In the rapidly evolving world of stock exchanges, NASDAQ stands out with its unique structure and operational dynamics. Daily, stocks find their way onto the NASDAQ list, influenced by prevailing market conditions. With over 500 firms acting as NASDAQ Market Makers, this exchange differentiates itself from other major markets in the United States through its competitive Market Maker framework. Market Makers, who are NASD member firms, play a pivotal role in buying and selling NASDAQ securities at self-determined prices for their own accounts. This competition for customer order flow involves displaying buy and sell quotations for a guaranteed number of shares.
In the fast-paced environment of a fast market, real-time quotes may not accurately reflect the market's status when an order reaches a Market Maker or specialist. This is a critical point for investors to consider, especially when executing orders that are handled on a first-come, first-serve basis in a market order. Market Makers are tasked with either purchasing from or selling to their own inventory or seeking the opposite side of the trade until execution is complete. Orders may even be executed in two blocks, such as 5,000 shares each, to accommodate high-volume trading.
A key distinction in order types is between stop orders and stop limits. A stop limit differs significantly, as it transforms into a limit order when the stock price attains the stop price. Importantly, it will only execute at the stop price or better, providing an added layer of control for investors. Meanwhile, the Federal Reserve Board's Regulation T mandates a minimum deposit of $2,000 or 50% of the purchase price of eligible securities bought on margin, or 50% of short sale proceeds. This Margin Requirement ensures that clients maintain sufficient funds in their margin accounts.
The prohibition of freeriding adds another layer of complexity to trading on NASDAQ. Freeriding refers to the practice of buying a security at a low price and selling it high within the same trading day while using sale proceeds to fund the original purchase. This practice is strictly forbidden to maintain market integrity.
The role of specialists further underscores NASDAQ's distinctiveness. These are securities firms with seats on national securities exchanges, charged with maintaining orderly markets for the securities in which they hold exclusive franchises. The interplay between Market Makers and specialists ensures that NASDAQ remains a dynamic and efficient marketplace.