17.1. First Market: The Auction Market

A first market transaction usually starts at a brokerage office. An investor places an order. The order is sent to an exchange either electronically or by telephone to the brokerage firm’s floor booth. At the NYSE today, most orders to buy or sell stocks reach the trading post through its electronic order-routing system. The most complex orders are sent to the firm’s floor booth, which the brokerage maintains as a result of having purchased exchange membership.

Once an order reaches the firm’s floor booth, it is phoned over to one of its floor brokers. Floor brokers are employed by members of the exchange to fill orders on the floor of the exchange. The floor broker will bring the order over to the trading post where that security trades. At the post, the broker may fill the order on its own or pass it on to another floor broker, or pass it on to the Designated Market Maker to fill. Floor brokers can only trade in an agency capacity. They cannot make principal or discretionary trades. Floor brokers are used mainly for large orders that require special attention.

The Designated Market Maker (DMM), also called the specialist, is the most important participant on the exchange floor. An exchange like the NYSE assigns each traded security to a DMM. The DMM resides at a trading post, and all trades in a security take place at the trading post where the security’s specialist is located. The DMM acts as auctioneer, controll