Question of the Week

A _______ is a person on the trading floor of certain exchanges who holds an inventory of certain stocks. This person is responsible for managing limit trades, but doesn't make info on outstanding limit orders available to other traders.


a) Floor broker
b) Market maker
c) Registered trader
d) Specialist
e) Commission Broker


Answer:

The correct answer is d.

A good example of an exchange using the specialist system is the NYSE. Each stock listed on the NYSE is allocated to a specialist and all buying and selling of a stock occurs at the location of this person, known as "the trading post." Buyers and sellers represented by a floor trader will meet at the trading post to learn about the best current bid and ask price for a security. These bid and ask offers are called out loud and indicate the current prices to any interested party. A trade will be executed when bid and ask orders meet.

The specialist doesn't only meet up buyers and sellers. Many specialists are forced to hold an inventory of shares themselves to minimize the imbalance of buy and sell orders. The specialist does this until a equilibrium price is reached, i.e. when demand and supply are very close. Buying an inventory of stocks is not a common occurrence, it is estimated that a specialist will be in on only 1 out of every 10-15 trades.

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