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 (e.g., NASD, OTC)

Exchanges, Markets and Utilities

Exchanges and Markets

The majority of modern investment securities are traded on active secondary exchanges or markets. Securities exchanges and markets provide liquidity to investors by enabling the free exchange of financial securities between investors.


A securities exchange is an organized trading environment where both buyers and sellers of investment securities come together to trade stocks, bonds and options. Securities traded on an organized exchange are commonly referred to as ‘Listed Securities’. The term Listed Security is derived from the fact that in order to be traded on a particular securities exchange the security issuer must be registered with that particular exchange. The issuer’s security – or securities - is maintained by the exchange on a list of securities that are eligible for trading – hence, ‘Listed’.

When most people think of securities exchanges they call to mind images of security, traders in bright colored jackets, yelling and screaming at one another – in a chaotic fashion - in large groups or ‘crowds’ on the floor of the exchange. And while this atmosphere certainly exists at the modern exchange, the vast majority of trades executed on today’s securities exchange are processed through sophisticated electronic trading systems.

In order to trade on a given securities exchange, a firm must be a ‘Member’ of that exchange. Member firms are said to "owns a seat on the exchange" – which simply means that the firm has a paid membership that permits it to trade on that exchange. Exchange members act as ‘Brokers’ - representing their clients by matching buyers of securities with sellers of securities. For this service, the firm generally charges its client a brokers fee or ‘Commission’.

The following types of investment securities are commonly traded on listed securities exchanges:

  • Stocks
  • Closed End Mutual Funds
  • Bonds
  • Options
  • Commodities

Stock Markets

The most prestigious of the US domestic securities exchanges are the stock markets. The most renowned stock markets – both of which are located in New York City - are:

  • NYSE – The New York Stock Exchange
  • AMEX – The American Stock Exchange

In addition to the NYSE and AMEX there are several, smaller, securities exchanges located throughout the United States. These exchanges, commonly referred to as ‘Regional Exchanges’ are:

  • PHLX – The Philadelphia Stock Exchange
  • BSE – The Boston Stock Exchange
  • PSE - The Pacific Stock Exchange (or P Coast) – located in San Francisco
  • MSE - The Midwest Stock Exchange – located in Chicago

Closed End Mutual Funds are also traded on Listed Stock Exchanges.

Bond Markets

Debt securities are also traded on listed stock exchanges. The most popular bond exchanges are:

  • NYSE – The New York Stock Exchange
  • <
  • AMEX – The American Stock Exchange

Option Securities

Options are also predominantly traded on listed securities exchanges. The most influential are:

  • CBOE – The Chicago Board of Options
  • PHLX – The Philadelphia Stock Exchange
  • AMEX – The American Stock Exchange

Commodities Markets

  • AMEX Commodity Exchange
  • Commodity Exchange Inc. – COMEX
  • New York Coffee, Sugar and Cocoa Exchange
  • New York Cotton Exchange
  • New York Futures Exchange
  • New York Mercantile Exchange
  • Chicago Board of Trade
  • Chicago Mercantile Exchange

The New York Stock Exchange

Certainly the most famous securities exchange, The New York Stock Exchange, currently located at 18 Broad Street in New York City, was first organized in 1792 – when 24 securities brokers agreed to trade securities under a tree on Wall Street. Its first constitution was adopted in 1817, and the exchange was first incorporated on February 18th, 1971.

The NYSE is an agency auction market. This means that trading takes place by the exchange of open bids and offers by exchange members. Prices are determined by factors of supply and demand.

Each listed security is assigned to a ‘Trading Post’. Each post is managed by a security ‘Specialist’. The Specialist is responsible for maintaining an orderly auction market for a particular security – or group of securities. Orders to buy and sell a particular security are maintained in the Specialist’s ‘book’.

Trades executed on the New York Stock Exchange are executed as either:

  • Crowd Trades
  • System Trades

Crowd Trades

Securities bought and sold by brokers on the floor – or Floor Brokers - of the exchange are referred to as ‘Crowd Trades’. Crowd trades are executed verbally between two brokers, or between the broker and a Specialist. The transaction is recorded on a Floor Report – which becomes the firm’s written record of the trade. Crowd Trades are often referred to as ‘Hand Held’ trades because of the hand written Floor Report.

The traditional paper floor reports are currently being replaced by mobile hand held devices – the device looks quite similar to a PDA (Personal Data Assistant) such as the Palm Pilot. The hand held device enables the floor broker to both receive orders and record executions electronically.

Upon execution, the Floor Brokers report the transaction to the specialist and to the NYSE OCS System.

Overnight Comparison System - OCS

In addition to specialist reporting, the Floor Brokers must report the transaction to the Exchanges Overnight Comparison System – OCS. OCS is a matching process through which the buyer and seller re-confirm the original trade details. The key trade elements are:

  • Buy or Sell
  • Quantity
  • Security Symbol
  • Price
  • Contra Broker – with whom the trade was executed.

Each Floor Broker – the buyer and the seller – must report the transaction independently. If the two submissions agree, the trade is passed to the NSCC - see Exchange Utilities – for settlement. If the inputs do not agree on the important key elements, the trade is forwarded for reconciliation and resolution.

The Broker Booth Support System

The Broker Booth Support System – or BBSS – is an electronic order management system provided to member firms that enable the floor broker to enter and receive orders, re-route orders, issue reports, review research and view other exchange services.

Two-Dollar (2$) Brokers

In addition to having direct representation on the floor of the exchange through membership, brokers can also utilize the services of a Two-Dollar Broker. A 2$ Broker is an exchange member that contracts his or her trading services out to other members and brokers.

The Two-Dollar Broker receives orders from the other brokers, and executes those orders in the crowd on the exchange floor. In turn, the 2$ Broker charges that broker a Floor Brokerage Fee or Commission.

The name Two-Dollar Broker is somewhat antiquated and refers to the $2 per trade flat fee that such independent contractors used to charge. With increased competition and improved billing capabilities, Floor Brokerage Commissions structures have changed significantly, and are no longer based on a flat fee. The name 2$ Broker, however, is still widely used in the industry.

System Trades – Super DOT

The majority of trades executed on the NYSE never reach the crowd on the exchange floor. Trade orders are input into a highly sophisticated order routing system known as Super DOT. DOT is an acronym that stands for Designated Order Turnaround.

Both Market Orders and Limit Orders are entered into Super DOT and routed to the appropriate trading post. Upon execution, the trade details are transmitted back to the broker along the same electronic line.

Bond Trading on the NYSE

Bond securities are also traded on the New York Stock Exchange. NYSE bonds are traded using the exchange’s Automated Bond System – ABS. ABS is an electronic bond trading system that matches bond sellers with bond buyers. Trade executions generated on ABS are routed to the NSCC for comparison and settlement.

You can learn more about the NYSE by visiting the NYSE web site http://www.nyse.com/.

The American Stock Exchange

The American Stock Exchange is the nations second largest floor-based exchange. In many regards, the AMEX is very similar to the New York Stock Exchange. For example, securities must be listed with the AMEX in order to be traded at the exchange. Further, both exchanges are agency auction markets and both execute transactions via Crowd Trading and System Trading. Crowd Trades must also be reported to the Overnight Comparison System.

Additionally, similar to their counterparts at the New York, specialists on the American Stock Exchange are also responsible for maintain an orderly market for their designated securities. The services of Two-Dollar Brokers are also available to members of the American Exchange.

The primary difference between the New York Stock Exchange and the American Stock Exchange is the system utilized for electronic order routing and trade execution. PER, the AMEX order routing system, works in the same manner as Super DOT, but is a proprietary AMEX system.

Option Trading on the AMEX

Another difference between the AMEX and the NYSE is that option contracts are traded on the American exchange. AMEX options are traded both in crowds on the floor of the exchange, and via a systemic order routing system.

Similar to equity floor trades, both the buyer and seller of an option contract traded on the floor of the AMEX must also report the trade for comparison. Option contracts executed on the floor of the AMEX are submitted to the exchange’s IDC comparison system. Comparison details are transmitted from the exchange to the Options Clearing Corporation – OCC.

The American exchange options trading system is the AMOS system. Brokerage firms use AMOS to route option orders directly to the option specialist for execution. Once executed, the trade details are transmitted back to the broker along the same electronic line. The trade details are routed to the OCC for trade comparison and settlement.

You can learn more about the AMEX by visiting the AMEX web site http://www.amex.com/.

Regional Exchanges and Commodities Exchanges

Regional Exchanges are US securities exchanges, other than the NYSE and AMEX, located throughout the United States. Although independent trading systems vary from one exchange to the next, the concepts and principals discussed above apply for the Regional Exchanges as well. As such, the regional exchanges are not discussed in detail here.

The same applies to the various Commodities Exchanges located throughout the United States.


Securities are either traded on an exchange or market. Exchange trades are executed as broker transactions, where the broker unites buyer and seller, and charges each a commission for the service. This is in contrast to the NASDAQ Over-the-Counter Market or OTC.

Founded in 1971 the NASDAQ is the world’s first electronic stock market. The NASDAQ - National Association of Securities Dealers Automated Quotation System - is owned and operated by the National Association of Securities Dealers – or NASD.

How NASDAQ Trades are Executed

The NASDAQ Market is a computerized dealer market. Securities dealers buy and sell securities into inventory or dealer accounts. NASDAQ Market Makers continuously quote prices at which they will buy and sell specific NASDAQ securities.

A Market Maker is a NASDAQ member that maintains both bid and offer prices in a given security. The Market Maker stands ready to buy or sell a given security at the publicly quoted prices.

The ‘bid’ price is the price at which the Market Maker is willing to buy (the investor sells) a security from an investor. The ‘offer’ – or ask – is the price at which the Market Maker is willing to sell (the investor buys) a security to an investor.

The current market price of a NASDAQ security is expressed as the highest bid price and the lowest ask price of all the market maker quotes. This is also known as the ‘inside market’ or the ‘inside quote’.

For example, assume the current market price – or inside quote – for XYZC stock is:


12 ½


12 5/8

An investor that wishes to sell shares of XYZC at the current market price will be quoted a price of 12 ½ per share – the current Bid. An investor that wishes to buy XYZC at the current market price will be quoted a price of 12 5/8 per share.

NASDAQ Trading Systems

Dealers participating in the NASDAQ OTC securities markets utilize the following NASDAQ trading systems:

  • ACT – Automated Confirmation Transaction Service
  • SOES – Small Order Execution System
  • SelectNet


The NASDAQ ACT system - Automated Confirmation Transaction Service - is the primary trading interface used by brokerage firms to executed trades on the electronic NASDAQ market. Trade orders entered into ACT are routed to a Market Maker for execution. Upon execution, a trade ‘confirmation’ is routed back – through the ACT system - to the originated broker.

Trade details are also transmitted to the NSCC for trade comparison and settlement.

SOES – Small Order Execution System

The Small Order Execution System – SOES – is an automatic execution system for orders of 1,000 shares or less. SOES is designed to protect investors because it guarantees that all eligible orders are executed at the best possible bid or offer price available on the electronic market at the time the order is placed.

Upon execution, trade notification is sent to the originating broker. Trade details are also submitted to the NSCC for trade comparison and settlement.


The NASDAQ SelectNet system provides is utilized by market makers to execute large security orders. The system provides a market maker t more control over the way the order is routed to obtain the best possible pricing for large executions.

Upon execution, trade notification is sent to the originating broker. Trade details are also submitted to the NSCC for trade comparison and settlement.

You can learn more about the NASDAQ Market by visiting the NASDAQ web site http://www.nadsaq.com/.


The automated processing, comparison and settlement of securities transactions is facilitated through the various firms that act as utilities to the Brokerage Industry. The primary Utilities are:

NSCC - The National Securities Clearing Corporation

The NSCC is the National Securities Clearing Corporation. NSCC provides centralized clearance, settlement and information services to the Financial Services Industry, providing connectivity between brokerage firms, mutual funds, banks and other financial institutions.

The NSCC clears the majority of equity, corporate and municipal bond and mutual fund transactions providing the following functions necessary to automated securities clearance:

  • Trade Capture/Reporting
  • Trade Matching
  • Trade Netting
  • Trade Settlement
  • Trade Guarantee

Trade Capture/Reporting

Trade Capture/Reporting is the process through which the trade records for NSCC member firms are submitted to NSCC for matching, netting and settlement. In certain instances, trade records are 'Captured' by NSCC at the point of execution - ie. the exchange or market trading system passes the member firm trade data directly to NSCC. In other cases, member firms are responsible for the communication - 'Reporting' - of trade records to the clearing corp.

Trade Matching

The NSCC trade matching process matches the trade submission of buying firms with the corresponding trade submission of the selling firms. Trades are matched based on the following criteria:

  • Trade Date and Settlement Date
  • The Security Traded
  • Buy or Sell
  • The Quantity of securities traded
  • The Trade Execution Price
  • The Contra Broker or Firm - with whom the trade was executed
  • Accrued Interest - in the event of Fixed Income Securities

A successful match between buyer and seller along the above criteria results in a compared trade, that is forwarded to the NSCC Settlement System. Unmatched trade records - or Uncompared Trades - are returned to the originating brokerage firm for reconciliation.

Trade Netting

Trade Netting - of function of the NSCC Trade Settlement System - is the first step in the Trade Settlement Process. The NSCC CNS System nets the member firm's buy and sell activity - in each security traded - to arrive at one net settlement quantity. A firm is either a net buyer (the firm's total buys are greater than its total sells) or a net seller (the firm's total sells are greater than its total buys) of a particular security.

Trade Settlement

The NSCC Continuous Net Settlement System (CNS) is the NSCC's settlement system for both security and trade related money settlements. After the Trade Netting process is completed, member firms settle one Net Position with the CNS System. Similarly, all of the member's trade related debits and credits are netted into one final net money settlement.

The NSCC's Trade Netting and Settlement processing can reduce the number of share and money settlements by up to 95% (taken from the NSCC web site).

Trade Guarantee

The NSCC provides to its members the guarantee that all trades will be completed - settled- once they are entered into the NSCC system as a compared trade. This guarantee applies to situations - rare as they may be - where one party to a compared trade becomes insolvent, and, for that reason is unable to meet its obligation to settle the trade.

Other important NSCC member services include:

  • ACATS - Automated Customer Account Transfer System
  • RECAPS - Reconfirmation and Pricing Service
  • PC Web Direct
  • DSS - Dividend Settlement System
  • The NSCC Envelope System

The NSCC is also the principal order routing and clearance system for the vast majority of US Mutual Fund transactions. NSCC's role in processing Mutual Fund related transactions is discussed in detail under the section - Mutual Fund Processing.

You can learn more about the NSCC by visiting the NSCCweb site at http://www.nscc.com.

DTC - The Depository Trust Company

The Depository Trust Company or DTC is the world's largest securities depository. Owned by the members of the Financial Industry, DTC holds nearly $20 trillion in assets on behalf of its participants and their clients - (taken from the DTC web site).

DTC offers its members a broad range of services - all of which relate to either:

  • Custody and Safekeeping of Securities
  • Securities Clearance and Settlement
  • Accounting for Securities Deliveries and Payments
  • Servicing of the Assets Held in Custody

Custody and Safekeeping of Securities

DTC is akin to a large securities vault. The depository holds as custodian for its members a wide range of physical security certificates (almost 2 million different issues) and provides for book-entry delivery of those securities between member firms. In doing so, DTC largely eliminates the need for the physical movement of paper certificates in the trade settlement process by centralizing the handling and processing of the securities it holds.

Securities Clearance and Settlement

The centralized security handling and processing functions performed by DTC make the depository the national clearing house for the settlement of most corporate and municipal securities transactions.

Accounting for Securities Deliveries and Payments

DTC provides its members with detailed records pertaining to the security issues held by DTC on behalf of the member and its clients, and the quantity of each held. Additionally, daily activity reports are generated that detail the member's book-entry deliver and receive activity for each security and any associated movement of funds processed.

Asset Services

In addition to the Custody and Safekeeping of assets DTC provides other services to its member firms to service the assets held in custody by DTC on the member's behalf:

  • Principal and Income Distribution
  • Corporate Action Processing
  • Collateral Loan and Repo Services

Principal and Income Distributions

DTC provides for the distribution of principal and interest to its members, of distributions received by DTC for the securities held on behalf of its members and their clients. Principal and Income distributions process by DTC generally include:

  • Dividends (both cash and stock)
  • Bond Interest
  • Principal Paydowns - including Principal returned on debt maturities and calls

The amount allocated to the member firm by DTC is based on the firm's DTC position - the number of shares or bonds held in custody by DTC for that member - on the distribution Record Date.

Corporate Action Processing

DTC also provides for the announcement and processing of Corporate Reorganizations, such as:

  • Voluntary and Involuntary Exchanges
  • Mergers
  • Conversions
  • Put Options
  • Warrant Exercises
  • Right Subscriptions
  • Stock Splits
  • Spin-Offs
  • Exercise of Voting and Consenting Rights

The results of Corporate Reorganizations are passed by DTC to its members based on each member's relative DTC position on the Affective Date of the Reorganization.

Collateral Loan and Repo Services

DTC provides collateral services that enable members to pledge securities held at DTC to banks and other funding institutions as collateral to support the member's financing activities. Members can also use securities held at DTC as collateral to satisfy margin requirements at the Options Clearing Corporation - OCC.

You can learn more about DTC by visiting the DTC web site http://www.dtc.org/.

DTCC - The Depository Trust and Clearing Corporation

The Depository Trust and Clearing Corporation is a holding company, established in 1999, that oversees tow principal subsidiaries:

  • The Depository Trust Company
  • The National Securities Clearing Corporation

The two organizations have been integrated under the holding company to leverage on each's respective strengths and to support the constantly changing environment in the Financial Services Industry.

You can learn more about DTCC by visiting the DTCC web site http://www.dtcc.com/.

SIAC - The Securities Industry Automation Corporation

SIAC - The Securities Industry Automation Corporation - formed in 1972, is the technology hub of the securities industry. A joint subsidiary of the New York and American Stock Exchanges, SIAC is responsible for the planning, development, implementation and management of a host of communication systems that support the Financial Services Industry in the following ways:

  • Order Processing and Trading
  • Market Data Reporting
  • Trade Comparison, Clearance and Settlement

You can learn more about SIAC by visiting the SIAC web site http://www.siac.com/.

OCC - The Options Clearing Corporation

The Options Clearing Corporation (OCC) is the sole issuer and Clearing Corporation for all US exchange listed options. Financial derivatives supported by OCC include Put and Call Options derived from common stocks and other equity issues, stock indexes, foreign currencies and interest rate composites.

OCC serves its members as a centralized organization for both the issuing of option securities and the comparison and settlement of option security trades. Unlike DTC, OCC is not an option security and the option securities issues and cleared by OCC are strictly book entry securities - not shares on deposit.

OCC is equally owned by the American Stock Exchange, the Chicago Board of Options, the Pacific Exchange, the Philadelphia Stock Exchange and the International Securities Exchange, and is under the jurisdiction of the Securities and Exchange Commission.

In addition to the issuance, comparison and settlement of option securities, OCC acts as a guarantor of option trade contracts by ensuring the fulfillment of option contract obligations in the event that one of the contra parties to the contract becomes insolvent.

You can learn more about OCC by visiting the OCC web site http://www.optionsclearing.com/.

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