Specialists Create Market Efficiency

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Specialists Create Market Efficiency

The NYSE should not abolish specialists. Both the NYSE and NASDAQ, however, need to realize that their relative trading volumes will continue to deteriorate as ECN's become more and more popular. The need for secondary and third markets will be diminished, however they still offer liquidity, so in some shape or form they will always be fashionable to certain types of investors.

The current system established within NYSE is very old and outdated. For any single trade, a number of players must be involved. First, an investor places a buy or sell order to a broker. The brokerage firm then contacts its commission broker, who is actually on the floor, to consummate the order. In this rigid and time consuming system, the specialist plays a major part in any trade. Any buying or selling in a particular stock takes place at the specialists post. A computer monitor shows all bid and ask prices for a stock in addition to the number of shares they are willing to buy or sell at the given bid ask price. Basically, Specialists execute the trades of other brokers, but they can also buy or sell shares for their own portfolios. When no other broker can be found to take the other end of a trade, the specialist must take the end of the trade where no one else can be found to do so. This is done to create liquidity, and is one of the biggest benefits to this system. Also, this type of trading creates an auction market, where buyers and sellers are together in one location, and the best buy or sell orders win trades. They also act as a dealer when they have to execute a trade when there isn't a buyer or seller available using their own inventory. Again, this is meant to facilitate liquidity. NYSE stocks, until recently, couldn't trade certain NYSE stocks outside of a formal stock exchange, however the NYSE has since abolished this rule. This has created a small trading volume of NYSE stocks over ECN's.

The current system on NASDAQ and most other OTC's incorporates dealers, who offer bid and ask prices to brokers who execute trades based on a listing of the current quotes from dealers. Although this is a very liquid market, dealers typically take a spread from the bid/ask price in exchange for the risk that they incur for holding the security.

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