Why has Square decided to go public now

50 years of Nasdaq When artificial intelligence shapes stock trading

The Vice President of the US technology exchange Nasdaq, David Wicks:

"Today is an exciting day. We celebrate the Health Care Capital Corp. IPO."

Then the final bell rings. The Nasdaq, located in New York's Times Square, is thus staging company IPOs in mid-January for the healthcare company.

300 companies raised a total of $ 77.8 billion in fresh capital with their IPOs on the Nasdaq last year alone. The Nasdaq is one of the leading stock exchanges in the world. If you want to find out more about the state of the US economy, you can't ignore the technology exchange. Nikolaus Piper, is a business writer for the Süddeutsche Zeitung and a former US correspondent:

"If you look at the exchange sheets, it always says Dow Jones, Standard & Poor's and the Nasdaq. Dow Jones is more traditional, is no longer that representative of the American economy. Standard & Poor's is more representative and Nasdaq is a measure of everything what is at the forefront of technical development. "

In the 1970s, computers and software were "bizarre things"

Nobody could have suspected this when the Nasdaq was founded on February 8, 1971. Back then, the US economy was dominated by industry, banking, and agriculture. Established corporations such as the aircraft manufacturer Boeing, the car manufacturer General Motors or the beverage manufacturer Coca Cola had their stock exchange home on Wall Street, on the traditional New York Stock Exchange, or Nyse for short. Although venture capitalists were investing in new technology companies in Silicon Valley in the early 1970s, the new economy was still in its infancy. Who would have thought that a software company like Microsoft could be a success when it started in 1975. Nikolaus Piper:

"Back then it was computers, software, these were bizarre things that a normal person and also an investor only dealt with marginally."

Biontech's IPO on the Nasdaq in 2019 brought in 150 million euros

When US technology companies go public on the Nasdaq today, investors from all over the world take a close look. As with the online retailer Amazon in 1997, the search engine operator Google in 2004 and most recently the online room broker Airbnb. However, this exchange has long since become a contact point for foreign technology companies. The Mainz-based pharmaceutical company Biontech, for example, raised 150 million euros of fresh capital there with its IPO in 2019 and the Tübingen-based company Curevac a year later raised 213 million euros. Why do local companies even opt for a US stock exchange?

"Yes, well, the American capital market is much more productive than the German one, purely in terms of volume, but also in terms of people's attitudes. There are more investors who dare to do something. That's why a young German company does it quickly wants to grow, it makes sense to offer the stocks in America because it's just easier to get your capital. "

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Nasdaq Mission: Help With Capital Formation

In the early 2000s, representatives of the Nasdaq appeared self-confident. For example, then Vice President Doreen Davis-Owen when she described the rise of her employer in a WDR report.

"Nasdaq's mission was to help raise capital. Back then, the New York Stock Exchange had very strict criteria that didn't allow high-end companies like Dell, Cisco and Intel to move around. So Nasdaq became an alternative."

The founders had by no means conceived Nasdaq as a stock exchange for fast-growing technology companies. Rather, the National Association of Securities Dealers wanted to create a fully electronic trading system for processing securities transactions. Nasdaq stands for 'National Association of Securities Dealers Automated Quotations'. Thomas Book, board member of Deutsche Börse, did his doctorate on electronic exchanges.

"Initially, Nasdaq wasn't an exchange, it was an association of brokers and dealers, that is, market participants who have come together to organize how they bring the orders to the exchange; so it was an over-the-counter system. First of all, it was about that To collect orders as if via the ticker, which were then executed. "

Cheaper trade and transparent price development in "real time"

The Nasdaq was an electronic trading system to which brokers and bankers were connected via lines. That was completely new at the time. Now the traders in their institutes could follow the price development for shares and other securities via terminals and place orders. A huge step forward. Until now, the securities dealers had to inquire about prices by telephone, which was associated with considerable uncertainty. Neither buyers nor sellers knew whether they were getting the best price. The Nasdaq system suddenly created transparency for those involved, which reduced trading costs. The calculation worked. Thomas Book:

"The first attempt to actually use the electronics for order transmission, which was also successful, and which also immediately led to the costs - what we call the bid and ask spread, between buying and selling - were immediately reduced because more immediately Participants had access to information and execution. "

From telephone acquisition to trading in microseconds

The use of microelectronics generally proved to be a turbo for the further development of securities trading and the stock exchanges. Little by little, all stock exchanges were relying on the technology. Economic historian Werner Plumpe from the Goethe University in Frankfurt:

"Yes, that can be seen as a milestone, because modern trading technology allows speeds, transaction speeds and also allows the automation of transactions that were not previously possible in this way."

From then on the speed increased enormously. Thomas Book:

"Exchanges live from processing information as quickly as possible, which is also their essential contribution, that the prices reflect new information very, very quickly. And that started from minutes, in the early years, in the 70s, that it took over seconds to milliseconds, which we had in the 2000s and now in recent years the speed of trading is certainly in the microsecond range and below in terms of execution. "

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At first, private investors could only trade securities through brokers and banks

As with the classic stock exchanges, access to the Nasdaq remained an exclusive matter for professionals.

"Of course, only those who were actually market participants were allowed to do so, the brokers and banks, who could execute orders directly. And if they wanted to execute an order as a private investor, then of course they could only go to the bank or the broker. Today, when they look, the private investor naturally has completely different possibilities to see all prices directly, to see all courses and to trade on virtually the same terms as professional market participants. "

Just recently, small investors made headlines, betting in droves on the rise of certain stocks and thus inflicted losses on hedge funds worth billions who had bet on falling prices.

NYSE neglected tech firms in the 1980s

Eleven years after its founding, the Nasdaq changed from a pure listing system to a fully electronic stock market in 1982 and brought together important companies under the so-called Nasdaq National Market. The chip manufacturer Intel was one of the first companies to be listed on the Nasdaq. Now fierce competition broke out between the traditional New York Stock Exchange and the Nasdaq, especially for lucrative IPOs that were important for the company's image. The Nasdaq gained a good reputation among young technology companies. In 1999, in the US business newspaper Wallstreet-Journal, Bill Davidow, who once worked at Intel and later became a venture capitalist, recalled:

"The NYSE has long treated high-tech companies with benevolent neglect, constantly conveying the message that we are not worth being listed on."

The dot-com bubble burst in March 2000

Decisive for the rise of the Nasdaq to the leading technology exchange in the world was a strategic decision of those responsible around the first Nasdaq president Gordon Macklin. They realized that it was natural for fast-growing companies in new areas like computers and software to look at their growth first, not their profitability. That is why the Nasdaq allowed companies - unlike the NYSE - to put their shares on the stock exchange, even if they were not yet making a profit.

In the 1990s, everyone was talking about the New Economy. There has been a tremendous amount of hype surrounding technology companies. This was also reflected on the Nasdaq stock exchange. The index rose rapidly. Some experts spoke of conditions like in the Wild West, because a good idea alone was often enough to raise large sums of money as a company with an IPO. As is so often the case in the history of the stock exchange, there were considerable exaggerations, which experts called 'bubbles'.

In March 2000, the so-called dot-com bubble burst - with serious consequences for the Nasdaq as well. A year later, NDR reporter Carsten Vick reported about broken expectations:

"Today we are disillusioned. The Nasdaq index has lost around 60 percent in twelve months."

In 2003, Deutsche Börse closes the Neuer Markt

By October 2002, prices had even slumped by almost four fifths. Because of the crisis, the expansion plans at the time failed and the Nasdaq sold the recently launched Nasdaq Europe. In 2007, however, the Nasdaq merged with the OMX exchange and expanded its business to at least the Northern European countries.

The New Market, which was launched in Germany in 1997 based on the Nasdaq model, gambled away its reputation. Deutsche Börse closed the segment in 2003. The US model also got it tough. The Nasdaq lost around half of the listed shares. But it recovered and later benefited above all from the gigantic success of Microsoft, Apple, Google, Amazon and Facebook.

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Stock exchange launch moved from Facebook to the company's headquarters

On May 8, 2012, the Nasdaq staged the launch of Facebook with great fanfare. The stock exchange button for the opening of the trade had been relocated to California, to the company headquarters of Facebook. Robert Greifeld, then Nasdaq boss, stood next to Facebook founder Marc Zuckerberg in the midst of hundreds of employees in the group. A reporter from CNBC:

"And this is the opening bell: Marc Zuckerberg and Facebock."

This IPO was extremely important for the Nasdaq, as it wanted to establish itself once and for all as the most important address for the IPOs of new technology companies. But then nothing happened at first.

"Nasdaq has some technical difficulties."

Nasdaq is having a few technical difficulties, CNBC reported. It took half an hour - half an eternity in the stock market. Nasdaq boss Robert Greifeld had to admit errors in the trading system. The debacle scratched the Nasdaq's image. But it wasn't the first time.

Suspicion of price fixing by securities dealers

In 1994 two university professors caused a stir about the Nasdaq with a study. In their view, the spread between buy and sell prices was abnormally high and their study suggested that this was caused by price fixing by securities dealers. Investors saw themselves cheated and complained. A federal court sentenced dozens of brokers in a civil lawsuit to pay the injured party around $ 1 billion.

Capital market to pre-finance future investments

Stock exchanges have been in existence since the beginning of the 15th century. Most of the time, people met in squares or in certain streets to trade securities.

"Exchanges are extremely important."

Economic historian Werner Plumpe refers to the economist Joseph Schumpeter.

"As in general, as Josef Schumpeter has already said, the entire credit apparatus is necessary to enable the high investments necessary under capitalism, which can only be earned through the sale of goods and services after they have been provided. From Therefore, a functioning credit system and, in particular, a functioning capital market, with which one can pre-finance future investments or finance them in general, is extremely important. "

The trading floor as a backdrop for television programs

But the exchanges have increasingly automated trading. If you go to the major stock exchanges in London, Chicago, Frankfurt, Tokyo or New York today, you will only meet a few people. Since the opening of the Nasdaq, computer trading has largely prevailed. Business journalist Nikolaus Piper:

"The parquet no longer plays a role, it's a backdrop for TV shows, but it was. The real thing has been happening in computers for many years."

"The London Metal Exchange, which trades metals, did this in the present tense trade until before Corona, and is now considering stopping present tense trading and doing it electronically, driven by Corona. So you can actually look at it in the same way that almost all major stock exchanges Acting fully electronically today because of the advantages in terms of range and also in terms of speed and, so to speak, the rationalization that electronics have. "

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From manual to artificial intelligence order

Thomas Book speaks of waves of automation:

"The pioneers were, of course, the stock exchanges, which initially switched to electronic trading. And in the 1990s, market participants sat in front of the computer and entered and executed orders manually. And the second wave of automation then captured the market participants themselves , which switched from manual order entry to algorithms or computers that execute these orders. In the meantime, there is certainly already the third wave of automation, where the trading strategies themselves are actually automated, i.e. an attempt is made to recognize patterns using artificial intelligence We have seen these waves of automation and of course they have also changed retail. "

Competition for fractions of a second over shorter lines

But because, thanks to the Internet, information flows almost simultaneously around the world in computers on the stock exchanges in real time, a physical factor now plays a role again - the distance between the computer and the stock exchanges' data centers. Because orders are processed according to the time they are received on the exchange, it is worthwhile for market participants to compete for fractions of a second over shorter lines because they can decide whether to win or lose. Because every microsecond counts, so-called high-frequency traders like to place their computers as close as possible to the computers of stock exchanges. And stock exchange operators, including the Nasdaq, have made money by renting such places for high fees. Because the high-frequency traders used their advantage to the detriment of other market participants, there was a scandal.

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Over 600 different trading venues in European stock trading

As a result, the electronic trading platform IEX was created in 2013 with a delay of 350 milliseconds for each stock order. This should create the same conditions for all market participants. Other market players, on the other hand, criticize what they consider to be the excessive fees charged by the established exchanges.In 2020, some financial groups started the trading platform Members Exchange, or MEMX for short. Two examples out of many. Thomas Book from Deutsche Börse:

"What you see today is actually an interesting new effect. The effort to operate a trading system is no longer very high. Today there is actually a fragmentation in which many of our market participants, many of the banks, operate their own trading systems and the number of systems increases There are over 600 different trading venues in Europe today, and most of them are operated by market participants themselves who execute orders before they go public. In the US there are around 115 marketplaces for shares. "

It depends on the pace of technology

They are doing exactly what the founders of Nasdaq did 50 years ago: they are starting a new OTC trading system. Today the technology exchange is one of the established exchanges that has to assert itself against new competitors. Since the triumph of computers on the stock exchanges, mathematicians and other experts who program computer software have been in demand. Has the stock exchange culture changed significantly? Business journalist Nikolaus Piper.

"Yes, necessarily. Well, there used to be these financial firms, these very elegant financial firms, I think they are called white shoe firms. They hardly play a role today, but it is a very technical business, and of course there are other people are there and where things get rougher and faster and where the most important thing is speed in technology. That is new and that is different. "

The founding of the Nasdaq in 1971 played a central role in this development.