading Hours

The Normal trading hours of the NASDAQ Stock Market are 9:30 A.M. to 4 P.M. (Eastern Time Zone). Apart from normal trading hours of NASDAQ, there is a pre-market session which happens between 7:00 A.M. to 9:30 A.M. and there is a post-market trading session which happens between 4:00 P.M. to 8:00 P.M.. In a year there are nine holidays on which the NASDAQ remains closed, also there are several early closure days when regular stock market trading ends at 1 P.M. (Eastern Time Zone).

Conclusion

NASDAQ is not only a major stock market in the United States of America, but it has a global effect on the world’s economy as major tech giants are listed on NASDAQ. The exchange came into existence in 1971, and it was also the first automated exchange in the globe. NASDAQ has a total market cap of 24 billion dollars and the number of listings under NASDAQ is more than 3000. NASDAQ follows strict financial and regulatory requirements. NASDAQ has three major markets i.e. Global Market, Capital Market and Global Select Market. NASDAQ is one of the most important financial markets in the world. NASDAQ has a significant role in paving the global technology landscape and economic growth.