I don’t really quite get it. The hollywood depictions seems to be lots of people standing in a small room shouting at each other in chaos. What are the people on the floor actually doing? Whats the procedure for making a trade? I understand that the NYSE is still based almost wholly on floor trading while nearly every other SE has moved to electronic, why does the NYSE still prefer floor?
At the NYSE, it works like this:
Each stock has a “Specialist” who’s job it is to trade in that stock. (A specialist usually handls multiple stocks.) When you call your broker, he contacts someone with a seat on the exchange, and a slip of paper is given to the specialist listing the trade. The specialist has slips for both buyers and sellers, so if you put in an order to buy a stock at $20, he will find a seller willing to sell at that price and match you together*. If there are more buyers than sellers (or vice versa), he adjusts the stock price so that the sides equalize (if, for instance, you raise the price, some buyers will drop out). The specialist also buys and sells stock from his own account. Thus, if you want to buy, and no one is selling, the specialist will sell his own stock to you. There isn’t a lot of shouting on the NYSE floor (commodity exchanges may be different), but a popular stock – one either rising or falling quickly – can have a large number of messengers clustered around the specialist.
The NYSE hasn’t changed to electronic bidding primarily because the specialists wouldn’t like it. They make big bucks (with some risks if a stock crashes) and want to keep doing so.
*The specialist gets a cut, of course. That gets into bid and ask prices – the specialist makes sure there is a difference between the two and takes that. (Or, at least, that was how it was before decimal stock prices – it’s probably the same, but he cut is less).
If you want to know what entities are large earners of those bucks, you may look up LaBranche & Co (LAB) and Van Der Moolen (VDM). These are two of the largest suppliers of specialist services for the NYSE. There are a few others, but these are the ones with a major stake in the system. You might remember that there was a scandal about a year ago involving the conduct of NYSE specialists (improper trading):
That flack, and the ever-present discussion of having the NYSE go electronic (there’s a proposal on the table), have made the outlooks for these companies rather uncertain.
The Chicago Board of Trade has retained open outcry trading for similar reasons. Floor trading can be very intimidating and gives the experienced trader a big advantage over-and-above financial acumen. Since CBOT is owned by it’s member firms they have an incentive to retain their trading advantage on the floor, even though electronic trading is probably more profitable for the exchange itself.
I was at a wedding recently in Chicago and was seated next to a female I knew barely in college. She is a nasty little thing (105 lb) and she fought hard after college to become a floor trader for the Chicago Board of Trade. I loved talking to her and hearing about all of the war stories. She showed me scars and bruise after bruise and effective physical techniques that she uses to get other traders away from her. Somewhere she mentioned that she makes some ridiculous amount in the several hundred thousand dollar a year range for going through this. I thought it was a little strange to combine these primitive urges with financial expertise but that is what they do.
[Insert obligatory joke about trading linoleum etc. here]
There have, however, been rumblings about a possible IPO. The CBoT’s local competitor, the Chicago Mercantile Exchange, in 2002 was the first U.S. financial exchange to become a publicly traded company.
As you can see by the date on this item, talk about possible IPOs by the New York Stock Exchange and the Nasdaq Stock Market has been kicking around for some time. A number of European exchanges are publicly traded, including London Stock Exchange Plc, Deutsche Boerse AG, Euronext NV (owner of the Paris, Amsterdam, Brussels and Lisbon stock exchanges) and OM HEX AB (owner of the Stockholm, Helsinki, Riga, Tallinn and Vilnius stock exchanges).