Specialists And Electronics
Price Vs. Speed
by Don Bright
Here's a look at the order handling of the New York Stock Exchange versus over-the-counter equities.
Over the last few months, I've been following the discussion, and even controversy, surrounding the best way to handle equities orders. In recent years we have seen the evolution of customer-initiated order flow. The Internet has opened up the world of trading to Main Street, and the increase in activity has spawned additional scrutiny into the way orders are handled.
THE SPECIALIST AND THE OTC
From a trader's perspective, I would like to discuss one of the two basic order-handling systems under review these days: the specialist system, which primarily means the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). These exchanges differ in their way of order handling, but the basic premise is the same. Since I am more familiar with the NYSE, I will use that exchange for my analysis.
The other system is, of course, the OTC (over the counter) electronic marketplace, as represented by the Nasdaq market system. Both systems are mostly electronic, so it is a mischaracterization to describe the debate simply as “specialist vs. electronic.” Market makers handle nonelectronic orders, as do specialists. However, most trades are submitted via direct order turnaround (DOT) or an electronic communications network (ECN).
Some of the debates of late seem to focus on which system is more likely to give unfair service to the trader, institution, or individual. Personally, I think that both systems do an excellent job of satisfying the ever-increasing demand for stock-trading activity, so I will attempt to show examples of how each system works in the real world.
ORDER ENTRY BASICS
The direct order turnaround electronic entry system is used by most broker-dealers (and our professional traders) for order entry. The DOT system can go either to the NYSE specialist or to an ECN directly. The NYSE orders will show up at the specified post assigned to the listed stock.
...Continued in the July issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the July 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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