New York Stock Exchange

Exchanges have been part of the fabric of the American economy and history since the 18th century.

In 1790, Philadelphia merchants, who had helped finance the Revolutionary War effort, supported the creation of the first U.S. stock exchange to trade the young federal government’s $80-million debt.

Spurred by the ensuing speculative boom, 24 traders gathered at 68 Wall Street in 1792 and signed the Buttonwood Tree agreement that marks the foundation of the New York Stock Exchange. The agreement sought to regulate commissions to trade war bonds issued by the young U.S. government as well as two banks. One of these, the Bank of New York, is still listed on the NYSE today.

The event that shaped trading on the world’s largest exchange occurred in 1875 when NYSE broker James Boyd hurt his leg. Lacking the mobility to scout the crowd of buyers and sellers in various issues, Boyd sat at a specific spot and handled a single stock, Western Union. Customers quickly found it was more convenient to always trade the same stock from the same place, leading to the creation of the specialist system where supply and demand are matched in an auction process.

Today, much of the NYSE’s order flow still comes via floor brokers who act as agents for a brokerage firm’s customers, bringing buy or sell orders to the specialist post. Floor brokers, if they work for a firm, may also represent proprietary orders. Independent floor brokers perform the same task, except that they do not work for a specific firm but help handle orders.

From his post, the specialist manages the auction process, based on his exclusive knowledge of the buy and sell orders entered in his book by the floor brokers. At times, the specialist himself is the buyer or seller of last resort and will commit his firm’s capital to reestablish an orderly market.

However, the specialist must never use the privileged information contained in his book to step ahead of clients’ orders when a match between buy and sell orders comes naturally.

In the past, NYSE specialists have abused their privileged position to take advantage of customers, resulting in a settlement reached with the SEC in early 2004. This also prompted the SEC to consider broad market reforms to align the U.S. regulatory framework with the advance of new trading technologies.

Competition from efficient electronic trading has intensified as well. As a result, the NYSE is proposing a new hybrid market model, which will offer certainty of execution to investors who choose that model or the opportunity for old-fashioned price improvement to others. The exchange is also considering diversifying its product offering.

But, without waiting for these recent developments, the NYSE had progressively modernized its market. Orders are delivered electronically to the NYSE via SuperDot, an order-routing system that delivers orders straight to the trading post and electronically sends post-trade reports to member firms where the orders originated.

NYSE e-Broker is one example of the use of technology in a manual environment. The wireless handheld order-management tool keeps floor brokers in constant contact with their firm’s trading desks and floor office.

Program-trading also regularly represents about 50 percent of volume on the NYSE. Interactive Brokers, a firm that pioneered the use of trading technology, regularly ranks among the top 15 program-trading firms on the exchange.

Anonymous SuperDot (Adot) allows institutional investors to submit orders directly to the NYSE without any participant knowing their identity. The institutions and their sponsoring brokers must set trading limits.

Some orders sent to the NYSE can be auto-executed on the Direct+ platform, which today handles about 10 percent of the exchange’s volume. Direct+ was designed for small retail orders of up 1,099 shares and had some constraints, such as a 30-second mandatory interval between consecutive orders.

The NYSE is now proposing to boost the functionality of Direct+ by lifting all size and interval restrictions to support its hybrid model. This will have a major impact on the market structure at the NYSE and affect not only the specialists and floor brokers but the global financial industry.

Member firms can also trade during four after-hour crossing sessions between 4:15 p.m. and 6:30 p.m. on the Off-Hours Trading Facility (OFHT).

The NYSE electronic market data service includes NYSE OpenBook, a real-time limit order book that displays the aggregate volume for each price for each NYSE security. LiquidityQuote provides a single price for the cumulative number of shares for large orders on the limit order book, with the specialist maintaining the inside quote.

Besides developing a hybrid model, NYSE CEO John Thain has outlined plans to diversify his exchange’s offering. The NYSE, which once traded options, may venture into derivatives and is expected to broaden its existing offering of government and corporate bonds, which trade electronically on its Automated Bond System or ABS platform.

Another innovation for the NYSE may be to extend its trading hours in a bid to facilitate trading for European participants.