How stocks are Traded

ndividual investors allocate their stock orders through agents who buy and sell stocks for their clients. These orders can be filled in two of the major negotiation systems: the auction market and the negotiation market.

An auction market is centralized location in which supplies and demands for stocks are made. Supplies and demands are matched by specialists and floor agents in an open-outcry auction and stocks with highest price offers are sold to investors. This process is carried out in the NYSE and AMEX.

A specialist is a member of the market that tries to negotiate one or many listed stocks in the same. An example can best illustrate the order execution process in NYSE. Let’s suppose that you are interested in buying 200 Home–Depot Inc. stocks. Do you call your agent to learn about the market price or do you search for it on-line? The offer is $39.90 and the demand is for $39.91 per stock. The bid means that the specialist agrees in buying Home-Depot Inc. stocks at $39.90 each and asking means that the specialist agrees to sell stocks at $39.91 each. The spread is $0.01. In the NYSE the specialist makes a stock market from Home-Depot Inc.

Then you must decide whether buying 200 Home-Depot Inc. stocks at market price or not. Transaction should be closed in a number near to $39.91 per stock; if you decide to allocate your order immediately after seeing the market price and if this do not fluctuate that much your agent fills in a buying order (or maybe you could do so on-line) which is electronically communicated to the floor market. Once in the floor the floor agent (member of the market that carries out the order in the floor) takes the order to the trading post where the buying order is finally carried out by some other floor agent that has selling order for 200 Home-Depot Inc. stocks or from the specialist. When the order is carried out the brokerage firm mails or e-mails confirmation that the order has been executed.

Specialists are allowed to negotiate assigned stocks from their own accounts and to profit from these negotiations. However, it is required that specialists keep a fair and transparent negotiation with stocks assigned to them. Specialists, for instance, are not allowed to compete with clients orders. If a client allocates a buying order in the market the specialist cannot buy for himself before having carried his clients order. Equally, a specialist cannot sell stocks from his own account  before carrying out his clients selling orders.

The purpose in allowing specialist work as agents is to reduce existing unbalance effects in stocks supply and demand. Specialists are forbidden by law to manipulate stocks price, even when SEC is monitoring the specialists negotiation activities, making sure they comply with each of the numerous rules.  keeping an organized market along with specialists earnings motivation, means going into a dark area.

NYSEs reputation was stained by negotiations abuse made by specialists and floor  agents for its own benefit in 2003. Repercussions over the survey about this financial scandal could lead NYSE negotiations more like those of NASDAQ where negotiations are made electronically.

Beginner Money Investing The secondary market and how stocks are negotiated How stocks are negotiated Negotiations market Kinds of orders Market orders Limit orders Stop order