Securities Markets - Exchange Market Characteristics

The main characteristics of exchange markets can be classified into:

1. Exchange Membership
In the U.S., the listed securities exchanges classify memberships as:

  • Specialists: Specialists are the market makers for stocks, controlling the limit book and posting bid and ask prices.
  • Commission Brokers: Commission brokers are employees of a firm that is a member of the exchange. The commission broker buys and sells shares for the clients of its firm.
  • Floor Brokers: Floor brokers function much like commission brokers buying and selling shares. Unlike commission brokers who are employees of member firms however, floor brokers are independent and aid commission brokers when they become too busy.
  • Registered Traders: Registered traders are members that buy and sell for their own account. They help to provide liquidity. Because they are independent, however, the exchange places limits on how they trade.
 
2. Types of Orders
An order on an exchange can be classified as follows:
  • Market Order: A market order is a basic order to buy or sell a security at the best available price. For example, a client places an order to buy 100 shares of Newco; the client expects/wants the best available price for buying those shares.
  • Limit Order: A limit order places a specific price at which a transaction is executed. These orders typically have a set time horizon in which the limit order can be executed. For example, Newco's stock is trading at $50. A client places a buy limit order to purchase shares at $45. The transaction will thus be executed when the shares reach $45, if they do. Otherwise, the order will expire in the allotted time.
  • Short Sale Order: A short sale order is an order to sell shares that a client does not own. As a result, the trader must borrow the stock, sell it, and then buy the stock again to replace the shares he borrowed. For example, a client wants to sell 100 shares of Newco short at $45. The trader must borrow 100 shares, sell the 100 shares and then purchases the shares to replace the ones he borrowed. A client may do this if he believes shares of the respective company will decline below the price at which the shares were sold short.
  • Stop Loss Orders: Stop loss orders are placed in order to prevent losses on shares below a specified share price. For example, an investor bought shares of Newco at $50. The shares appreciated to $100. The investor is interested in protecting some profit on the shares of Newco in case the price starts declining. This investor may place a stop loss order on the shares of Newco at $80. If Newco's shares decline to $80, the stop loss order would be executed, protecting some of the investor's profit. Whether you use this strategy for your own or for a client's portfolio, stop loss orders are essentially a simple but powerful tool to help implement a stock-investment strategy. Find out more in the article called The Stop-Loss Order, Make Sure You Use It
 
3. Market Makers
Market makers facilitate the trading in a stock, buying and selling stock from their own accounts in order to maintain orderly trading and provide liquidity in a stock if it is needed. Additionally, the market maker manages the limit order book where both limit and stop orders are recorded. In the U.S. exchanges, the market maker is known as a specialist.
 
Short Selling


Related Articles
  1. Investing Basics

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  2. Professionals

    TYPES OF ORDERS

    Order Execution Most customer orders, which are market orders or executable limit orders, will be routed electronically to the trading post for automatic execution. The electronic system bypasses ...
  3. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  4. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  5. Professionals

    A. Introduction: Trading Securities

    Investors, who do not purchase their stocks and bonds directly from the issuer, must purchase them from another investor. Investor-to-investor transactions are known as secondary market transactions. ...
  6. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell options. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  7. Professionals

    Types of Securities Orders

    Securities Orders
  8. Professionals

    Transacting Securities

    FINRA Series 6 Exam Study Guide - Transacting Securities. In this section: Long and Short Sales and Types of Orders with different characteristics and costs.
  9. Professionals

    The Chicago Board Option Exchange

    The CBOE functions in many ways, exactly like other exchanges, except it has one major difference. The CBOE does not use a specialist system like the one used on all other exchanges. The specialist ...
  10. Active Trading Fundamentals

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  3. Above The Market

    An order to buy or sell at a price set higher than the current ...
  4. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
  5. Market-With-Protection Order

    A type of market order that is canceled and re-submitted as a ...
  6. Bracketed Sell Order

    A sell order on a short sale that is accompanied (or "bracketed") ...
RELATED FAQS
  1. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  2. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
  3. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
  4. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
  5. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  6. Why do limit orders cost more than market orders?

    Learn the difference between a market order and a limit order, and why a trader placing a limit order pays higher fees than ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center