In our last lesson we continued our course on the logistics of stock trading, with a look at what exactly a stock exchange is. In today's lesson we are going to continue this discussion with a look at one of the Major stock exchanges in the United States, the New York Stock Exchange.

The New York Stock exchange is the oldest exchange in the United States with history going back all the way to 1792. It was then that 24 traders who had been gathering under a buttonwood tree on Wall Street in New York, signed what became known as the button wood agreement. This formalized the relationship between the traders who had been gathering there to trade stock among one another, and stipulated that they would all charge the same commission going forward.

Because of its size and long history, many of the country's largest public companies choose to list their shares for trading here. In addition to being known for its long history and size however, the NYSE is also known for its physical location and human involvement in setting the price for stocks it trades, and it is these features that it is most important for traders to understand.

While many of the worlds exchanges have gone completely electronic, the New York Stock Exchange maintains a physical trading floor, and people who are known as specialists, seek to conduct an orderly market through an open auction process. What this basically means is that there is an actual person sitting on the floor of the New York Stock Exchange who is responsible for gauging supply and demand for a particular stock in the market and setting its price based on that supply and demand.

The fact that the specialist is seeing all the orders come into the market for a particular security at one time, as well as how the people around him such as the floor brokers (which we will learn about in our next lesson) are acting, gives them a huge edge over the market that is not available to the individual trader. In return for this privilege, specialists are required to provide liquidity when there are not enough buy and sell orders coming into the market to make a price. To do this the specialist holds an inventory of shares and uses this to balance the market when there are not enough buyers and sellers.

Specialist make money buy buying at the price where the public is selling (referred to as the bid price), and selling at the price where the public is buying (referred to as the offer), and pocketing the difference between those two prices (referred to as the spread). Within certain guidelines, they are also allowed to take positions in the market, which with their "inside view of the action" can be very profitable. It is for this reason that there are many rules relating to how they can do this, and also why specialists often have a bad reputation for trading against their clients.

That's our lesson for today. In our next lesson we will look at the process a traders order goes through to be executed when trading an NYSE listed stock so I hope to see you in that lesson.

As always if there are any questions or comments please leave them in the comments section below, and good luck with your trading!

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.