NASDAQ’s Conversion to a “National Securities Exchange�

Bill Sjostrom —  10 February 2006

Not much, if anything, has been written about NASDAQ’s conversion from a “national securities association� to a “national securities exchange.� (Press release here). Perhaps it’s because few people care, few people were aware that NASDAQ was not already a national securities exchange, and/or it doesn’t really matter. That all may be true, but it raises the question of why NASDAQ bothered (note that it had been pursuing the change in status since 2001). This FAQ put out by NASDAQ explains why it bothered:

• Exchange registration allows NASDAQ to operate independently without being controlled by the NASD . . . .
• NASDAQ’s new status as an exchange will eliminate any appearance of conflicts of interest stemming from the NASD’s control of NASDAQ and its role as regulator of NASDAQ’s market participants.
• Becoming an exchange will eliminate some disparate treatment of securities liste on NASDAQ because they are not considered “exchange-listed� . . . .

As for what exactly changes by NASDAQ becoming an exchange, the FAQ states “[v]ery little.� I thought perhaps that the conversion results in securities listed on the NASDAQ Capital Market (f/k/a NASDAQ SmallCap Market) falling within the definition of “covered security� under ’33 Act § 18. This would mean preemption of state blue sky registration requirements for these securities. A close reading of § 18, however, reveals this is not the case.

From my perspective (law professor who writes in the securities regulation area), one big positive of the change is that now both the NYSE and NASDAQ can correctly be referred to collectively as “exchanges.â€? In past scholarship, I’ve struggled with the right collective term—”exchanges” was not technically correct and neither was “markets.” Again, most people probably don’t care.

4 responses to NASDAQ’s Conversion to a “National Securities Exchange�


    They converted because they make more money by converting. Professional market participants get charged various fees for real-time market data. That revenue gets divided up based on where trades that generate that data happen. By becoming an exchange NASDAQ gets significantly more tape-revenue than if they were not an exchange. This is the same reason that Archipelago (before they were bought by the NYSE) converted to an exchange.


    I actually found the distinction to be a useful starting-off point for purposes of discussing whether there was a physical floor on which the securities were traded. On the positive side, however, this change may perhaps allow identification of someone cribbing from a student outline from a prior year.

    I had, however, understood that NASDAQ formerly was formally an “automated inter-dealer quotation system”, not a “national securities association”.



    I am chuckling because I had exactly the same reaction. “Finally, I can just say ‘exchanges’!”

    So, at least one other person cared.

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  1. TRUTH ON THE MARKET » Shareholder vs. Stockholder - May 21, 2006

    […] Along the lines of the last paragraph of this post, when I was a second year law firm associate I drafted a brilliant “Comparison of Rightsâ€? section for an S-4 registration statement as required under Reg S-K, Item 1004(a)(2)(v). The section compared the rights of owners of common stock under Minnesota law and Delaware law. It was soon pointed out to me, however, that I had made the rookie mistake of referring to all owners of stock as “shareholders.â€? While in Minnesota and other MBCA states, owners of common stock are referred to as “shareholders,â€? the Delaware corporate code uses the term “stockholder.â€? Hence, my references to owners of stock in the Delaware corporation should have been to stockholders not shareholders. Fair enough and easy to fix, but I wonder how many people are aware of the distinction. I read articles and opinions (some of them by Delaware judges) all the time where the author seems to be blissfully unaware—he or she either refers to owners of Delaware stock as shareholders, or, more horrific (because it violates the golden rule of contract drafting), he or she refers to them in one place as shareholders and in another place as stockholders. […]