"Our strategic goal was to build Nasdaq as a viable, competitive alternative to the New York Stock Exchange...We wanted to keep the Microsofts, we wanted to keep the Intels, we wanted to keep those sorts of companies which were driving America's growth."
Nasdaq drew the previously staid association of OTC broker-dealers into a world of relentless innovation and continual tinkering with the mechanics of the market. From the start, Nasdaq provided three levels of service to different types of customers. Level I provided representative bids much like newspaper listings. Level II approximated the pink sheets, providing actual wholesale quotes. Level III offered a level of sophistication previously provided only by a broker. Users could place "limit orders," entering and retracting bids to be exercised at a particular price.
Although execution of orders was still done by telephone, Nasdaq revitalized the OTC market. Spreads, the difference between bid and ask prices, began narrowing immediately. By 1980, when inside quotations—the highest bids and lowest offers—replaced representative bids on Level I, Nasdaq claimed to be doing 63 percent of the volume of the New York Stock Exchange.61
The 1970s, with oil shocks and stagflation, was a troubled decade for American business. But the "Nasdaq National Market System," implemented in 1982, threw Nasdaq into high gear just in time for the business expansion of the 1980s. On a select list of forty heavily-traded stocks from companies that observed high reporting standards, Nasdaq offered price and volume information 90 seconds after execution. By 1990, the renamed "Nasdaq National Market" consisted of more than 2,500 high quality stocks, many of them from the burgeoning tech sector.62
By then, computerization had penetrated every corner of the securities industry, and equities trading had become closely linked with derivatives trading. In the fall of 1987, when this fast-moving and complex market crashed, the low tech link in Nasdaq's high tech system broke when overwhelmed market makers stopped answering telephones. Although Nasdaq already allowed small transactions to be executed by computer, it had been optional. In 1988, therefore, Nasdaq expanded its small order execution system (SOES) and made its use mandatory.63
(61.) 1980 NASD Annual Report; Ingebretsen, NASDAQ, 78. Volume comparisons between Nasdaq and the NYSE can be problematic since Nasdaq market makers are on both sides of every transaction, while NYSE specialists take only one side.
(62.) Ingebretsen, NASDAQ, 89.
(63.) February 1988 The October 1987 Market Break: Report by SEC Division of Market Regulation, 9.1-9.32.
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