What do they do? We always see pictures of a few hundred people standing and screaming like crazy. What is their job?
In my imagination, they are yelling things like “I’ll pay 37 5/8 for 5000 shares of Widgets Inc.!”, hoping that someone will hear them and accept the offer. But I can’t believe that this is more efficient that doing it in some electronic manner. Not just now, but even 10 or 20 years ago. Hundreds of millions of shares are sold each day; a miniscule portion of that must go through those people, I’d imagine. Why do they bother?
Is it possible that they really do nothing, and are there only for the tourist’s cameras?
Actually, most shares do go through the actual traders. The floor of the NYSE is made up of what are called “specialists.” Each is responsible for a list of stocks, and as part of his job, has to be ready to buy or sell any shares of that particular stock when asked.
Say you want to buy 100 shares of GE. You call your broker, who contacts someone who eventually contacts someone on the floor of the exchange (a “runner”). The runner goes to the GE specialist and offers to buy the shares. The specialist either matches you up with someone interested in selling 100 shares, or sells you some out of his personal account. Prices are set according to the demand for the stock – if people are clamoring to buy, then the price goes up.
That’s just the NYSE. NASDAQ uses “market makers” instead of specialists. Market makers are brokerages, not individuals.
The specialists and market makers make money due to the “spread” – the difference between the buy and sell price. It can be quite lucrative, but you can get badly burned in a crash.
“East is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does.” – Marx
Most small orders are in fact handled electronically, and the system RealityChuck describes is the way to do the rest, with the following minor nit. The runner does not trade stock but rather communicates the order to a broker, who trades mostly with other brokers but sometimes with the specialist, of which there is only one per listed stock.
The NYSE web site has an “anatomy of a trade” area that is pretty helpful.
When I visited the Chicago Board of Trade (years ago) there were a lot of people on the floor, very few of whom were actual traders. According to the tour guide, the different color jackets they wore were to make it easy to tell who was doing what. My recollection is that there about six different colors but, other than traders and runners, I can’t recall what the roles were.
It was a fascinating place. The trading occurred in “pits”, designated areas for the different commodities. The more popular commodities had small tiers built around the pit so more traders were visible to each other. The traders used hand signals: palm out meant they were buying, palm in meant selling (or vice versa), number of fingers was the price, where you stood was the month, etc. “Trading Places” got it right but their focus was on the story line rather than the scene so a lot of “the good stuff” wasn’t shown.
All in all a fun and educational visit. It’s free and accessible (it’s right downtown). You don’t visit the acutal floor, they have a glass-walled gallery built above it. The only tricky part is it is only open weekdays during (duh!) business hours.
“If ignorance were corn flakes, you’d be General Mills.”
Cecil Adams The Straight Dope
They used to do that to her a lot when she first started down there. They do it to everybody, but since she was (IIRC) the first female routinely to report from the floor, she got it worse.
Having survived her hazing, she’s practically a hero down there now.
People on the floor of the CBOT and CBOE wear jackets colored according to who their employer is. People on the floor of the Chicago Mercantile Exchange, where I used to work, wear jackets colored according to job function. Clerks at the Merc wear yellow, which is the predominant color there. There’s no predominant color at the Board.
Palm out means selling, and palm in means buying. Think of it as pushing a commodity away from you versus gathering it in.
Today there’s nothing done on the trading floors that a computer network can’t do more efficiently. In fact most of the commodity exchanges in Europe have completely computerized – they have no trading floors anymore. The Merc and CBOT already have limited electronic trading networks, but the transition here will be much slower, mainly because all the brokers are very interested in keeping their jobs. But elimination of the floors is inevitable.
I too survived a stint as a market reporter at the Chicago Mercantile Exchange. You think the runners and traders have it tough? Try standing in the middle of the pit for an hour, listening to all that yelling, and reporting the price changes. I’ve held a wide variety of jobs since then, and I can honestly say that no matter how bad things get, they can never get as bad as that again.
I believe the reason the whole system isn’t computerized (which it could have been, easily, more than a decade ago) is that computers don’t feel fear. It can be very hard for a human being to hold a position while all about hundreds of people are frantically yelling and screaming, while the price is slowly moving the wrong way.
Many a young trader enters the floor with a fat account (or “margin”) and loses it all because they end up playing their hunches or their fear. The experienced, calmer traders take all their money, and they leave, broke, within a few months.
“Many a young trader enters the floor with a fat account (or “margin”)
and loses it all because they end up playing their hunches or their
fear. The experienced, calmer traders take all their money, and they
leave, broke, within a few months.”
Thats what that video is all about…Took a whole bank with him too…$800M