 Tuesday. Second Day at the NYSE Teach the Teacher course!
How could Tuesday top Monday. Well it did with a visit to the floor of the exchange during trading hours!
The morning began with a presentation by John Dolan, Managing member of Van der Moolen (a specialist firm), discussing the work of the Specialist. He talked with us for 45 minutes before he had to go down to the floor of the Exchange for the opening and go to work. He loves his job. He said that if he weren't making a market in stocks, he would be making a market in anything and everything---pencils, coffee cups, etc. It is in his blood.
The Specialist makes a market on the floor of the Exchange for the stocks he is responsible for. He creates an arena where trades can take place. A 100 share order receives the same priority as a 10,000 share order.
The Specialist creates one store where the stock can be bought and sold. The Nasdaq with its dealers has many stores that quote prices for the stock. On the Nasdaq the trade takes place between the investor and the dealer. On the NYSE the trade takes place on the floor of the Exchange between two floor brokers representing two investors. The Specialist is the auctioneer. He gives the quote from his order book. The quote consists of the buy price and the number of shares available at that price and the sell price and the number of shares available. If necessary, the Specialist steps in to offer a better price by buying or selling from his inventory of the stock. Because of this, one-third of the time investors can obtain a better price than the one quoted.
Specialists are required to step in to minimize the price differential between the bid and ask prices as the stock moves up or down. This ensures that the price rises and falls by small increments between each buy and sell (ensures an orderly market). On the Nasdaq the price difference between the bid and ask price and between consecutive trades tends to be larger.
The Specialist acts as an Agent by buying or selling on behalf of a floor broker (floor broker leaves his order with the Specialist and goes off to fill other orders).
The Specialist acts as a Principal by buying and selling from his inventory to give the customer a better price than the quoted prices of the next bid and ask prices in his order book. The Specialist also acts a Principal as the other side of a one-sided trade (buy if there is not an immediate buyer on the floor or in his limit order book or sell if there is not an immediate seller). The Specialist makes money for his firm by acting as an Agent and as a Principal.
The Specialist also acts as a catalyst by bringing buyers and sellers together on the floor of the Exchange. If a floor broker has a buyer for a number of shares, and no seller is present, the Specialist will call a floor broker over who has a history of trading that stock or who sold shares earlier in the day and may currently have shares to sell. Specialists build relationships with brokers on the floor.
The other important function of the Specialist, is to work through an order imbalance before the stock opens for trading at 9:30. An imbalance occurs if there are more shares to be sold than shares to be bought (or the other way around) at the opening market price. The Specialist uses limit orders in his order book and shares from his inventory, if necessary, to match and equalize the number of shares to be traded at the best possible price. At opening the imbalance has to be zero---all market buy and sell orders have to be matched.
When a new company is listed on the Exchange, the Specialist applies to the company to become its Specialist on the floor of the Exchange. The company interviews the Specialist and looks at the ratings the floor brokers have given him. The floor brokers rate the Specialists quarterly on how well the Specialist creates a market for everyone and whether he deals fairly with all brokers.
If a company's stock price is falling, the Specialist calls the company to let it know about the drop and to find out what is happening.
Floor brokers work to obtain the best possible price for their clients. If the broker does a poor job, his or her customers will go elsewhere.
Next, we heard from Gary Campagne about the technology infrastructure. Technology provides the efficiencies that allow trading volume to increase. In 1972, 16 million trades took place with 100 percent manual paper trades. In 2002, 1.4 billion trades were completed. The system is able to transport 6,000 messages per second.
Much of his department's work involves discovering possible bottlenecks and analyzing the need for added capacity. Technology covers trading technology, information products, infrastructure, regulatory systems, web servers, corporate network systems, etc.
The NYSE technology safety infrastructure includes 8 access centers around the country----8 different centers brokerage firms can connect through to reach the Exchange.
Before lunch we practiced being the specialist and floor brokers buying and selling and using the correct lingo in preparation for our trip to the floor after lunch.
On the floor of the NYSE. Each two teachers were assigned to a Specialist for 30 minutes. Our Specialist was Christopher Culhane in the New Trading room at Post 20, position F. He works for the specialist firm Bear Wagner, which is owned by Bear Stearns. He is responsible for 8 stocks---R. H. Donnelley (RHD), Owens-Illinois (OI), Medicis Pharmaceutical (MRX), American Axle (AXL), Pepsiamericas (PAS), Packaging Corp of America (PKG), Saga Communications (SGA), and Tootsie Roll (TR). He was most gracious about answering any and all questions and explaining what he does as well as the jobs the people behind the counter were doing. Mostly, I just stood and watched and soaked it up. Some things I noted:
- The New Room is smaller and quieter with better lighting than the other trading rooms.
- All Specialists in the New Room worked for Bear Wagner.
- The speed (incredible) and concentration with which the clerk behind the trading counter keyed in all trade information that goes out over the wire. Talk about eye, hand, brain automatic coordination! Not a place for my dyslexics.
- Seeing the Specialist's electronic limit order book (on a computer screen at eye level to his right). It used to be a handwritten pad that was the closest kept secret of all (At least that's my perception.). The Floor brokers still can't readily see it (nor are they supposed to).
However, anyone can now subscribe to the NYSE OpenBook in realtime. The OpenBook is a list of the limit orders in the Specialists' order books for all NYSE-traded securities. It lists limit order information for all bids and offers including the number of shares. Yet, it represents only the limit orders on the Specialist's book and not the entire market. The OpenBook does not include crowd interest or specialist proprietary interest that is part of the Specialist's book.
It fascinates me that this data has become available to all.
NYSE OpenBook display recipients will be charged $50 per display device per month directly by NYSE. This applies to any display of NYSE OpenBook received directly from NYSE or via an approved NYSE OpenBook vendor. Additional fees may be charged by the vendor.
- Several times while standing there, a broker came up to our Specialist and asked "How's Axle?" Mr. Culhane would tell him about the two or three most recent sales---the price, number of shares, and which brokerage firms were involved in the trade. The sharing of that information was of interest to me.
- There was not a lot of trading activity. There were four or five trades in AXL while we were there and that is about it.
- Two or three women floor brokers
- Just being there, seeing it, the atmosphere, taking it all in----incredible!
- Feel the pulse of the U.S. capitalism system
- Feel the heart beat of publicly traded corporations
- A place I thought I'd never get to be as I looked down on it from the pre 9/11 visitors' gallery.
When we got back to our meeting room on the 6th floor, we heard from Lou Pastina about the Next Generation Trading. Floor brokers are now using large handhelds rather than paper and pencil to track and execute their orders. The person in the brokerage firm[base ']s booth can now electronically transmit the firm's orders to their floor broker's handheld. He immediately receives it where ever he is on the floor. The Runner is a position of the past.
The new Hybrid Market will allow investors to quickly trade (3 to 5 seconds) blocks of stock by directly matching the number of shares. These trades will not necessarily be traded at the best available price. However, it answers the demand for speed. It also allows for anonymity.
Beth Oporto discussing Exchange Traded Funds (ETFs) was our last presenter of the day. I think of an ETF as an index basket of stocks that can be traded between investors at any time during the day as opposed to a mutual fund that is a basket of stocks picked by a money manager and bought and sold from the fund company only at the closing day at the end of the day value/price. This is the NYSE official definition of an ETF:
An Exchange Traded Fund (ETF) is an index fund representing a basket of stocks that trades on the Exchange throughout the day, with intra-day pricing. Investors get the advantages of trading a diversified "basket" of stocks that reflect the performance of a market index, industry, sector, style or region---all in one security. ETFs can offer investors benefits such as: tax efficiency, diversification and the ability to buy and sell throughout the trading day.
The NYSE lists16 ETFs and trades another 24 ETFs that are listed on other exchanges.
The NYSE is most excited by two ETFs put together by Barclays---NY and NYC. These are the first ETFs to be based on an NYSE Index. NY is ishares NYSE 100 Index Fund. The NYSE Index is composed of the 100 largest U.S. common stocks listed on the NYSE. NYC is ishares NYSE Composite Index Fund. The NYSE composite Index Fund is composed of all common stocks listed on the NYSE---2,044 listed companies--1,665 U.S. and 379 non-U.S.
Once again 4:30 arrived and we were escorted down to the outside door. It was back to the hotel for an early Bloody Mary and dinner and time to let the brain collapse. In retrospect, there is no way I could have blogged even if the blogging software had been up and running on my laptop! It has taken me a week to digest the experience and begin to put it together.
3:08:42 PM 
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