Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Big Board

What it is:

The Big Board, also known as the New York Stock Exchange (NYSE), is the first and most popular stock exchange in the world. It was created in 1792 when two dozen stockbrokers and merchants signed the Buttonwood Agreement. The first company it listed was the Bank of New York.

How it works (Example):

Stocks, bonds, mutual funds, exchange-traded funds, and derivatives all trade on the NYSE. The exchange also offers electronic trading products, historical trading information, and order-execution products. The NYSE is an auction market where brokers and specialists buy and sell securities for people by matching the highest bidding price with the lowest selling price. This is one of the most distinguishing characteristics of the NYSE -- unlike the Nasdaq or other electronic exchanges, the NYSE has an actual trading floor at 11 Wall Street in New York.

Trading on the Big Board
When an investor wishes to buy or sell a security listed on the NYSE, he or she "places a trade" or an "order" by calling her broker or going to her online trading account. In either case, the order goes to a broker, who can get the order to the exchange several ways -- through a regional exchange, electronic communications network, or directly to the NYSE. No matter the way, the order eventually reaches the floor of the NYSE where floor brokers and specialists handle transactions.

Floor Brokers
Floor brokers execute buy and sell orders on behalf of their clients or the firms they work for. If you wanted to sell some shares of Company XYZ, for example, you might call your broker down the street and place a sell order. Your broker might in turn route the order to one of his firm's floor brokers who are actually on the floor of the exchange. The floor broker approaches the Company XYZ specialist (see below) and executes the trade. Some floor brokers are independent, meaning that they are not employed by any brokerage firm, but provide services to brokerage firms (i.e., they work for themselves). In either case, floor brokers are the people doing most of the shouting on the trading floor.

Being a floor broker requires owning a seat on the NYSE. A seat allows a person to trade on the floor of the exchange, either as an agent for someone else or for their own personal accounts (in which case, the person is called a floor trader).

Specialists match up brokers' buy and sell orders, and each specialist specializes in certain listed securities.

A specialist has four roles. First, he is the principal -- he is the primary party to a transaction, and his customers' interests come before his own. He must be willing to buy and sell out of his own inventory to steady the market if there is a buying frenzy or a huge sell-off. Second, he is an agent -- he places orders on behalf of his clients and ensures that they get the best price as quickly as possible. Third, he is a catalyst -- he reports the prices of his securities in a timely manner and he sets the opening bid prices of his securities every morning based on supply and demand. Fourth, the specialist is an auctioneer -- he must disclose the best buying and selling prices and ensure that orders are transacted properly.

The NYSE does not employ specialists. Rather, each specialist works for one of a handful of companies.

NYSE Regulation
After centuries as a nonprofit institution, the NYSE became a for-profit corporation on March 7, 2006. Like any other corporation, the NYSE has a board of directors. This board, along with the management and other employees of the NYSE, is responsible for accurately listing securities, setting effective policies and supervising trading activity. It also manages the transfer of trading seats and determines which companies qualify for listing on the exchange.

Although the Big Board expends considerable effort monitoring its members and listed companies, it is subject to a great deal of regulation from several federal agencies, such as the Federal Reserve, and from a host of laws, such as the Securities Exchange Act of 1934. The Securities and Exchange Commission (SEC) is the weightiest of the regulators -- it supervises the NYSE and all national exchanges, brokerage and investment institutions, and other participants in the securities markets. The NYSE must also comply with each state's securities laws.

One of the Big Board's main responsibilities is to ensure an orderly market. When the prices of any listed securities are moving up or down rapidly, the NYSE may restrict trading (primarily to reduce the large number of program trades that occur in an average trading session). This is particularly the case if the Dow Jones Industrial Average moves more than 170 points.

Why it Matters:

For many, the Big Board is a symbol of all that is Wall Street. It is the place where fortunes are made and lost, and where the free market can be seen in its most tangible form.

Companies listed on the Big Board are generally perceived to be more well established than companies listed on the Nasdaq or other exchange. This is not always the case, however.