Organization of the NYSE

The New York Stock Exchange, or NYSE, popularly known as the Big Board, recently celebrated its bicentennial. It has occupied its current location on Wall Street since the turn of the twentieth century. Measured in terms of dollar volume of activity and the total value of shares listed, it is the largest stock market in the world.

member

The owner of a seat on the NYSE.

commission brokers

NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor.

specialist

A NYSE member acting as a dealer in a small number of securities on the exchange floor; often called a market maker.

floor brokers

NYSE members who execute orders for commission brokers on a fee basis; sometimes called $2 brokers.

Members The NYSE has about 1,400 exchange members, who are said to own "seats" on the exchange. Collectively, the members of the exchange are its owners. Exchange seat owners can buy and sell securities on the exchange floor without paying commissions. For this and other reasons, exchange seats are valuable assets and are regularly bought and sold. In 2001, seats were selling for about $2 million. The record price is $2.65 million in 1999. Interestingly, prior to 1986, the highest seat price paid was $625,000, just before the 1929 market crash. Since then, the lowest seat price paid has been $55,000, in 1977.

The largest number of NYSE members are registered as commission brokers. The business of a commission broker is to execute customer orders to buy and sell stocks. A commission broker's primary responsibility to customers is to get the best possible prices for their orders. The exact number varies, but, usually, about 500 NYSE members are commission brokers. NYSE commission brokers typically are employees of brokerage companies such as Merrill Lynch.

Second in number of NYSE members are specialists, so named because each of them acts as an assigned dealer for a small set of securities. With a few exceptions, each security listed for trading on the NYSE is assigned to a single specialist. Specialists are also called "market makers" because they are obligated to maintain a fair, orderly market for the securities assigned to them.

Specialists post bid prices and ask prices for securities assigned to them. Specialists make a market by standing ready to buy at bid prices and sell at asked prices when there is a temporary disparity between the flow of buy orders and that of sell orders for a security. In this capacity, they act as dealers for their own accounts.

Third in number of exchange members are floor brokers. Floor brokers are used by commission brokers who are too busy to handle certain orders themselves. Such commission brokers will delegate some orders to floor brokers for execution. Floor brokers

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

8. Stock Valuation

© The McGraw-Hill Companies, 2002

CHAPTER 8 Stock Valuation are sometimes called $2 brokers, a name earned at a time when the standard fee for their service was only $2.

In recent years, floor brokers have become less important on the exchange floor because of the efficient SuperDOT system (the DOT stands for Designated Order Turnaround), which allows orders to be transmitted electronically directly to the specialist. SuperDOT trading now accounts for a substantial percentage of all trading on the NYSE, particularly on smaller orders.

Finally, a small number of NYSE members are floor traders who independently trade for their own accounts. Floor traders try to anticipate temporary price fluctuations and profit from them by buying low and selling high. In recent decades, the number of floor traders has declined substantially, suggesting that it has become increasingly difficult to profit from short-term trading on the exchange floor.

Operations Now that we have a basic idea of how the NYSE is organized and who the major players are, we turn to the question of how trading actually takes place. Fundamentally, the business of the NYSE is to attract and process order flow. The term order flow means the flow of customer orders to buy and sell stocks. The customers of the NYSE are the millions of individual investors and tens of thousands of institutional investors who place their orders to buy and sell shares in NYSE-listed companies. The NYSE has been quite successful in attracting order flow. Currently, it is not unusual for well over a billion shares to change hands in a single day.

Floor Activity It is quite likely that you have seen footage of the NYSE trading floor on television, or you may have visited the NYSE and viewed exchange floor activity from the visitors' gallery (it's worth the trip). Either way, you would have seen a big room, about the size of a basketball gym. This big room is called, technically, "the Big Room." There are a few other, smaller rooms that you normally don't see, one of which is called "the Garage" because that is what it was before it was taken over for trading.

On the floor of the exchange are a number of stations, each with a roughly figure-eight shape. These stations have multiple counters with numerous terminal screens above and on the sides. People operate behind and in front of the counters in relatively stationary positions.

Other people move around on the exchange floor, frequently returning to the many telephones positioned along the exchange walls. In all, you may be reminded of worker ants moving around an ant colony. It is natural to wonder: "What are all those people doing down there (and why are so many wearing funny-looking coats)?"

As an overview of exchange floor activity, here is a quick look at what goes on. Each of the counters at a figure-eight-shaped station is a specialist's post. Specialists normally operate in front of their posts to monitor and manage trading in the stocks assigned to them. Clerical employees working for the specialists operate behind the counter. Moving from the many telephones lining the walls of the exchange out to the exchange floor and back again are swarms of commission brokers, receiving telephoned customer orders, walking out to specialists' posts where the orders can be executed, and returning to confirm order executions and receive new customer orders.

To better understand activity on the NYSE trading floor, imagine yourself as a commission broker. Your phone clerk has just handed you an order to sell 20,000 shares of Wal-Mart for a customer of the brokerage company that employs you. The customer wants to sell the stock at the best possible price as soon as possible. You immediately walk (running violates exchange rules) to the specialist's post where Wal-Mart stock is traded.

SuperDOT system

An electronic NYSE system allowing orders to be transmitted directly to the specialist.

floor traders

NYSE members who trade for their own accounts, trying to anticipate temporary price fluctuations.

order flow

The flow of customer orders to buy and sell securities.

Take a Virtual field trip to the New York Stock Exchange at www.nyse.com.,

Take a Virtual field trip to the New York Stock Exchange at www.nyse.com., specialist's post

A fixed place on the exchange floor where the specialist operates.

Ross et al.: Fundamentals III. Valuation of Future of Corporate Finance, Sixth Cash Flows Edition, Alternate Edition

8. Stock Valuation

© The McGraw-Hill Companies, 2002

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Responses

  • leonard
    How it's the nyse organized?
    7 years ago

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