announcement

Become a Contributor

How Does the New York Stock Exchange Work

How Does the New York Stock Exchange Work

The exchange is now known as NYSE EuroNext, after its merger with a premier European exchange. It is the largest and most diverse stock exchange in the world now. In this article, we provide a brief overview of its working.
Omkar Phatak
The New York Stock Exchange is not only one of the oldest but also the largest stock exchange in the world, by the United States dollar value, of its listed securities. Till October 2008, the combined market value of all the listed US companies in this exchange, was USD 10.1 trillion.

In 2007, NYSE merged with Euronext, a completely electronic stock market, creating NYSE Euronext, as an entity that controls the day-to-day working of the exchange. Its location is 11, Wall Street, in New York city, and for most stock brokers in the world, it's the place to be.

History

This stock exchange began as a modest stock trading company, co-founded by 24 stock brokers, on May 17, 1792, through the Buttonwood agreement, named so, as it was signed under a Buttonwood tree. Interestingly, once upon a time, it was listed as a nonprofit organization and became a for profit organization only in 2005. Today the day-to-day workings of the exchange are regulated and controlled by the 'US Securities and Exchange Commission'. Since then, over two centuries, it has grown to be the Mecca of stock traders.

Working of the Exchange

To trade as a brokerage firm at the NYSE, one needs a trading 'seat', the term dating to times when members actually traded from seats. It is more of a membership of the exchange, that allows you to trade and it has to be bought by the interested company. The cost of a seat varies and could range from USD 50,000 dollars to USD 1,000,000 or more. The highest price paid till date is USD 4,000,000, in 2005. Now, the exchange also gives the right of leasing a seat to an individual. Only, money cannot guarantee a seat. The approaching firm must satisfy some strict prerequisites and promise to follow an ethical code. The seats are made available through an auction. Now, the total number of seats is 1366.

The advantage of having a seat is that you can get direct access to the exchange market. Otherwise, you have the option to operate through brokers. The system is designed to facilitate stock trading of companies, listed on the exchange in a continuous auction format. It is a hybrid market and it provides the most comprehensive and diverse range of investment options in the world.

There are two ways of auctioning stock at this exchange. One is the traditional way of open outcry format. The other option is electronic trading. In the 'open outcry' form, stock selling is conducted like an auction, with buyers and sellers vocalizing their demands and fixing deals. Every firm has a specialist broker at the auctioning podium. The podium is the place where the auctioning happens. The specialist broker is the person, whom all floor brokers of stock trading firms, forward demands or sell orders for stocks. These demands and sale orders originate from the customers, who have stock trading accounts with these brokerage firms. The specialist broker brings about the deal between a buyer and a seller, for a stock. Till January 2007, this was the modus operandi for trade at the exchange.

Things changed in January 2007 and electronic trading was made available as an option. Since then, more than 80% of trade at the NYSE, happens through the electronic route. With the advent of e-commerce, this is an easier and viable option for traders in New York and rest of the world. Some very high-priced, premier stocks are withheld from electronic trade. They have to be bought and sold by the traditional auction route. The most important indicator of the health of the secondary stock market is the NYSE composite index. It is an indicator of the market capitalization of various companies, listed at the exchange. This index is continuously calculated, every half an hour, according to market developments.

Thus, the New York Stock Exchange, listed with more than 2000 premier companies all over the world, is a melting pot of world economy and an indicator of the economic pulse of the globalized industrial world.