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Let's look at the two ways orders get to the floor of the NYSE: manually or electronically. |
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The first way orders come to the floor is through the floor brokers who work from one of the 1,500+ trading booths that surround the trading floor. You give your order to your brokerage firm, which sends it to its booth on the floor. Once the floor broker has received that order, that floor broker physically goes to the post and represents your order as agent to the market. In that way, buyers and sellers, represented by these individual floor brokers, literally "meet" at the specialist's post on the trading floor to seek the best possible prices. |
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The second way to get an order to the floor is through an electronic system, called NYSE Super Dot, which sends your order directly from your brokerage house to the specialist's electronic "book." |
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The specialist is charged with maintaining an orderly market in the stocks traded at his post. Floor brokers meet at his post to expose their buy and sell orders through open outcry. In this way, a competitive determination of prices is possible. |
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When a bid gets high enoughor an offer gets low enoughfor the prices to match, a trade is made. |
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If there are temporarily more buy orders than sell orders, the specialist will sell shares from his or her inventory to bring the market back into balance. If there are more sell orders than buy orders, the specialist will use her or his capital to buy shares, again to bring the market back into balance. |
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In most cases, orders are filled without the intervention of a specialist; in fact, it has been estimated that specialists are involved only in about 10 percent of the shares traded through their posts. |
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The chart in Figure 10.1 shows how two floor brokers, one representing a buyer and one representing a seller, come together to effect a trade at the specialist's post. |
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An interesting question is: do the buyer and seller get the "best price" possible in an auction market? Think about it. Certainly the price at the instant the trade is consummated has been exposed to a group of willing buyers and sellers around the specialist's post who have declined the opportunity to improve upon that particular price. Isn't that a pretty good definition of best price? |
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