Understanding Stock Trading: Exchange Floor vs. Electronic Trading

The most common image that comes to mind when people hear about stock trading is one from movies—men in suits shouting and jostling each other in a large New York building. While there is some truth to this portrayal, trading in the stock market is actually a more complex process that helps many people earn money and keeps businesses alive.

Stock trading fundamentally involves buying and selling stocks among individuals or companies through brokers. By purchasing a share of stock—a piece of ownership in a company—an individual can potentially profit from the company’s success in the market.

There are two basic ways in which the stock market operates: trading on the exchange floor, which follows a traditional approach, and electronic trading, where technology takes over the exchange game.

Trading On the Exchange Floor

Trading on the New York Stock Exchange (NYSE) floor is what most of us recognize from movies and TV. The NYSE is filled with brokers negotiating trades on behalf of their clients.

Though the exchange floor appears chaotic, most simple trades follow a similar process. First, a broker negotiates an order to buy a certain number of stocks. This order is forwarded by the broker’s department to their floor clerk at the exchange. The floor clerk then informs the floor traders to find others willing to sell the same number of stocks being offered. Once a price is agreed upon and the deal is made, the message goes back up the line, and the broker informs the buyer of the final price.

Negotiations may take a few minutes or longer, depending on the market and stock performance. Larger or more complex trades might involve more complicated processes, but the overall principles remain the same.

Trading Electronically

A growing trend today is trading stocks electronically through advanced computer systems. Unlike the NYSE, which relies heavily on brokers, NASDAQ—an electronic counterpart—trades stocks entirely through electronic means.

Electronic markets replace human brokers with advanced computer networks that match buyers and sellers. This method is faster and more efficient.

Electronic trading provides investors with benefits like faster confirmations and greater control through online investing. However, brokers still handle the trades, as investors don’t have direct access to electronic markets.

For the most part, the processes in both traditional and electronic trading are hidden from investors. Typically, if you’re an investor, you receive a call from your broker or periodic reports on your investments, but you don’t see the activity behind the scenes.

Through the investments individuals make, many businesses stay afloat and continue operating. In exchange, investors earn a fair share of the profits. Stock trading may be a complex process, but ultimately, many people benefit from it, and the entire concept becomes much simpler.