From Ken Little,
Your Guide to Stocks.
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If your image of a stock exchange is a cavernous room full of people in oddly colored coats and vests running around in apparent chaos, you must be thinking of The New York Stock Exchange.

The NYSE is the oldest major stock exchange in the United States and the one that is synonymous with Wall Street in most people’s minds.

Unlike the Nasdaq, which has no physical exchange, the NYSE has had a physical presence since 1792 in one form or another.

Prices Set by Auction

Another big difference is that the NYSE sets stock prices by auction. The Nasdaq is a negotiated market. (See Market Markers Keep Nasdaq Humming for more information on how the Nasdaq works.)

The key player in the NYSE is the specialist – a market professional who works for a specialist firm that is responsible for making a market in a particular stock.

The specialist’s role is that of an auctioneer. They are responsible for maintaining order in the market for a stock and posting the best buy and sell orders first.

Not that Simple

However, it’s not quite that simple. If the orders become unbalanced, the specialist must try to get the market back into order even if it means buying or selling against the market out of the company’s own account to achieve some balance to the buy and sell orders.

The specialist doesn’t set stock prices anymore than any other auctioneer does. Their role is to match the best prices possible for the stock.

However, the specialist can adjust the opening price of a stock if there is a large book of orders before the opening bell in the morning. The specialist can also halt trading if necessary in extreme circumstances of order imbalance.

For the most part, the specialist role remains that of matching buyers and sellers at the best price for both.

Trading Volume

Even though the specialist is a real person, a sophisticated trading network handles most of what happens. No human can keep up with trading volumes measured in the hundreds of millions of shares each day that pass through the NYSE.

The specialist makes money by pocketing the spread – the difference between the bid and ask price on market orders. (See Understanding the Bid Ask Spread .) They can also trade for their own firm’s account and others.

Conclusion

The specialist on the NYSE is responsible for matching the best prices for a particular stock. This auction method assures investors they can buy and sell at the best price available at that particular moment.