The starting place when buying or selling a stock is the brokerage firm. Before the internet, brokers were what are known today as “full service brokers”, which basically means that you get to call and speak to a registered broker when placing your trade. With the advent of the internet came electronic platforms which allow traders to bypass the human stock broker and place trades with the click of a mouse. This obviously lowers transaction costs for the brokerage firms considerably and allows them to provide reduced cost trading which is referred to as discount brokerage. Before we get into electronic trading however, lets first look at how trades were executed on the NYSE before the internet so we can gain a better understanding of the process a trade goes through to be executed.
Lets say for example that you had been doing some analysis and felt that Apple stock was due for a run higher so you decided to buy 100 shares. Before the internet you would pick up the phone and call your stock broker and ask him to please buy 100 shares of Apple at the current market price of $126.43 dollars a share. Your broker would then call his firms order department with the order for 100 shares of Apple , who would then notify the firms clerk who actually sits on the floor of the New York Stock exchange where Apple stock is traded. The order clerk would then give the order to the firm’s floor broker who would then approach the specialist who was responsible for conducting the market in Apple stock. The order would then be given to the specialist who would match your order to buy 100 Shares of Apple at the current market price with another trader who was looking to sell at least 100 shares of Apple at the current market price. Once the trade is completed the floor broker would then notify the clerk that the trade was executed and give him or her the price. The clerk would then notify the firm’s order department, who would then notify you and your broker that your trade was completed. Sound complicated enough for you?
Well luckily things have come a long way with the internet and the large majority of trades are now processed on the NYSE through an electronic system called SuperDOT. For trades under 100,000 shares, the SuperDOT system can now be used to route trades of under 100,000 shares directly to the specialist on the floor, bypassing the other human components which used to be involved in the trade. As you can imagine this system, combined with online trading systems which allow traders to enter trades right from their computer, has sped up trade execution immensely, while lowering costs at the same time. While stock brokers, order clerks, and floor brokers are all still a part of the process, stock brokers now focus on providing more customized financial advice and the clerks and floor brokers provide assistance with executing very large order sizes.