How Does the New York Stock Exchange Function?

by Cam Merritt

The New York Stock Exchange oversees trading in the stocks of nearly 3,000 companies with a total market value in the trillions of dollars. It's called an "exchange" because this is the place where investors meet -- in a virtual sense -- to carry out direct trades. Orders from brokers around the world flow into the "NYSE," where specialists match up buyers and sellers.

Listings

The NYSE handles trading only in the shares of stocks listed on that exchange. Shares listed elsewhere, such as on the Nasdaq or foreign exchanges, can be traded only through those exchanges. Companies hoping to have their stock listed on the NYSE must meet the criteria set by the exchange. For example, as of 2011, a company applying for an NYSE listing had to have a stock price of at least $4 a share, with at least 1.1 million shares outstanding and at least 400 different shareholders who own 100 or more shares. Other initial listing requirements have to do with the value of the company, measured in such things as earnings, assets, cash flow and the total market value of all outstanding shares.

Specialists

The NYSE itself doesn't actually carry out trades. Rather, it provides a forum for "specialists" to do so. Each stock on the exchange is represented by a specialist, an employee of one of seven firms authorized to handle trades. These are the people you might see scurrying about the floor of the NYSE, hollering price quotes, in news footage. Stockbrokers send buy and sell orders to the exchange, and these are routed to the specialist for the stock in question.

Arranging Trades

The NYSE specialist's job is to match incoming buy and sell orders. Every buy order comes with a price the buyer wants to pay, called the "bid," and every sell order comes with a price the seller hopes to receive, called the "ask." The specialist serves as a kind of auctioneer, continually updating bid and ask prices, making that information available to all investors. The specialist then executes trades by matching the highest current bid with the lowest current ask. (The difference between bid and ask -- the "spread" -- is the specialist's fee.) A lot of this is simply done electronically, but old-fashioned haggling at the NYSE's "trading posts" still goes on. That's all the shouting you see on TV.

Ensuring Liquidity

When someone wants to sell or buy shares, the NYSE wants to make sure that investor can find a trading partner. That's why specialists also act as "catalysts" and "principals." As a catalyst, the specialist tries to drum up interest in a stock to ensure that there are sufficient bids and asks to keep trading activity going. When they're acting as "principals," specialists are actually buying and selling shares themselves, maintaining an inventory that they can use to ensure that the market for a stock remains liquid. Specialists acting as principals are performing the same role as the "market makers" who facilitate all trading on the Nasdaq market.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images