A Trader’s Guide to Stock Markets

Stocks are bought and sold on stock markets, also known as stock exchanges. In the United States, the three main stock markets are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ.

The NYSE and the AMEX are traditional exchanges with a physical trading floor and a manual, auction-based system for trading. On these exchanges, a specialist manages and oversees all trading activity for a specific stock. The specialist’s main role is to maintain a fair and orderly market for his specific stock by ensuring that a market of buyers and sellers exists for the stock. Though this old-fashioned system works fine for standard stock investing, it doesn’t work for stock trading, for two main reasons:

The NASDAQ is an entirely electronic stock exchange: it has no physical location, trading floor, or manual, auction-based system. Instead, the NASDAQ operates as an electronic bulletin board on which professional traders called market makers can post the number of shares of a particular stock they would like to buy or sell. For each block of shares, the market maker lists a bid price (if he’s looking to buy) or an ask price (if he’s looking to sell). Unlike on the traditional auction-based exchanges, on the NASDAQ traders can view market makers’ postings and then place and fill their own orders directly. This system, known as the Small Order Execution System (SOES), enables traders to execute orders instantly and avoid dealing with brokers.

The introduction of NASDAQ’s SOES during the 1980s ushered in the era of Electronic Direct Access Trading (E-DAT), which has made bona fide stock trading accessible to individuals, not just to institutions, insiders, and market professionals. Soon after the NASDAQ introduced its SOES, the NYSE and AMEX introduced their own E-DAT systems. The NYSE’s is called the Super Designated Order Turnaround System (SuperDOT), and the AMEX’s is called the Auction and Electronic Market Integration (AEMI) platform. These systems make stock trading possible on the NYSE and the AMEX, though traders still favor the NASDAQ because it has the world’s largest and most active E-DAT system.

The three main stock markets operate from 9:30 a.m. to 4:30 p.m. EST and are closed on weekends and major holidays. Electronic communication networks (ECNs) are electronic systems that allow traders to trade around the clock, including after normal trading hours. Like the NASDAQ’s SOES system, ECNs allow traders to buy and sell directly from market makers. Two of the most popular ECNs, Instinet (www.instinet.com) and Archipelago (www.nysearca.com), have been acquired by the NASDAQ and NYSE, respectively, and now operate as subsidiaries of those companies. Individual traders typically can access ECNs only through direct-access brokers, some of whom charge extra fees for ECN-routed trades.