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How the brokerage system works on Wall Street, by Dr. Rolf Jacobsohn, Singapore

Wednesday 9 September 2015

My good friend, Dr Rolf Jacobsohn in Singapore, describes the brokerage system on Wall Street when he worked as a broker in the 1980ies and 1990ies.


In 1984 we made a visit to the New York Stock exchange and talked to the people on the trading floor after the market closed for the day.

The New York stock exchange has "Specialists" who are supposed to make an [orderly] market in the stocks they trade, which may be a hundred or so issues.

http://www.investopedia.com/ask/answers/04/060304.asp

When orders are routed to the NYSE, they are then sent on to the specialist who has an electronic box DOT.

https://en.wikipedia.org/wiki/SuperDot

So first all buy and sell orders offset each other, and any remaining excess of Buy orders over Sell orders will then either be absorbed by the Specialist from his inventory, which may be long or short the relevant stock, and if that does not work, prices will change in order to execute the trade.

If the price difference is above a certain range, the NYSE floor supervisor needs to be informed. If the price is very different, the stock will not open for trading due to the imbalance of orders. This I saw first-hand during the crash in 1987.

The Specialist is supposed to maintain an orderly market and not commit financial suicide to adhere to the rules.
Then you have the independent professional brokers on the floor of the exchange who take the risk.

I am referring only to the NYSE, if "Over the counter Bulletin Board" stocks are involved, then the market makers will just take the phone of the hook if the flood of sell orders is not to their liking. This means no market, no liquidity.

The three types of US orders are:

1. A market order to be executed at the current price irrelevant what that is.
2. A Limit order, where the stock can only be done at that particular price, not a cent more or less.
3. A Stop Limit order, to get out of a trade long or short at a Limit price, which is meant to avoid being stuck with a stop loss order when the prices gap down
or up.

The other pain is the spread between bid and ask prices, particularly if there is no volume of trading in the stock to speak of.