NASDAQ Trading
Penny Stocks

The Nasdaq Stock Exchange, Inc.

Nasdaq Trading is beneficial for targeting and trading technology penny stocks that are of the highest quality, lowest risk, yet very high in profit potential.

The Nasdaq is far more productive ground to find such penny stocks than for any other financial market.

This is the last topic of the section called:

"Stock Market Essentials are Reviewed for Successful Penny Stock Investing."

In a future topic called; "Technology Stocks," this site will include the unlisted securities within the stock market and includes the TXE (Toronto Stock Exchange).

In that topic you will learn more about penny stocks trading on the OTC BB, Toronto Stock Exchange, OTC Pink Sheets, and OTC Gray Sheets. These securities are listed under "Technology Stocks" for a good reason.  

The Extraordinary Investor will search for, concentrate on, and study technology stocks within these financial markets for the greatest consistent returns on investment now and for the future.

The NASDAQ: These six letters use to represent "The National Association of Securities Dealers Automated Quotations."

Now these six letters represent the actual name of this exchange, which is: The Nasdaq Stock Market, Inc.

This SEC authorized stock exchange is the largest exchange next to the NYSE and fairly well regulated and is heavily tech related.

Nasdaq Trading - Electronic Dealer-Broker Network

The Nasdaq is not a centrally located stock exchange like the NYSE even though Nasdaq does have a building that represents it.

Unlike the NYSE, this stock exchange is a broker-dealer network of computers systems and terminals. Buy and sell orders are set, and all trading takes place through, market-makers and other market participants by means of that computer network.

  • The computers themselves facilitate all the Nasdaq trading activity by means of software programs.
  • The software programs link the computers into that Network.
  • The computers that make up the network are located in many different places across the USA and even globally.
  • This electronic broker-dealer network is accessed by dealer-brokers, other market participants, brokers, and even retail investors, to trade securities with each other.
  • Every broker-dealer trading firm, and other market participants, that are members of Nasdaq use their own computers to access the dealer-broker computer network and trade securities.
  • Retail brokers and traders may also access this network through direct access level 2 trading desks, giving them the ability to trade directly with Market-Makers.

To recap then. . . In the Nasdaq market, Nasdaq trading occurs via this electronic computer network of broker-dealer firms (middlemen) who must carry inventories of securities to facilitate the buy and sell orders of other broker-dealers, market participants, and retail brokers and traders for each stock traded. Buy and sell quotes are set buy these Market Makers.

The buying and selling functions of Market Makers provides trading activity/liquidity and greater equilibrium of buy and sell orders, thus helping to prevent inactivity or heavily buy or sell dominated stocks.

Market Makers, therefore, attempt to insure adequate trading liquidity to handle all Nasdaq trading, and also the trading of the other broker-dealer networks in the US and abroad.

Market Makers are also there to make a profit through intense competition with other market makers for each Nasdaq Stock.

Nasdaq Trading Decreases as ECN Trading Increases

Nasdaq trading vs fully automatic ECN's

ECN's are SEC approved Electronic Communications Networks.

These ECN's are fully automated; so,

• no market makers (broker-dealers) make the market as in broker-dealer markets.

• no broker-specialists facilitate trading as in auction markets.

• ECN's have no human to human interface. All trade orders are handled automatically through an ECN computer program.

The only exception is the BATS (A SEC approved ECN Stock Exchange), which dose have market makers for its IPO or primary listings of stocks called the BATS CLP program (Competitive Liquidity Provider program). This unique arrangement between ECN and Registered Market Makers was filed on 12-19-2011 and was approved by the Securities & Exchange Commission (SEC) in 02-06-2012.

The ECN's themselves automatically facilitate trades except in that novel BATS CLP program. The traders themselves using the ECN's make the market.

ECN's are creating a favorable market for retail traders and brokers, broker-dealers and other institutions. The result is growing popularity of ECN's over traditional Nasdaq trading.

I can give some good reasons that make ECN's favorable and popular for a growing number of traders.

Here is my list:

ECN trades are anonymous while Nasdaq trading (Level 2) is not, in that Level 2 identifies the Market Makers from other traders.

Anonymous trading is a huge plus for broker-dealers and mutual funds who rely on anonymity for their trading activities.

ECN trading is executed faster than Nasdaq trading (Level 2). All trades are automatically matched by the ECN at lighting speeds in millionths of a second.

These ECN's are programmed to obtain the best bid and ask price for each trader's order out of the total orders outstanding for that stock traded on the ECN at any given time.

The speed of trade executions is unique to ECN's and is vital for high tech algorithmic day-trading strategies and programs.

ECN growing stock liquidity for Nasdaq stocks and other stocks is comparable to liquidity experienced trading those stocks directly on a their own exchanges for most stocks. . .

This liquidity is growing because:

• increasing numbers of traders are using ECN's to trade financial securities

• increasing use of ECN's for highly sophisticated day-trading utilizing smart algorithmic trading programs that trades securities in fractions of a second. Nasdaq, as well as other stock exchanges, are fast, but cannot quite compare to the speed of ECN's.

• ECN's reward investors for making trades that create liquidity for a stock.

More benefits for ECN trader growth. . .

ECN best buy-sell price fills many times actually surpasses Nasdaq Trading (Level 2) price fills. ECN's are improving in accuracy of best price fills as technology for ECN's advances.

ECN's provide the trader more control over his trades than does Nasdaq Trading of the same stocks. In essence, any trader now becomes his own Market Maker choosing how, when and where his trades are placed, and at what price - all anonymously through direct access trading platforms with smart trading software and trading programs.

ECN's provide increasing accuracy in trading. Increasing numbers of investors are convinced that ECN's, being fully automated, eliminate human error and increases neutrality (favoritism eliminated), thus providing a more secure environment for trading than Nasdaq trading online, including Level 2 trading.

ECN trading is less expensive than Nasdaq trading. And trades themselves can be practically free due to the rewarding of investors who add liquidity to the market by placing orders that are filled later. Many times when traders place orders that add liquidity, they do not pay ECN per share fees.

ECN's potentially allow traders to see a history of full trading depth at every price a stock is trading. This vital information allows traders to locate trends and pockets of liquidity at different share prices for a stock. Traders can then plan trades accordingly and place trades at prices that are most likely to be filled at that second(s).

In the ways listed, ECN's are not only growing in popularity but are increasingly taking on the role of Market Makers of Nasdaq Trading, and also the role of Broker-Specialists of the auction markets, by facilitating all trades and creating the needed liquidity and equilibrium that these other special brokers are now enlisted to do.

All the benefits listed for trading on ECN's make ECN's very appealing to a growing number of traders, which is why ECN's are growing in trade volume at the expense of Nasdaq trading, and the trading of other stock exchanges and OTC markets.

What will ECN trading growth do to NASDAQ Trading?

In order to compete with ECN's, Nasdaq is adapting to become a true dealer market between all securities traders as equals while also insuring added liquidity for each stock traded through the use of Market-Makers similar to what the BATS Exchange has done with its BATS CLP program

Supermontage is the newest adaptation of Nasdaq.

Nasdaq Supermontage replaced several other routing systems Nasdaq used to facilitate trading. Now the only Nasdaq routing system for all Nasdaq security orders, and all rules and abilities of the other routing systems, are incorporated into Supermontage.

Supermontage handles orders far more efficiently, swiftly and intelligently than the individual programs did separately.

This offering gives traders similar control, savings and speed of ECN's, while offering the added protection of stock liquidity and equilibrium through Market Makers. Even so, the depth history of trading and speed of ECN's are unmatched, although closer than they use to be.

In time, more ECN type trading and programs will develop on the Nasdaq and other financial markets.

More info on the Dealer Market and Market Makers of the Nasdaq

This study on the Dealer Market and Market Makers is another wave of similar information just given.

The information is expressed in different ways with new bits of information added. In this way, your mind will dutifully recollect, find similarities and piece all this information together and create a full puzzle for the mind of understanding to be realized regarding this important topic.

Within the current structure of the Nasdaq dealer market are market makers. On average about 14 competing market makers trade per stock listed on the NASDAQ. There can be as many as 40 market makers at a time trading in a fast moving high volume Nasdaq trading stock. Three market-makers is the minimum for a slow moving stock on the Nasdaq.

Nasdaq Market makers are broker-dealer firms or individuals registered with SEC and members of NASDAQ permitted to trade on a particular NASDAQ listed stock or other security.

Other Market Participants are also Nasdaq Member traders besides Market Makers. Among these are the ECN's themselves, and also Wholesalers Order flow firms, both of which commonly trade shares of Nasdaq stocks on the Nasdaq Level 2. You can see ECN and Wholesaler quotes along with the market makers on the Level 2 screen.

Market makers as middlemen for each stock or security are distributors of that security for that exchange, continuously and publicly setting their best bid and ask prices against each other to be competitive and to make a profit.

Each Market Maker competes for customer orders by displaying buy and sell quotations for a guaranteed number of shares.

Once an order is received at the price quoted by the Market Maker it must be filled if shares are available - on first come first serve bases. The market maker will immediately purchase for or sell from its own inventory until it is executed, normally in a matter of seconds.

This competition keeps each stock liquid: The competition for best bids and asks by competing market makers, and other market participants, for orders by other traders and brokers with level 2 access is what keeps prices efficient, competitive and realistic, the stock liquid, and facilitates active Nasdaq trading.

Many retail investors, like you and me, who place a trade with an online broker, commonly get our stock orders filled by a market maker that the online broker sends your order to.

• A broker may also send your order to an ECN. ECN's are explained in much greater detail in the next topic called "Real-Time Quotes Explained."

• A broker may fill your order from the broker firms own shares of that stock if allowed by the stock trader.

All of this is done automatically and within seconds to several minutes.

The electronic dealer-market is quick and efficient at executing all Nasdaq trading. While Nasdaq has increased its own trading speeds and efficiency since since creating and implementing their new routing system in 2002 called, Supermontage, automated ECN's are still quicker and extremely efficient.

As ECN's grow in popularity throughout the world, the more likely NASDAQ trading of stocks will remain liquid even without the need for Market Makers to create liquidity. The need for Market Makers to create liquidity for any given stock will diminish.

At best though, both ECN's and Market Makers working together form to become a more powerful means of ensuring stability and liquidity to markets, more so than either could do alone.

Better still, lets include

• market makers of dealer markets,

• ECN's,

• broker-specialists of the auction markets

as the insurance our stock market requires to help prevent future flash market collapses of the stock markets.

Despite the growing popularity of ECN's, Nasdaq traded securities, and Nasdaq trading software and platforms, will continue to see rising trading activity globally.

This increasing trade activity will continue to improve liquidity and price efficiency of the Global Market through the Electronic Dealer Market. Yes, Market Makers are greatly valued by other countries to create liquidity and efficiency in financial exchanges globally for some time to come.

Nasdaq Trading vs NYSE and AMEX Trading

The auction market format of the NYSE and AMEX, in contrast to Nasdaq trading (dealer market), most trades on a stock are made between retail brokers on behalf of traders, but also by retail traders themselves through direct access trading platforms.

Such trading is facilitated by one market broker-Specialist, called a Designated Market Maker, whose job is to match buy and sell orders from these retail brokers and retail traders. Most of this is accomplished electronically or by phone.

Unlike the market maker of the dealer market, the Specialist of the auction market rarely buys and sells stocks of his own, but will do so on occasion to provide liquidity and equilibrium to the stock.

As you can see, a variety of competing methods exist to add liquidity and equilibrium to the trading of a stock. No single method is absolutely better than the other, just different. And all working together may actually be healthier for the market than any one method alone.

Third Market Maker - Auction Market

An auction market also has market makers called Third Market Makers trading on its exchange, but they do not carry out the major function, or have equal prominence, as do Market Makers on the Nasdaq. But there trading activities are important because they add liquidity to NYSE and AMEX traded securities.

Nasdaq Trading:

Listing Requirements for companies traded

This topic provides more detail with the listing requirements of the NASDAQ than I did for the other stock exchanges because this is the place I regularly trade high potential penny stocks for the safest high reward trades.

The minimum standards you should watch for that affect companies listed on this exchange are:

Initial Mimimum Bid Price of $4. This $4 bid price will many times trend down to half that much or less over a period of several years for exploration and developmental micro cap companies. Such stocks usually have little history. Stay away from Nasdaq trading of initially public offering stocks - inherently risky for the reasons I gave.

Maintain thereafter a Minimum publicly traded closing Bid Price of at least $1. The small company will be granted a maximum of 360 days to comply with the $1 closing bid price for 10 consecutive days if the bid price is trading below $1. If the company is unable to meet the $1 closing bid price, the company is advised to use a reverse stock split as an acceptable means of gaining the minimum $1 closing bid price. A suffix "D" will be added to the stock symbol for 20 days after the reverse stock split.

Operating history of at least one (1) year or $50 million market cap.

Initial Net Tangible Assets of $4 million or $50 million market cap (shares traded X share price) or a net income in the latest fiscal year, or two of the past three fiscal years, of $750,000 net income

Maintain thereafter net tangible assets of $2 million, or a $35 million market cap (shares traded X share price) or a net income in the latest fiscal year, or two of the past three fiscal years, of $500,000 net income.

Public Shareholders minimum is 300.

Initial Market Cap (shares traded X share price) of $5 million with at least 1 million shares held by the public (at least 300 public shareholders).

Maintain thereafter a market cap $1 million with at least 500,000 shares publicly held. If the company does not maintain the $1 million market cap for 30 days, then it will be given a maximum of 180 days for a total 210 days to correct the situation and then maintain that market cap for at least 10 consecutive days (which includes weekends and holidays).

Must file SEC periodic reports in a timely manner. If the company is delinquent in its filings, the company will be given a 60 day extension and up to 180 day extension based on the company's past performance and situation.

Three (3) market makers minimum are required to fulfill orders on each stock listed with this exchange. The average number of market makers for securities traded on the Nasdaq is 14.

NOTE: As a reminder. . . All OTCBB, Pink Sheets and Nasdaq trading of stocks are accomplished electronically through the buying and selling activity of dealer-brokers called market makers whose function to buy and sell shares with other market makers and with retail investors. That is why this type of market is called an electronic dealer network.

If the company is still deficient after the extensions, the company may apply for a hearing. The company must provide solid reasons for continued listing for Nasdaq trading, and submit an approved plan of action to achieve minimum listing requirements.

If listing requirements are still not met for a maximum of perhaps 180 more days, the company is delisted - Nasdaq trading of such stocks is reviewed and likely terminated. Most companies are delisted for not meeting the $1 minimum last bid price and the net tangible assets requirement.

Once the company is delisted from the Nasdaq, Nasdaq Trading of the security will cease, although the stock will likely trade on the OTC BB or Pink Sheets with the same stock symbol and the suffix "pk" for Pink or "OB" for OTCBB.

The OTCBB is definitely preferable to the Pink Sheets. The share prices, trading volume, and market cap will most likely be drastically affected in a negative way once the delisted stock begins trading on the OTC BB or Pink Sheets especially after several weeks of being delisted. . .

Why so negatively affected? Most investors are skittish about stocks not traded on a stock exchange - that is why volume of shares traded is typically far lower than Nasdaq trading of the same or similar stocks. Investors look at delisted stocks as speculative and risky. . .

Why are delisted stocks speculative and risky?

• These companies cannot meet the listing requirements

• Such companies are not under the careful watch of a review board of a stock exchange.

• Now that the ex-Nasdaq stock has very little regulation on the OTC BB or Pink Sheets the stock is looked upon as shady and lacking integrity or ability to continue as a business.

• Many hard-core investors in such stocks were or will be stung badly with losses after a stock was/is delisted especially if the stock begins to trade on the Pink Sheets rather than the OTCBB. Now, even the hard-core investors will eventually dump shares and avoid this stock like the plague.

The Nasdaq trading of stocks (including the OTC BB and Pink Sheets trading) can be followed or tracked in real-time by what is called Level 1 and level 2 software (explained in later topics) since they are all electronic dealer markets.

Is NASDAQ trading of shares any different than the NYSE?
Not for the non-professional retail trader. For the day-trader (day-traders are classified as professional traders) there is a difference. This difference has to do with the way shares are traded. Remember earlier about the explanations I gave about the auction markets and the dealer markets. . .

Day Trading on the NASDAQ online with Level 2 access is only available for NASDAQ, OTC BB and Pink Sheets. Level 2 trading for a particular stock tracks the trading of competing broker dealers called market makers. Auction Market exchanges do not have market makers, so no tracking of market maker activity with Level 2. . .

The NYSE and AMEX are two major auction style exchanges. Unlike Nasdaq Trading, the trades are made between brokers and retail traders with one specialist acting as a facilitator for the smooth transactions of such trades between these retail buyers and sellers.

Since market makers are not a key element to the trading of such stocks, then there can be no level 2 access to market maker activity.

Level 2 will be discussed in more detail in the following topic called "Real-Time Quotes Explained.". In brief though, Level 2 quoting is helpful to learn so that you do not later become confused about all the different services offered on the internet, and so you can accurately choose which stock tools and services best fit your needs as an extraordinary investor.

Not all extraordinary investors use the same exact tools and services because there are small variations in techniques, personality and interests between them even though the core proven trading strategies are the same or very similar.

The extraordinary investor, Nasdaq Trading and Level 2

Nasdaq trading of securities does not require the use of Level 2 to be a very successful penny stock investor.

Day Traders, Nasdaq Trading, and Level 2

Day traders require level 2 access for Nasdaq Trading. Successful Day traders rely on super fast and complex trading platforms with order processing in the fractions of a second because of the type of trading they do and the type of traders they must compete against - very sophisticated highly technical competitors with big pockets (mostly large firms).

This extra knowledge and trading software programs required by day-traders makes day trading very different from extraordinary investing.

Level 1 data, which is the same as plain streaming real-time trade data, is not absolutely essential for Nasdaq trading as an extraordinary investor either, but it is convenient to track stock activity, and is highly beneficial for following stocks, lowering risks and capturing successful trades more efficiently.

Streaming Real-Time data is essential to set up time-critical Nasdaq trades, especially to track quotes of a stock who's shares are trending erratically.

In the following new topic, a detailed explanation of real-time quotes (includes level 1) and level 2 access is given.

All this will be described in more detail in following topic.

You have now completed this present topic on the Stock Market Essentials are Reviewed for Successful Penny Stock Investing.

You have completed this Lesson called

Nasdaq Trading - Penny Stocks Nasdaq Trading.

The next section deals with Real-Time quotes - what it is, types of, how it works, where it originates, etc.

All this information is important knowledge that your mind requires to build a complete picture of the market you are investing in and how it all helps you to be a better investor - an extraordinary investor.

When you are ready, please continue then to the next section called:

Real-Time Quotes - Explained

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