How the Stock Exchange Functions

The stock exchange functions with new speed and efficiency since the advent of electronic trading. Some buy and sell orders for stock are still routed to specialists on the floor of the NYSE, the way they have been for decades. Other orders, however, are filled through ATS/ECNs, which execute orders without human intervention.

When a customer calls a stockbroker, or when he or she taps an order to buy or sell into a computer screen, the brokerage routes the order to a market where it will be matched with someone else’s, so someone will buy the stock the customer is selling, or sell her the stock she wishes to buy.


On the floor of certain stock exchanges, the trading of many popular stocks still takes place at a Post. At the post, a Specialist oversees trading, and “maintains a fair, orderly, and continuous market” according to his or her mandate. He or she acts as a market maker, keeping an inventory of stock.

He or she, or more precisely his or her firm, is also an auctioneer.  The specialist posts bid and ask prices. The Bid is what someone is willing to pay to buy a stock. The Ask is the price at which someone is willing to sell. The specialist buys and sells for customers, attempting to match buyers to sellers in a way that gets each party the best available price.

Floor brokers are another feature of this process. They deal directly with the Specialist, buying and selling large orders in person, often at the trading post.

LaBranche is a well-known specialist firm and so is Spear, Leeds & Kellogg. Every specialist firm concentrates on a number of stocks. This is the way many people were taught in school that the markets work, and to a degree, they still work this way.

Market Makers

The Nasdaq has about 300 Market Makers. These firms keep a supply of stocks, and sell them to all comers. They are shopkeepers, in effect, whose inventory is stock. They are required to buy and sell at all times when the market is open, to maintain liquidity. Like specialists, they match buyers and sellers, but they have no physical post. Their business is conducted, as a rule, electronically. Famous names among the market makers include Goldman Sachs, Schwab, and Knight Trading.


ATS stands for alternative trading system, and ECN stands for Electronic Communications Network. Technically, an ECN might be described as a special kind of ATS, but in practice the word ECN describes a way of buying and selling stocks and other financial instruments, such as currencies, on an electronic network.

Instinet may have been the first ECN, beginning operations in 1969. It used computer terminals to link users and allow them to sell instruments without using specialists or suffering delays by going through a stock exchange. Instinet expanded trading hours and lowered costs. Though Instinet was slow to gain full acceptance, it has since been followed by a multitude of successful ECNs.

Nowadays, an ECN customer, such as a stockbroker, enters an order into a dedicated computer screen. In the system, it is matched to a contra-order. That is, if the customer wants to sell a certain amount of stock, the system displays buy orders for similar amounts at similar prices. If the customer wants to buy, the system matches the order to sell orders. The order is often fulfilled automatically, faster than thought.

Unmatched orders are posted in the system for new buyers or sellers to view. ECNs can have provisions for buyers and sellers to negotiate, and networks generally keep users anonymous. Screens carry a variety of information about the stock in question.

One final way that stocks are bought and sold is through internal crossing networks, another form of ATN. In this case, the stock of a broker’s customer may be sold to another customer who wishes to buy. In this case, the proper price is discovered by referring to the price on a public exchange, but the stock is sold within the company and never affects the public price.

Some customers have direct access to ECNs, but most continue to place their orders through a broker, by telephone, in person, or online. Most of these customers will never notice whether their order was filled by a specialist, a market maker, an ECN, or by an internal crossing network.

It does matter. Each kind of stock exchange functions differently. Each has strengths and weaknesses, and each is most appropriate to certain trades. As ECNs grow in capability, they will probably fill an increasing proportion of orders, and serve an expanding and increasingly knowledgeable clientele.