Second Edition
`
`I
`
`DAVID M,WEISS
`
`1
`
`TS 1020
`
`

`
`Library of Congress Cataloging-in-Publication Data
`
`Weiss, David M.
`After the trade is made: processing securities transactions /
`David M. Weiss.-2nd ed.
`p. cm.
`Includes index.
`ISBN 0-13-177601-0
`1. Stock-exchange--United States. 2. Securities(cid:151)United States.
`3. Commodity exchanges(cid:151)United States. I. Title.
`HG4910.W365 1993 (cid:9)
`332.64’273(cid:151)dc20
`
`93-25716
`CIP
`
`' 1993, 1986 by NYIF Corp.
`All rights reserved. No part of this book may be reproduced in any form or by any means, without
`permission in writing from the publisher.
`
`Printed in the United States of America
`
`10 9 8 7 6
`
`This publication is designed to provide accurate and authoritative information in regard to
`the subject matter covered. It is sold with the understanding that the publisher is not engaged
`in rendering legal, accounting, or other professional service. If legal advice or other expert
`assistance is required, the services of a competent professional person should be sought.
`(cid:151)From the Declaration of Principles jointly adopted by a Committee of the American Bar
`Association and a Committee of Publishers and Associations
`
`ISBN 0-13-17760I-0
`
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`2
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`(cid:9)
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`
`44 (cid:9)
`
`Part 1: The Multifaceted Securities Industry
`
`executes because of priority, C executes because of precedence, and B
`executes before D because of time advantage.
`Parity. When two brokers can both fill the order and both
`enter their intentions at the same time, there isn’t any logical way
`of awarding the trade. This is parity. In this case, either the
`brokers agree to an equitable distribution, or they flip a coin and
`the winner takes the trade.
`Example: The quote is 22-1/2, and the bids are:
`Broker M: 100 shares, 10:14
`Broker N: 100 shares, 10:15
`Broker 0: 100 shares, 10:15
`If Broker Z enters the crowd with a sell market order for 100 shares,
`Broker M executes. If Broker Z enters the crowd with a sell market order
`for 200 shares, M executes 100 shares. Since Brokers N and 0 can fill or
`best fill the order and neither has a time advantage, they have parity. So
`Brokers N and 0 either agree to one of these two taking the 100 shares
`or toss a coin, and the winner of the toss executes 100 shares.
`When an execution takes place, the floor is cleared, all remain-
`ing bids or offers at that price must be resubmitted. This proce-
`dure keeps quotes updated while reaffirming all orders.
`
`The Specialist’s Book
`Specialists enter public orders, that are away from the market, in
`their books by price and in the order they are received.
`Example: See Figure 4-2. If this specialist’s book represents the highest
`bid and lowest offer of the crowd, the quote is 22 1/4-5/8. The highest
`bid is 22 1/4, the lowest offer, 225/8. If these orders are the only shaes
`comprising the quote, the size is 5 by 9. The largest order for a buy at
`221/4 is for 500 shares (200 by Broker D and 300 by Broker B). The largest
`order for sale at 225/8 is 900 shares (300 by Broker F and 600 by Broker
`C).
`
`Specialists execute orders from their books by price on a
`first-in/first-out (FIFO) basis. The first order in is the first order
`out.
`Example: If Broker Z enters the crowd with a 200-share buy order at the
`market, the specialist executes 200 of Broker F’s 300-share order at 22/8
`
`3
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`

`
`Chapter 4: The Exchanges
`
`FIGURE 4-2.
`
`A page In the specialist’s book
`
`45
`
`4uUfaceted Securities Industry
`
`because of precedence, and B
`tage.
`both fill the order and both
`, there isn’t any logical way
`ity. In this case, either the
`tion, or they flip a coin and
`
`ds are:
`
`11 market order for 100 shares,
`crowd with a sell market order
`nce Brokers N and 0 can fill or
`advantage, they have parity. So
`these two taking the 100 shares
`executes 100 shares.
`the floor is cleared, all remain-
`be resubmitted. This proce-
`affirming all orders.
`
`are away from the market, in
`r they are received.
`ist’s book represents the highest
`quote is 22 1/4-5/8. The highest
`hese orders are the only shares
`9. The largest order for a buy at
`md 300 by Broker E). The largest
`0 by Broker F and 600 by Broker
`
`rn their books by price on a
`irst order in is the first order
`
`with a 200-share buy order at the
`oker F’s 300-share order at 225/8.
`
`4
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`

`
`46 (cid:9)
`
`Part 1: The Multifaceted Securities Industry
`
`The NYSE specialist’s book is maintained on a CRT and
`referred to as display book. This electronic book sorts all orders
`coming to the specialist in time and price sequence; it also keeps
`track of executed orders, so that inquiries from member firms
`may be quickly researched.
`Display book is part of a larger system, known as DOT
`(designated order turnaround). DOT orders are executed by the
`specialist either against other DOT orders (orders entered by
`member firms into the DOT system), or against brokers in the
`"crowd" or against the specialist’s own position.
`
`THE AMERICAN STOCK EXCHANGE (AMEX)
`
`The Amex membership is basically like the NYSE’s. On the floor
`are commission house brokers, two-dollar brokers, specialists,
`and traders. Their functions are very similar to those of their
`counterparts on the NYSE.
`One notable difference from the NYSE is the way the mem-
`ber firms communicate with their employees. Conversations
`regarding security, shares, price, and the like are carried on
`through a system of hand signals. The individuals actually dis-
`cuss quote, size, and other terms without speaking or writing a
`word.
`The Amex trading floor also operates differently than the
`NYSE. Its procedure for awarding trades is known as priority
`prorata. Under this system, one broker may have priority, as cn
`the NYSE. After priority, however, shares are allocated in round
`lots among the other participating brokers. Precedence and parity
`do not play a part in the Amex procedure.
`Example: Three brokers enter bids for ABC at 26, as follows:
`Broker A: 100 shares, 10:14
`Broker B: 200 shares, 10:15
`Broker C: 300 shares, 10:15
`Broker X enters the crowd with a 400-share sell market order,
`Broker A executes a trade for 100 shares (priority). Broker B then bUYS
`remaining
`100 shares, and Broker C takes 200 shares. In other words, the
`300 shares are distributed "prorata."
`
`- . (cid:9)
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`5