Subject: Exchanges - The New York Stock Exchange

Last-Revised: 4 June 1999
Contributed-By: Jeffrey Benton (jeffwben at aol.com), Chris Lott (contact me)

The New York Stock Exchange (NYSE) is the largest agency auction market in the United States. Visit their home page:
http://www.nyse.com

The NYSE uses an agency auction market system which is designed to allow the public to meet the public as much as possible. The majority of volume (approx 88%) occurs with no intervention from the dealer. Specialists (specs) make markets in stocks and work on the NYSE. The responsibility of a spec is to make a fair and orderly market in the issues assigned to them. They must yield to public orders which means they may not trade for their own account when there are public bids and offers. The spec has an affirmative obligation to eliminate imbalances of supply and demand when they occur. The exchange has strict guidelines for trading depth and continuity that must be observed. Specs are subject to fines and censures if they fail to perform this function. NYSE specs have large capital requirements and are overseen by Market Surveillance at the NYSE. Specs are required to make a continuous market.

Most academic literature shows NYSE stocks trade better (in tighter

ranges, less volatility, less difference in price between trades) when compared with the OTC market (NASDAQ). On the NYSE 93% of trades occur at no change or 1/8 of a point difference. It is counterintuitive that one spec could make a better market than many market makers (see the article about the NASDAQ). However, the spec operates under an entirely different system. The NYSE system requires exposure of public orders to the auction, the opportunity for price improvement, and to trade ahead of the dealer. The system on the NYSE is very different than NASDAQ and has been shown to create a better market for the stocks listed there. This is why 90% of US stocks that are eligible for NYSE listing have listed.

A specialist will maintain a narrow spread. Since the NYSE does not post bid/ask information, you need to check out the 1-minute tick to figure out the spread. In other words, you'll need access to a professional's data feed before you can really see the size of the spread. But the structure of the market strongly encourages narrow spreads, so investors shouldn't be overly concerned about this.

There are 1366 NYSE members (i.e., seats). Approximately 450 are specialists working for 38 specialists firms. As of 11/93 there were 2283 common and 597 preferred stocks listed on the NYSE. Each individual spec handles approximately 6 issues. The very big stocks will have a spec devoted solely to them.

Every listed stock has one firm assigned to it on the floor. Most stocks are also listed on regional exchanges in LA, SF, Chi., Phil., and Bos. All NYSE trading (approx 80% of total volume) will occur at that post on the floor of the specialist assigned to it. To become a NYSE spec the normal route is to go to work for a specialist firm as a clerk and eventually to become a broker.

The New York Stock Exchange imposes fairly stringent restrictions on the companies that wish to list their shares on the exchange. Some of the guides used by the NYSE for an original listing of a domestic company are national interest in the company and a minimum of 1.1 million shares publicly held among not fewer than 2,000 round-lot stockholders. The publicly held common shares should have a minimum aggregate market value of $18 million. The company should have net income in the latest year of over $2.5 million before federal income tax and $2 million in each of the preceding two years. The NYSE also requires that domestic listed companies meet certain criteria with respect to outside directors, audit committee composition, voting rights and related party transactions. A company also pays significant initial and annual fees to be listed on the NYSE, in the tens or hundreds of thousands of dollars. Initial fees have a base fee plus a charge per million shares issued. Annual fees are also based on the number of shares issued, subject to a minimum and maximum.

For all the listing details, visit this NYSE page: http://www.nyse.com/listed/

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