America's Major Organized Stock Exchanges
National Stock Exchanges
A national exchange is one registered with the U.S. Securities and Exchange Commission, which followed the Securities Exchange Act of 1934. Any exchange engaged in interstate commerce or using the mail must register with the SEC. The following are registered national exchanges: New York Stock Exchange, American Stock Exchange, and the National Association of Security Dealers Automated Quotations System. All are located in New York City. The U.S. equity markets are broken down into three major groups: the national exchanges; the regional exchanges; and the over-the-counter market trading.
The New York Stock Exchange, which opened in 1792, is the oldest and largest exchange in North America. Over 600 million shares are traded daily. The NYSE lists 2,300 common stocks and 3,600 company bonds. It has about 1,500 members who own seats and trade for themselves or their firms. Membership seats are also traded. In March 2009, seats sold for $1.4 to $1.5 million.
Membership categories include commission brokers, floor brokers, registered traders, and specialists.
The commission broker belongs to the largest member category and is employed by one of the 500 securities houses which handle the exchange’s business. Orders are executed on behalf of the brokerage firm for its customers at a pre-determined commission rate.
Floor brokers are members of the exchange who act as brokers for other members when the members need help handling large orders or when they have more orders than they can handle. Floor brokers share in the commission of the member firm they are helping.
US Stock Exchange Floor
Registered traders are members on the floor of the exchange who buy and sell for their own account. They provide the market with additional liquidity.
The specialists are considered to be the most important group on the floor of the exchange. They constitute about 25% of the total membership of the exchange. The specialist acts as a broker and a dealer, and trades in a specific group of stocks. The specialists are also expected to buy and sell for their own account whenever there is insufficient public supply or demand to provide a continuous liquid market.
The American Stock Exchange Trades
The AMEX is also a national stock exchange. It is nicknamed the "Curb Exchange" because in the beginning its members traded stocks outside the NYSE on the curb of Wall and Broad Streets. It moved indoors in 1921. It maintains listings like the NYSE on about 800 stocks, but its listing standards are less rigid than the NYSE. However, the AMEX's membership structure is similar to that of the NYSE.
In order to distinguish itself, the AMEX has aggressively sought new forms of securities to list. It originated the ADR or American Depository Receipt, allowing U.S. investors to trade in foreign securities. It introduced trading in warrants. And, in the U.S. it maintains the second largest market share in listed securities options.
National Association of Securities Dealers Automatic Quotations
Dating back to 1971, the NASDAQ is not a centralized exchange and has no physical trading floor. It is a network of brokers and dealers connected by telephone and computer terminals. Stocks of small companies that cannot meet exchange listing standards are traded on this system. However, there are extremely large companies like Intel, Microsoft, MCI, and others that, despite their size, have chosen to remain with the NASDAQ market rather than move to a listed trading environment.
Unlike exchange specialists, market makers are not required to make a two-sided market. The NASDAQ system simply maintains an electronic book of current bid and offer quotes.
How to Trade Securities
The OTC market is not a formal market organization with membership requirements. As long as someone is willing to take a position in a stock, it is possible to trade any security on the OTC market. Firms or individuals make markets in stocks by buying or selling stocks for their own accounts rather than acting as agents for other investors.
The Chicago Stock Exchange, Boston Stock Exchange, Pacific Stock Exchange (located in Los Angeles and San Francisco), Philadelphia Stock Exchange and the Cincinnati Stock Exchange (located in Chicago) are exchanges which list securities that have only a regional interest, and that have dually listed New York Stock Exchange stocks. For example, shares of IBM trade on the NYSE, but they also trade on each of the regional exchanges. This allows smaller brokers to have access to a market with a much lower seat price than the NYSE.
Companies can raise either debt or equity capital. To raise equity capital, companies issue shares which are sold to investors who want to take on the risks and rewards of ownership. Once shares are issued, the stock market provides the mechanisms and processes by which these shares can be bought and sold. The Securities and Exchange Commission, or SEC, which regulates securities trading, created “19c-3 stocks.” These stocks refer to the regulation’s section number, when the exchange’s monopoly in listed securities ended in 1979. Common stocks listed since that date may be traded on any ex change and many are now listed on several exchanges. Stocks listed by more than one exchange are termed “dual listings.”
Investors can also use the so called third and fourth markets. The term “third market” refers to over-the-counter trading in exchange listed securities. The fourth market consists of proprietary electronic trading networks that permit the trading of exchange listed common stocks without a broker's involvement.
The third market
The over-the-counter market is a dealer market, similar to the NASDAQ. Dealers make a market in the securi ties they choose. Unlike exchange specialists, dealers are not required to make a two-sided market in a security. A dealer maintains inventory and may offer to buy and / or sell as principal for their own account.
Practically speaking, a dealer posts an offer to sell from inventory or buy for inventory on an electronic bulle tin board or in the pink sheets. Trades occur when a broker phones a dealer to negotiate a purchase or a sale. Traditionally, “off-exchange” was a broad term encompassing all over-the-counter trading. Now, the term “off-exchange trading” is usually applied to over-the-counter transactions in listed securities.
This differs from the trading of unlisted stocks, such as Microsoft, Intel, and MCI, on the NASDAQ system. These are referred to as “unlisted” because they do not trade on the NYSE, AMEX or any regional exchange.
The fourth market
Electronic trading mechanisms include productivity innovations of the national and regional exchanges, as well as proprietary trading systems. As trading volumes increased, the exchanges automated the execution of small, primarily individual orders so they could handle them cost effectively. Some of the better known exchange systems are the NYSE's Designated Order Turnaround system, DOT for short, and Super DOT, for larger orders. The NASDAQ’s Small Order Execution System is another example of an exchange system.
Electronic trading systems foster the use of portfolio management tactics such as program trading, including the automated execution of block trades. Block trades are large orders and security baskets, or bundles of securities, such as the components of an index like the S&P 500 index.
Proprietary systems such as Instinet, a product of Reuters, and Posit, a product of Jefferies & Company, were initially developed to facilitate institutional investors’ trading before fixed minimum commissions were eliminated on May 1, 1975. Today, institutional investors still find proprietary systems a cost effective means of trading large blocks of stock without a broker.