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February 1, 1999

The History: How Nasdaq Was Born

By Monica Simms

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  • The History: How Nasdaq Was Born

In its first humble year of operation in 1971, the Nasdaq Stock Market was broadcast to some 500 market makers across the country, trading nearly two billion shares in about 2,500 securities. The index average at the close of 1971 was just over 100. Nasdaq desktop devices were cathode-ray terminals that provided quotes, market-maker identification numbers, or IDs, and the names of stocks. But little else.

Gordon Macklin, who was president of the National Association of Securities Dealers from 1970 to 1987, recalls those early devices.

"It was an absolute miracle to be able to push a button and pull up on the screen everyone from all over the country, and all of their current bids and offers," he said.

"It was state of the art, at the time," Macklin added, "just a huge leap forward. Coming from over the counter to over the computer, even in its most primitive stages, was a thrilling lifetime experience." The OTC market he referred to was, of course, the market for stocks listed on pink sheets and traded manually.

Macklin recalls the shortcomings as well as the benefits.

"The system was programmed so that instead of publishing the absolute best bid and the absolute lowest offering price, it published what was known as the representative bid along with the representative markup," he explained.

"That obviously left room for dealers to make profits on their retail sales of these securities," he added. "Nonetheless, we weren't unhappy with the system because it was so vastly superior to anything the market had ever seen before."

Rivalry

The world's first screen-based exchange has since grown to rival in terms of average daily trading volume the floor-based New York Stock Exchange. Nasdaq is arguably the most liquid electronic trading environment in the world.

Nasdaq broadcasts to nearly half-a-million international brokers and dealers trading more than 5,100 stocks, with a 1998 total volume of more than 200 billion shares, and a press-time closing index value of 2408.17

Today's proprietary Nasdaq network features Unisys 4800 mainframes, which provide stock quotes; Tandem Himalaya K20,000 processors for running Nasdaq's Small Order Execution System (SOES) and SelectNet trading systems; and desktop Pentium II PCs with Windows 95 and Microsoft NT operating systems. Nasdaq's network backbone features a quarter-of-a-million miles of leased lines provided by MCI Worldcom. The network's main computer hub is in Trumbull, Conn. Backup facilities are in Rockville, Md.

According to a Nasdaq mission statement, the exchange's goal is "to facilitate capital formation in the public and private sector by developing, operating and regulating the most liquid, efficient and fair securities market for the ultimate benefit and protection of the investor."

Few would argue the question of its liquidity. But in terms of efficiency, some say work done to enhance Nasdaq's core information-technology infrastructure has been slow in coming, particularly for an entity that is so reliant on its technology infrastructure.