The Trading Post

Executing a Trade

There are two basic ways to execute a trade, on the exchange floor or electronically. With the ever changing technological advancements in this day and age, there is a drive to move more trading to the networks and off the trading floors, however this is meeting with some resistance. Most markets trade stocks electronically.

The New York Stock Exchange (NYSE) is the first type of exchange where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through 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 buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don’t think that the NYSE is still operating in the dark ages: computers play a huge role in the process.

Thanks to television and movies it’s easy to conjure up an image of what trading on the floor of the NYSE would look like. I guess reality isn’t much different than what’s portrayed in the media because when the market is open, there are hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors and entering data into terminals. You want chaos, this is it. Despite what looks like organized confusion, the process works. Here’s how a very simple trade on the NYSE would occur:

1. you tell your broker to buy 100 shares of BNB Widgets at market

2. your broker’s order department sends the order to their floor clerk on the exchange

3. The floor clerk alerts one of the firm’s floor trader who finds another floor trader willing to sell 100 share of BNB Widgets. This process is easier than it sounds as the floor trader knows which floor traders make markets in particular stocks.

4. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.

This was a rather basic trade, simply to give an example of the process on the NYSE, complex trades and large blocks of stocks involve considerable more detail, and more space than I have to write in.

Electronic markets use vast computer systems to match buyers and sellers, as opposed to human brokers. Several large institutional traders, such as pension funds and mutual funds, among others, prefer this method of trading. For the individual investor, you typically can get almost instant confirmations on your trades. It also facilitates further control of online investing by putting you one step closer to the market. You still need a broker to handle your trades as individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.

About the Author

Tradeopolis.com, your stock market trading and stock investing resource. Vist Tradeopolis.com today for educational articles on stock market trading and stock investing and information on TSX and TSX Venture Exchange companies.

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