If you have ever bought or sold stock, you know that you have to do so through a stock broker. The stock broker has access to sophisticated systems that link in to a series of exchanges that execute the trade. Most of us never think about those systems and exchanges, but I was just there and I thought it was interesting. Here is how a stock trade works from the buyer side.
New York Stock Exchange, 1930
So Joe Investor decides he wants to buy a share of Citigroup, which might not be so advisable today. Citigroup’s ticker symbol is C.
In the old days, Joe would call up his stock broker and say, “Mr. Stock Broker, buy me 100 shares of Citi.” At that point, the broker would call his trading desk and tell them to buy 100 shares of Citi for Joe. The trading desk would call their floor trader at the New York Stock Exchange, and that trader would go find someone who wants to sell 100 shares of C. Those people would meet at a spot on the floor where a specialist is posted for that stock. The two traders would agree on a price. If no one was selling, the Joe’s trader would just buy the stock from a specialist who keep an inventory of C in case anyone wanted to buy it but couldn’t find a seller. Once an agreement was made on the price, the trade would take place and Joe would be the proud owner of C. Joe’s broker would keep the stock in his account until he wanted to sell it or transfer to another broker.
Now, things are a bit different. If Joe wants to buy a share of stock, he logs on to his stock broker website. If he wants, he can still call, but the fee for doing that is usually about $20 higher than doing it online himself. If Joe knows he wants C no matter what the price is, he can just type in that he wants to enter a market orderfor the stock. At this point, the computer system will link into the NYSE-Euronext system and look at current sellers of C. The system matches buyers and sellers automatically. For small orders, this all happens automatically with no human intervention.
The order system is best visualized through the image on the right. Just click on it to make it larger. This is the active trading screen for Charles Schwab’s Street Smart, the program I use to monitor stocks live. If you have a large account it is free, otherwise there is a big fee. The screen, and similar ones at trading desks and Bloomberg terminals around the world, lets you see current bid and ask prices. When they meet, a trade executes. In this screen, you can see recent trades in the colored boxes.
Once the trade executes, your stock broker’s system will credit the shares to your account. This generally takes two or three days to happen, as there is still a settlement lag time for the assets to transfer from the seller’s account to the seller’s broker to your broker to your account.
If I didn’t confuse you enough, some trades still can happen between two people, but those people must enter the trades into the computer system. New shares of stock are distributed through an IPO and involve pre-orders through designated brokers. Each stock exchange also has a separate system. The NASDAQ and NYSE cannot trade each other’s stocks, but the NYSE and Euronext have merged and can trade each other’s stocks. There is a lot to know.
How does this really impact you? It does not unless you work on the stock market or are a serious active trader. Either way, it is good to know how the system works. You can impress your friends telling them about the bid-ask spread over drinks tonight. (Disclaimer: Unless your friends are nerds they will not think this is cool.)
An Picture of the Elusive Eric at the NYSE
If you think I missed something or have any questions, feel free to let me know in the comments.
Pingback: How Corporate Bonds Work | Narrow Bridge