Question

The secondary market includes stock exchanges such as the New York Stock Exchange and NASDAQ. How do these stock exchanges facilitate the process of trading securities?

Answer 1

The New York Stock Exchange uses two methods of trading: brokers and all-electronic. Regardless of the method of exchange, all stock transactions are an auction.

Brokers actively trade stocks on the floor of the NYSE. Buyers and sellers auction securities for the highest price. Brokers represent the entity buying the stock, whether it's for a retail brokerage company or institutional investors such as pension funds. The brokers set the "bid" price, which is the price you're willing to pay for the stock.

When your stockbroker executes your order to sell, it is not completed until one of the dealers on the floor of the New York Stock Exchange finds another broker to buy it. Before trading, brokers and dealers must get approved by the NYSE and hold a trading license.

The dealers match up the brokers with the stock sellers, who submit an "ask" price. It's usually higher than the bid price. In this way, it's like selling a home. The dealer is like the real estate agent, who puts the buyer and seller together. Dealers get to pocket the difference between the ask and bid price, minus fees and expenses, for their work.

Most of the transactions occur electronically. A computer acts as the dealer, matching up buyers and sellers. Even the brokers and dealers get their information and trade electronically.