The New York Stock Exchange - How It Works |
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By: David A. Sorenger Posted: 2006-10-16 23:26:18 |
| The New York Stock Exchange (NYSE) is the biggest US stock exchange. It's recent acquisition of the fully automated stock exchange Archipelago formed a new company, the NYSE Group, which then became a for-profit organization and publicly traded in March 2006.The NYSE consists of hundreds of member firms which must meet high standards. These member firms employ the specialists and brokers who are allowed to trade securities at the NYSE. The stock exchange is a market where buyers and sellers from all over the world meet to trade securities. Investor protection therefore plays a major part in all regulatory requirements. The regulatory requirements are high.The NYSE is a self-regulatory organization but it's always under supervision of the SEC, the Securities and Exchange Commission. There is also the Securities Investor Protection Corp. which was established in 1970 by the US Congress. The SIPC covers losses up to $500,000 in the case a broker company goes bankrupt.The New York Stock Exchange differs from other exchanges. Its so called open outcry system is an auction market where the specialist matches buy and sell orders at the best possible price. There are several trading posts on the NYSE trading floor. Each post is responsible for more than 100 different stocks. Each listed company is assigned to a specialist who must make the market in the stock and act as the middlemen between buyers and sellers. Only NYSE member specialists and floor brokers are allowed to trade on the floor. The floor broker acts as an agent for the public orders while the specialists matches the orders of the brokers.It's often said that the auction system is not efficient compared to the fully automated exchanges like the NASDAQ but the NYSE specialists and brokers could handle up to 10 billion shares daily. The record day so far was 3.1 billion shares on June 24, 2005. The NYSE also introduced a new market system recently, the NYSE Hybrid Market which shall combine the traditional market system with automated trading systems.There are different studies with different results. One says NYSE is better, the other says NASDAQ is. It's difficult to compare different systems though. Orders are executed faster on the NASDAQ because of the human intervention on the NYSE. But faster doesn't always mean better. The trading floor has advantages although it is slower. One study says that because of the non-competitive specialist system of the NYSE the costs for investors would be higher. Another study says that the spread at the NYSE is smaller than at the NASDAQ, especially with the large stocks. |
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