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Answer:
Dear
BuyandHolder,
A
timely question! No, we do not have them at BUYandHOLD
but you will find them on the floor of the New York
Stock Exchange (NYSE).
The
specialist system, which operates at the Exchange,
has come under some criticism recently, along with
the fact that the former Chairman of the Exchange
was being paid a pretty hefty salary. But the two
are not connected even though the media often lumps
them together in their coverage. The specialist system
was in place long before Richard Grasso was granted
an impressive array of perks.
The
auction system
The
NYSE is an auction market in which bids and asks are
competitively put forward by investors. The basic
function of the NYSE is to match all buyers and sellers
of stocks at fair prices.
Maintaining
an orderly market
Once
a corporation lists its stock on the NYSE, it is assigned
to a specialist by the Allocations Committee of the
Exchange. In other words, every stock that trades
on the NYSE has one specialist that handles it. This
specialist (also a member of the Exchange), is responsible
for managing "fair and orderly" trading in that particular
stock.
How
do they do this? They must step into the situation
when buyers or sellers do not exist for a particular
stock, risking their own capital to fill the gap between
supply and demand. In the process of buying and selling
for their own account, specialists can right a temporary
imbalance between supply and demand. In other words,
to equalize the market, specialists must buy or sell
counter to the direction of the market. They must
do this even if it costs them money.
For
example, when sell orders outweigh buy orders, specialists
must buy that stock to absorb the sales. On the other
hand, specialists must take the sell side when there
is a greater number of buy orders.
And,
if an order comes in for a stock that no one else
is buying or selling, the specialist must fill the
order just to make a market in the stock.
To
be more specific, if, for example, there are no buyers
for Stock XYZ when you want to sell your shares, the
specialist is required to offer XYZ shares from his
own account.
The
two main functions of specialists
(1)
As agents or brokers they execute orders on behalf
of other floor members, charging a commission for
this service. Most of these orders are limit orders
and stop orders -- orders that cannot be filled immediately.
This process -- entrusting an order to a specialist
-- is called placing an order "on the book."
(2)
As dealers or market makers they buy and sell
stock for their own accounts, with their own money,
in order to provide liquidity to the market place.
They do not charge a commission for this service but
theoretically profit on what they buy and resell.
The
specialist's obligations
Among
the rules by which the specialist must abide, and
two of the most important are:
(1)
To always put the customer's interest before his own
and (2) to stand out of the way when there is a match
between a public buyer and a public seller at a fair
price.
The
history of the system
The
specialist system began quite by accident in 1875
when James Boyd, an exchange member, broke his leg
and was unable to move about the stock exchange floor.
Confined to one spot, he limited his trading to a
single stock -- Western Union -- until his leg healed.
To Boyd's surprise, his business increased as fellow
brokers left orders with him when they wanted to buy
or sell above or below the current price. Soon others
on the floor also began specializing.
For
More Information
I
have given you a short lesson in the role of the specialist.
If you want to know more, get a copy of John M. Dalton's
superb book, How
The Stock Market Works (New York Institute of
Finance, 2001), and read the chapter entitled "The
Specialist: Riding the Bulls and Bears." It covers
the role of the specialist as dealer and as broker,
his other duties, the technicalities involved, the
assignment of securities to specialists and much more.
For
Another Opinion
Read
the op-ed column in the September 19, 2003 issue of
the Wall Street Journal. It is written by Jack Bogle,
the retired founder of Vanguard, one of the country's
largest mutual fund companies. Bogle takes the position
that the specialist system should be eliminated.
BUYandHOLD
does not recommend any securities. The security mentioned
above is being used for informational purposes only
and should not be regarded as an offer to sell or
as a solicitation of an offer to buy.
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