Participants in the stock market range
from small individual stock investors to large hedge fund traders, who
can be based anywhere. Their orders usually end up with a professional
at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions
are carried out on a trading floor, by a method known as open outcry. This
type of auction is used in stock exchanges and commodity exchanges where
traders may enter "verbal" bids and offers simultaneously. The
other type of exchange is a virtual kind, composed of a network of computers
where trades are made electronically via traders at computer terminals.
Actual trades are based on an auction market paradigm
where a potential buyer bids a specific price for a stock and a potential
seller asks a specific price for the stock. (Buying or selling at market
means you will accept any bid price or ask price for the stock.) When the
bid and ask prices match, a sale takes place on a first come first served
basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange
of securities between buyers and sellers, thus providing a marketplace
(virtual or real). The exchanges provide real-time trading information
on the listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange,
where much of the trading is done face-to-face on a trading floor. This
is also referred to as a "listed" exchange (because only stocks
listed with the exchange may be traded). Orders enter by way of brokerage
firms that are members of the exchange and flow down to floor brokers who
go to a specific spot on the floor where the stock trades. At this location,
known as the trading post, there is a specific person known as the specialist
whose job is to match buy orders and sell orders. Prices are determined
using an auction method known as "open outcry": the current bid
price is the highest amount any buyer is willing to pay and the current
ask price is the lowest price at which someone is willing to sell; if there
is a spread, no trade takes place. For a trade to take place, there must
be a matching bid and ask price. (If a spread exists, the specialist is
supposed to use his own resources of money or stock to close the difference,
after some time.) Once a trade has been made, the details are reported
on the "tape" and sent back to the brokerage firm, who then notifies
the investor who placed the order. Although there is a significant amount
of direct human contact in this process, computers do play a huge role
in the process, especially for so-called "program trading".
The Nasdaq is a virtual (listed) exchange,
where all of the trading is done over a computer network. The process is
similar to the above, in that the seller provides an asking price and the
buyer provides a bidding price. However, buyers and sellers are electronically
matched. One or more Nasdaq market makers will always provide a bid and
ask price at which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext
is an order-driven, electronic stock exchange. It was automated in the
late 1980s. Before, it consisted of an open outcry exchange. Stockbrokers
met in the trading floor or the Palais Brongniart. In 1986, the CATS trading
system was introduced, and the order matching process was fully automated.
From time to time, active trading
(especially in large blocks of securities) have moved away from the 'active'
exchanges. led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group,
already steer 12 percent of U.S. security trades away from the exchanges
to their internal systems. That share probably will increase to 18 percent
by 2010 as more investment banks bypass the NYSE and Nasdaq and pair buyers
and sellers of securities themselves, according to data compiled by Boston-based
Aite Group LLC, a brokerage-industry consultant.
Now that computers have eliminated the need
for trading floors like the Big Board's, the balance of power in equity
markets is shifting. By bringing more orders in-house, where clients can
move big blocks of stock anonymously, brokers pay the exchanges less in
fees and capture a bigger share of the $11 billion a year that institutional
investors pay in trading commissions. |
