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.
Understanding the Specialist
A specialist holds an inventory of the particular 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.
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 the stock, gather around a specialist's trading post to learn the best bid and ask offers for security or stock. Specialists execute a trade when bid and ask orders match.
Specialist Roles and History
Specialists also buy or sell the stock when it reaches a certain price. 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.
Seven firms in New York employ all of the specialists on the floor of the New York Stock Exchange (NYSE).
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.
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. Since the advent of electronic trading, the vast majority of trades occur digitally, as opposed to through specialists on the floor.