Specialist

What is a 'Specialist'

A specialist is a member of a stock exchange who acts as the market maker to facilitate the trading of a given stock. The specialist holds an inventory of the stock, posts the bid and ask prices, manages limit orders and executes trades. If there is a large shift in demand on the buy or sell side, the specialist steps in and sells off his own inventory as a way to manage large movements and to meet the demand until the gap between supply and demand narrows.

BREAKING DOWN 'Specialist'

Most specialists trade five to 10 stocks at a time on any given trading day. There is usually one specialist per stock who stands ready to step in and buy or sell as many shares as needed to ensure a fair and orderly market in that security. Each specialist has a particular spot on the floor of the exchange, called a trading post, where the buying and selling of stock occurs. Floor traders, who act on behalf of customers who buy and sell stock, gather around a specialist's trading post to learn the best bid and ask offers for a security or stock. Specialists execute a trade when bid and ask orders match.

Specialists also buy or sell stock when it reaches a certain prices. If a floor trader's bid is above the ask price, but then the ask price rises to match the bid price later, the specialist then fills the order. Before the stock market opens for the trading day, specialists attempt to find a fair opening price for a stock. If a specialist can't find a fair opening price, he may delay trading on a particular stock as part of his overall role.

Roles

Seven firms in New York employ all of the specialists on the floor of the New York Stock Exchange (NYSE). Companies who sell stock on the NYSE interview specialists to represent them on the trading floor in front of brokers. Once a specialist reaches the trading floor at about 9:15 a.m. eastern time (ET), the hard work begins.

A specialist has four major roles to fill. He acts as an auctioneer to show brokers the best bids and offers. A specialist also continually updates floor brokers to act as a catalyst for buying and selling. He places an order on behalf of brokers, and places orders for customers ahead of his own. Despite all of these duties, the number of specialists has declined, thanks to electronic trading.

History

Specialists started on the floor of the New York Stock Exchange in 1872. In 1986, as many as 420 floor brokers sold approximately 250 million shares of stock every trading day. Volume of shares on the NYSE topped 3.5 billion every day in October 2014, much of it handled by computers. Since the advent of electronic trading, all but approximately 15 percent of trades occur digitally, as opposed to through specialists on the floor.