The Open Outcry Trading System

The long-standing tradition of the open outcry trading system is the one portrayed by movies and TV shows, where we see swarms of traders wildly waving their arms and shouting at the tops of their lungs. That realistic portrayal of the NYSE auction market system (before computers took over), where sellers announce asking prices and buyers put forth bids, shows how the market works: The highest bid gets matched with the lowest ask, and the auction trade is completed. Understanding the ins and outs of the trading floor involves knowing what each player does, particularly customers, brokers, floor traders, and specialists.

A customer contacts a broker with a trade request. The broker connects with the floor trader. A floor trader follows the wishes of the broker and looks for the best bid or ask offer from the specialists. A specialist’s job is to make sure the trading traffic flows smoothly by making it easy to trade a particular stock, and most specialists handle somewhere between five and ten stocks on any given day. A specialist is responsible for posting bid and ask prices (or quotes), maintaining an inventory of the stocks (to facilitate trading), and actually executing the trades. Specialists act like matchmakers for bidders and askers, connecting as many as possible. If necessary, they will even buy for and sell from their own supply of shares.

Today, instead of face-to-face contact, lively and loud haggling, and paper buy and sell pads, trades on the NYSE are all done electronically. Even so, the NYSE system follows a familiar pattern that remains ingrained in market culture. In today’s market:

  1. A customer contacts a broker, whether by phone or Internet, and tells the broker what stock he wants to buy or sell.
  2. The broker contacts the floor trader with the order.
  3. The floor trader brings that request to a specialist in that specific stock.
  4. The trade gets written up and executed.

Despite frantic market activity, the trading floor itself is a calm, quiet place, its character forever changed by technology. The shouts of traders have been replaced by the quiet buzz of computers, and the floor seems more like the quiet room in a library than a melee.