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Stock Exchanges

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The New York Stock Exchange (NYSE), the preeminent, biggest and most organized stock exchange in the United States, is an example of an auction market. Other regional stock exchanges in the United States include the American Stock Exchange (AMEX) in New York, the Pacific Stock Exchange in both San Francisco and Los Angeles, the Chicago Stock Exchange, the Philadelphia Stock Exchange, the Boston Stock Exchange, and the Cincinnati Stock Exchange. The NASDAQ and the NYSE account for the vast majority of stock trading. Regional exchanges account for little of the total stock trading volume in the United States.

All transactions in a stock listed on the NYSE and completed within that exchange occur at a unique place on the floor of the exchange, called a post. There are three major sources of active bids and offerings in an issue available at a post: (1) floor brokers executing customer stock orders, (2) limit price orders for stock left with the specialist for execution, and (3) the specialist in the stock buying and selling for his or her own account. Since trading is physically localized, the best available bid-and-offer quotes are very available. Competition and ease of communication among market participants at a post ensure the absence of bids above the lowest offer price or offerings below the highest bid for the stock.
Types of Orders

Orders from the public are transmitted by internet, telephone, or telex from brokerage houses to brokers on the floor of the NYSE, who bring the orders to the appropriate posts for execution. Most of these orders are either market orders or limit orders.

A market order is an order to buy or sell at the best possible price available at the time the order reaches the post. The broker bringing a market order to a post might execute the order immediately upon his arrival, or he might hold back all or part of the order for a short time to see if he or she can get a better price than is currently available. He or she may also decide to quote a price on the transaction to reduce the amount of time he or she will have to wait until completing the trade.

A limit order is an order to buy or sell at a designated price or at any better price. Investors place limit orders when they want to buy or sell at a price well above or well below the bid-ask spread. A floor broker handling a limit order to buy at or below a stated price, or to sell at or above a stated price, will usually stand by the post with his order if the limit price on the order is near the current market bid-and-ask prices.

When a limit order is at a price that is not very close to the current market prices (the bid-and-ask), the broker handling the order knows it is unlikely the order will be executed anytime soon. For example, a bid or purchase order at $50 on a stock currently trading at $55 may not be satisfied for days, or even may never be satisfied. As an alternative to maintaining a physical presence at the post, the broker can enter the limit order on the order book maintained by the specialist. No trades can take place at a particular price unless all bids are above and all offerings are below it. In other words, the market has to move up through all of the sell limit orders in the book to hit your sell limit orders. Alternatively, the market has to move down through all other limit orders in the book between your limit order's price before it can be executed. Entering a limit order on a specialist's book is a great alternative to floor brokers who would otherwise have to maintain a physical presence at a post to keep a limit order active.

Specialists provide the third source of bids and offers in listed securities. On the NYSE, Specialists are members of the exchange who are both dealers and order clerks. Specialists have to maintain the price quotations at all times for the issue in which they specialize. Specialists also act as dealers, trading for their own account and at their own risk. NYSE specialists act as order clerks as well, maintaining the book of limit orders for the floor brokers.

Heavy trading volume ensures that there are always active bids and offerings available from either floor brokers or the limit order book. In these cases, the dealer function of the specialist is to be a source of liquidity so that your orders get filled quickly if trading is more sporadic or infrequent. In these cases the obligation of the specialist to provide the liquidity service of immediate execution is vital. Indeed, if the prices of the purchase and sales orders on the specialist's book have a wide spread (which is common for infrequently traded stocks), the specialist may be the sole source of a market for immediate transaction.