The role of specialists at the NYSE
From the NYSE.com
Specialists are critical to the auction process. They perform a role that could be compared to that of an air traffic controller. Just as controllers maintain order among aircraft aloft, specialists maintain a fair and orderly market in the securities assigned to them.
They manage the auction process, providing a conduit of information -- electronically quoting and recording current bid and asked prices for the stocks assigned to them. This enables current price information to be transmitted worldwide, keeping all market participants informed of the total supply and demand for any particular NYSE-listed stock.
Specialists act as agents, executing orders entrusted to them by a floor broker -- orders to be executed if and when a stock reaches a price specified by a customer. In instances when there is a temporary shortage of buyers or sellers, NYSE specialists will buy or sell for their own accounts, against the trend of the market. They are not, however, required to fund all the liquidity for the market at any time. These transactions serve to manage volatility and represent a small portion of trading. The vast majority of NYSE volume is a result of public order meeting public order -- individuals, institutions and member firms interacting directly with each other.
Each stock listed on the NYSE is allocated to a specialist, a broker who trades only in specific stocks at a designated location. All buying and selling of a stock occurs at that location, called a trading post. Buyers and sellers - represented by the floor brokers - meet openly at the trading post to find the best price for a security.
The people who gather around the specialist's post are referred to as the trading crowd. Bids to buy and offers to sell are made by open outcry to provide interested parties with an opportunity to participate, enhancing the competitive determination of prices. When the highest bid meets the lowest offer, a trade is executed.
To a large degree the specialist is responsible for maintaining the market's fairness, competitiveness and efficiency. Specifically, the specialist performs five vital functions:
One of the specialist's jobs is to execute orders for floor brokers in their assigned stocks. A floor broker may get an order from a customer who only wants to buy a stock at a price lower than the current market price -- or sell it at a price higher than the current market price. In such cases, the broker may ask the specialist to hold the order and execute it if and when the price of the stock reaches the level specified by the customer. In this role the specialist acts as an agent for the broker.
Specialists serve as the contact point between brokers with buy and sell orders in the NYSE's two-way auction market. In this respect, the specialists act as catalysts, bringing buyers and sellers together, so that offers to buy can be matched with offer to sell.
At the start of each trading day, the specialists establish a fair market price for each of their stocks. The specialists base that price on the supply and demand for the stock. Then, during the day, the specialists quote the current bids and offers in their stocks to other brokers.
Specialists are also called upon to maintain "orderly markets" in their assigned stocks. That is, they ensure that trading in the stocks moves smoothly throughout the day, with minimal fluctuation in price.
Finally, if buy orders temporarily outpace sell orders in a stock -- or 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. In this role the specialist acts as a principal or dealer. Specialists participate in only about 10 percent of all shares traded. The rest of the time, public order meets public order, without specialist participation.