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.
For example, says Leonard Hefter, senior vice president in charge of Nasdaq trading for Los Angeles-based Jefferies & Company, "Nasdaq is now trying to upgrade its system to handle increased volumes, provide faster updates, and report trades more quickly. But I think a lot more has to be done in that area, especially during high volume times of the day."
For instance, Hefter added, at the opening, "we see lots of delays in Nasdaq time and sales, which is unfortunate. The new PCs are fine in terms of features and functions. The only thing Nasdaq has to do now is provide more speed and fewer delays." To that end, Nasdaq is currently working on a five-year, $600 million upgrade of its wide-area network.
As for Nasdaq's pledge to become the fairest securities market, a combination of federal regulatory and technological enhancements, such as new trade-monitoring tools, have helped move the exchange closer to the goal.
For example, Macklin says, 1982 federal regulations that made timely trade reporting mandatory have helped place tighter control on the burgeoning market. "When we put the burden on the market makers to report trades," Macklin said "there was great resistance because the new obligation to report within 90 seconds took a lot more staff and added to their costs. Plus, to some extent, they disclosed what they were trying to do."
On the other hand, he added, when that data started coming out, it made Nasdaq stocks even more popular and the exchange more prominent. "Now when you look at any major television program about the markets," Macklin said, "you see the Dow Jones [Industrial Average] and the Nasdaq [Composite Index] side by side. To get from where we were, as basically an electronic bulletin board to the system as it exists today, with all of its wonderful enhancements, took a lot of policy changes. And interestingly, we found that the more price information we offered, the faster our volume grew."
Like the age-old quandary Which came first, the chicken or the egg? it's hard to say which has led to which: Nasdaq's technological developments or changing regulatory requirements. In fact, the two have evolved in tandem over the years. For instance, the SOES system, introduced in 1984, has frequently been the subject of regulatory scrutiny. Said Macklin: "We thought [SOES] would enable our dealers to get small orders sent automatically, thereby reducing their handling costs. But many dealers felt that if you left their markets vulnerable to everyone in Nasdaq, they'd get lots of abuse. And they did."
As markets became more volatile and hotter stocks became the stocks du jour, that put the dealers at even greater risk. "Apparently neither the Securities and Exchange Commission nor the NASD were able to restrict that system to its original purpose and consequently, SOES became a sort of day-trading vehicle. I think it was a wonderful idea that went astray," Macklin said.
However, since those early days, Macklin says technological and regulatory developments have helped bridge the credibility gap in Nasdaq's systems and practices.
As for the future, Nasdaq mavens like Hefter and Macklin predict that a confluence of regulatory and systems developments are likely to continue. These developments include the recent integration of Nasdaq and the American Stock Exchange, and a gradual shift towards utilizing the Internet, particularly for market data and perhaps even for full-fledged market making.
These and more will redefine Nasdaq trading terminals in the years ahead.
"As long as [Nasdaq's] systems are functional and there are no delays, they're fine," Hefter said. But he thinks Nasdaq must improve the ability of its systems to accept and send orders. Nasdaq must also take a definitive step to make SOES and SelectNet either separate or integrated systems. "At some point, the Internet will play a [larger] part," he added. (Nasdaq's so-called agency-quote proposal aims to integrate SOES and SelectNet into one system, while Nasdaq is using the web for publishing price quotes on a 15-minute delayed basis.)
