Wednesday, September 25, 1996
Just What Happens At The
NYSE?
By MF Shrimp
Did you ever wonder where your order goes after you've given it to your broker? Ever wonder about the goings-on on the floor of the stock exchange? Well, recently it seems others have as well. So, I thought perhaps I should take the time to explain this to all of you *need to know* investors. The process is a bit more convoluted than I will show here, but suffice it to know that the things I leave out don't really affect you. They have to do with the firm's control over the brokers and compliance.
Let's start with some common misconceptions. We've all seen little news clips showing these wild-eyed, arm-waving, hand-signaling lunatics running around the floor of the stock exchange, visions of ticker tapes racing through their heads, right? Wrong! That is the commodities exchange, not the stock exchange. So the loony tunes belong to the futures market. Stock exchanges such as the NYSE or the AMEX or the PSX are nice, calm, orderly places made up of areas called pits. In those pits you'll find several types of people. You have specialists (no they're not assassins), floor brokers, $2 brokers, and registered brokers, again, very calmly, waving their arms, throwing around hand signals, and generally all running around like lunatics. But orderly lunatics.
First, your order. You've placed an order with your broker for a stock trading on the NYSE. But where does it go from there? Well, it goes either through the computer or over the wire to the floor brokers in the pit. They then bring it to the specialist to find out the size of the market, that is, how many buyers and how many sellers there are at the price he's asking. The specialist will indicate the bid/ask and how many on each side. The floor broker then seeks the best price and executes on that price. Voila! Your order is filled.
Now let's examine what exactly the responsibilities are for these guys.
The specialist has the awesome job of maintaining an orderly market in the stocks in which he trades. He keeps his own inventory in these stocks to facilitate an orderly market. If the market isn't moving, he'll buy or sell with his own stock to get the ball rolling. But he's not allowed to compete with customers' orders, so he can only go higher than the existing bid or lower than the existing ask. This has the affect of reducing the spread, sparking more trading. In this way, he keeps things running smoothly. It is also within his parameters to handle all stop and limit orders. He enters them in his book in order of arrival and size and keeps a running tally until execution is possible. Whew! Heavy responsibilities!
The registered brokers are not important to us, in that they trade for themselves with their own inventory. They can take orders from customers, but mostly don't because the customer's order would then take precedence over their own trades.
The floor brokers and $2 brokers (both called runners) do essentially the same things, only for different people. They each trade stocks, but the floor brokers do so for the firm they work for, and the $2 brokers do so for the floor brokers when they're too busy, and charge a commission for doing so. When you place your order with your broker, the floor broker is notified of this order and carries it to the specialist responsible for the particular stock. From there, a price is agreed on, and the order is filled.
Now let's clear up one last misconception. Market makers are dealers in OTC (often erroneously called NASDAQ) trades who provide continuous bids and offers for only one security. They buy and sell for their own profit. On the exchanges such as the NYSE or the AMEX, the specialist plays the role of market maker for the stocks they're responsible for, which translates to only one market maker per stock. In OTC trading there can be numerous market makers for each stock. When you place an order OTC, it doesn't go to an exchange, it goes to a trader on the trading desk of the firm. He then must locate a market maker with whom he can negotiate the price. These days it's all done pretty much by computer. A market maker must stand ready to buy or sell at least 100 shares of the stock at the quoted price. And unless otherwise stated, all quotes are considered to be firm.
So now we have the chain of events from when an order is placed with the broker to the moment of execution. Now, that wasn't so bad!
Well, back to the truly hard part for me! Now, how do I format this thing for email?
Transmitted: 9/25/96