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You’ve probably seen wild images of floor traders yelling and waving at one another before. Do you actually know how orders to buy or sell stock get filled though? A lot of investors don’t and that’s why Tom and Brendan discuss the process during this week’s Mullooly Asset Management podcast.
The first point to understand in this process is that the New York Stock Exchange trades in a continuous auction format. To understand how an order to buy or sell gets filled, it is important to know how things worked before 2007 (when computers became more heavily involved). Traders got orders from brokers and went to a designated post where the specific stock traded. At the post there is a broker called the specialist. The specialist is not an employee of the New York Stock Exchange. He is simply a broker whose job is to keep trading orderly. The brokers use “open outcry” to buy or sell their shares. This is where the crazy image of brokers yelling and waving signals at each other comes from. Open outcry lets the market set the price for each security. They announce what stock they’re selling, how many shares, and for how much and offers are made. It works the same way when you’re buying.
You can learn a bit more about “open outcry” here: http://www.investopedia.com/terms/o/openoutcry.asp
Since 2007 the NYSE has moved to become a “hybrid market”, meaning all stocks can trade electronically or be routed to the floor for the auction format. The electronic system is favored because it’s generally quicker and more efficient at getting orders processed.
Another topic that Tom and Brendan address during this week’s podcast is after hours trading. After hours trading does not get processed in the traditional auction format. It is done by matched sale only. This means that the buyer and seller agree on the price and quantity of stock to be moved. Investors should be skeptical of reported after hours trading numbers because they are frequently based off small volumes.
Make sure you listen to this week’s podcast to hear Tom and Brendan discuss the process of buy and sell orders getting filled.