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At the NYSE, two types of members work on the Trading Floor, each playing a distinct role in the trade execution process: Floor Brokers and Specialists.
Floor Brokers
A floor broker, acting as agent, traditionally executes orders to buy or sell stocks on behalf of a client. Sometimes a floor broker may represent his or her firm’s proprietary account. “Direct access” to the market through floor-based, registered representatives of NYSE member firms also has become a very important function of NYSE floor brokers. The two main types of floor brokers are house brokers and independent brokers:
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House Brokers are employed by large, diversified broker-dealers. Broker-dealers were once called “investment houses” or “banking houses,” from which the term “house” broker is derived. The house broker executes orders on behalf of his or her firm’s customers or occasionally on behalf of his or her firm’s own account.
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Independent Brokers are individuals, or “boutique” member firm employees, who provide execution services to house brokers, member or non-member broker-dealers. Independent brokers were commonly known as “$2 brokers,” servicing only the large brokerage houses. Today, independent brokers are the NYSE’s “agent entrepreneurs.” They help a house broker manage order flow on a busy day, conduct business directly for the public, or execute special orders for customers. Their income is derived purely from commissions. The number of independent brokers has more than doubled in the last decade in response to increased public demand for agency brokerage services on the floor of the NYSE.
Specialists
A specialist performs five essential functions in the specific securities allocated to him/her:
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Manage the auction process. To maintain a fair and orderly market in a particular security, the specialist establishes the opening price for his security every day. Then, during the day, he quotes the current bid and offer prices to brokers.
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Execute orders for floor brokers. The specialist can execute an order immediately or hold the order and execute it when the stock reaches the specific price requested by the customer. As a dealer, the specialist will buy or sell stock from his own inventory to keep the market liquid or to prevent rapid price changes.
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Serve as catalysts. Specialists are the point of contact between brokers with buy and sell orders. The specialist acts as a catalyst, bringing buyers and sellers together enabling a transaction to take place that otherwise would not have occurred.
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Provide capital. If buy orders temporarily outpace sell orders, or conversely if sell orders outpace buy orders, the specialist is required to use his firm's own capital to minimize the imbalance. This is done by buying or selling against the trend of the market until a price is reached at which public supply and demand are once again in balance. Usually public order meets public order without specialist participation, however, specialists do participate in about 10 percent of all shares traded.
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Stabilize prices. To ensure that stock trading moves smoothly, with minimal price fluctuation, the specialist will step in against the market trend. Specialists buy and sell stock to cushion temporary imbalances and to avoid unreasonable price variations.
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