NEW YORK — The NASDAQ Stock Market, the self-named "stock market for the next hundred years" turns 30 this week, boasting of its past success and touting its plans for the future. But the market that pioneered electronic trading is also struggling with the issues of today.
A year ago, the NASDAQ was basking in an 86 percent surge in its composite index during 1999. Now it's smarting from its worst annual performance ever in 2000, when the technology-dominated composite dropped more than 50 percent from its record close of 5,048.62 and lost some of its glamour along the way.
And while the NASDAQ was considered a technological wonder, it has fallen behind its rival, the New York Stock Exchange, in converting to decimal pricing.
The NASDAQ market feels it has much to celebrate, including plans to separate from its parent, the National Association of Securities Dealers, the opening of NASDAQ markets in Europe and Japan and its ability to hang onto its biggest companies, including Microsoft and Intel.
But "every stock on the NYSE is trading in decimals, and we're still waiting on the NASDAQ," said Patrick Healy, a former NASDAQ official who now owns Issuer Network, a Chevy Chase, Md., business that advises companies on market issues like exchange trading. "They market themselves as the technology market, but it looks like the New York Stock Exchange has the better technology."
NASDAQ officials say the criticism isn't warranted and that their market — which has more stocks and smaller companies — can't be compared with the NYSE. Instead, they point to their achievements — the way the NASDAQ has revolutionized investing and the industry.
"When you think of all those (companies) that changed our lives in the last 25 years, you will find most of those companies are on the NASDAQ," said Hardwick "Wick" Simmons, who on Feb. 1 became NASDAQ's new CEO.
The NASDAQ has come a long way, Simmons said, since its Feb. 8, 1971, start as a "junk pile" for thinly traded, highly volatile stocks previously listed on the over-the-counter market.
Outside observers agree that since its founding as an electronic, dealer-run market specializing in smaller, younger company stocks, NASDAQ has grown from a distant No. 2 to a worthy competitor to the NYSE.
Last year, its average daily trading volume of 1.7 billion shares surpassed the NYSE. It should be noted, however, that because of the NASDAQ's dealer structure, it counts trades twice — once when stocks are sold and again when they are purchased.
The number of companies traded on the NASDAQ — short for National Association of Securities Dealers Automated Quotation System — has doubled since 1971 to about 5,000, higher than the 3,500 stocks traded on the NYSE.
The NASDAQ composite also has enjoyed huge growth as the world's dependence on computers, cell phones and the Internet increased. Considering that the composite started 30 years ago at 100 and took nine years to break 200, last year's close of 2,470.52, although a big disappointment to today's traders, doesn't look all that shabby.
Industry experts credit the NASDAQ for creating a trading place for newer, less capitalized companies to grow when the NYSE rejected them for being too puny. Many of those companies, including giants like Microsoft and Intel, have stayed with the NASDAQ, although the NYSE would now welcome them.
"That puts the NASDAQ on more equal footing with the New York Stock Exchange," said Charles Jones, professor of finance at Columbia University's graduate school of business.
Still, those accomplishments haven't been enough to distract NASDAQ from its shortcomings, including a new 2000 Securities and Exchange Commission study that showed investors still pay more to trade on the NASDAQ than on the NYSE.
The finding came six years after the SEC and the Justice Department alleged that some NASDAQ dealers had conspired to fix prices to increase their spreads, the profit they make on the difference between the selling and buying prices on a stock. New rules, created following a settlement of the charges, forced the NASDAQ to reduce spreads.
Simmons and NASDAQ Chairman Frank Zarb, who before Simmons had also been CEO since 1997, dismiss the latest SEC finding — which doesn't accuse the market of wrongdoing — as flawed, saying it didn't account for type or age of the companies.
"We trade different stocks, different companies. Ours are much less mature. . . . They are going to trade with more volatility generally," Simmons said. "Therefore, traders are going to have slightly wider spreads because they are taking larger risks."
Likewise, they said critics of their decimalization conversion, which is expected to meet the April 9 deadline set by the government, are unfairly comparing NASDAQ with the NYSE.
The government mandated in 1997 that U.S. stock markets price their issues in decimals, saying investors would better understand a price of $10.63 than $10 5/8. Decimals also allow stocks to be traded in penny increments and are no longer limited to halves, quarters, eighths and sixteenths.
Despite the advance notice, the NASDAQ last year said its computers, strained by heavy trading volume, weren't ready to handle the switch. The SEC then pushed its original July 3, 2000 deadline back to this April.
Whatever the NASDAQ's reasons, "It looks bad," said Jones, the Columbia professor.
Believing investors won't remember its decimal tardiness, NASDAQ officials remain focused on the future. The NASDAQ announced late last month it has raised $516 million from investors and appointed a committee to review whether it should go public.
By spinning itself off later this year from the NASD — the brokers' group that operates and regulates the market — the NASDAQ is positioning itself for a possible initial public offering in the future. That's fitting, NASDAQ officials said, given what the NASDAQ has done for investing in America.
"It has created an entrepreneurial class, a venture capital class that we didn't have years ago," said Zarb, who also is chairman of the NASD. "It's been an engine for growth and creating jobs."