How Does the New York Stock Exchange Work?

How Does the New York Stock Exchange Work?
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The Beginning

The New York Stock Exchange is the center of the universe if you're involved with stocks. It's the last bastion of the original method of purchasing and selling stocks. The origin of the exchange was in 1792 when 24 merchants and stockbrokers created the Buttonwood Tree Agreement.

NYSE Seats

In order to trade on the NYSE, the trader or broker has to own a seat. The seats normally cost between $500,000 and $1,000,000 but the highest price ever paid was $3,250,000 in 2005. Just because the trader or company can afford a seat doesn't necessarily mean they get to buy it. They have to go through a selection process based on ethics and high levels of compliance.

The Floor

The NYSE is an auction market. That means that the traders actually form a group around the post on the floor of the market for the specialist, someone that works for one of the NYSE member firms and handles the stock. Just like in an auction, there are shouts coming from those that want to sell and those that want to buy. The specialist facilitates in the match and centralizing the trades.

The Trade

If you place a trade order with a broker or online, the broker's backroom sends the order to their person on the floor and looks for someone willing to fill your purchase order or buy your shares if you're selling. The company's representative goes to the post for the specialist, makes a deal with someone that wants the stock or wants to sell it. The representative confirms the trade completion with the order department of your broker's backroom, and you get a call from your broker or a message online telling you that your trade's complete.

Electronic Trade

Change is inevitable, and the NYSE underwent the biggest change on January 24, 2007: it went from strictly an auction market to a hybrid that encompassed both the auction method and an electronic trading method that immediately makes the trade electronically. A small group of extremely high-priced stocks isn't on this trading system and is still auctioned on the trading floor.

Your Choice

Even though over 82 percent of the trades take place electronically, the action on the floor of the stock exchange still has its place. While electronic trade is faster and provides for anonymity, there's more opportunity to improve the price of a share if it goes to the floor. Investors have the right to select the method they want to use.