You wake up, read the news, and decide to buy or sell a stock. You log into your brokerage account and enter a trade. Within a second or so, it's executed.
All is well. But what happened in between?
I recently met up with Art Cashin, director of floor operations at UBS and a regular on CNBC for years, on the floor of the New York Stock Exchange. I asked him to explain what exactly goes on on the floor. Have a look (transcript follows):
Morgan Housel: What exactly is going on on the floor behind you? What are all those people doing down there?
Arthur Cashin: Okay, several are doing various things. There are what we used to call "specialists," which have been transformed into "designated market makers," and they are the people at the center of trade. So that the viewers best understand it, long before electronics, the New York Stock Exchange ingeniously decided that they would centralize trading. In other words, if you were going to trade General Motors, you had to go to one specific spot. The reason I say that's ingenious was that it thereby forced all the best bids and offers, the best prices, to come together at one central point, and that made for much better pricing here in New York, and it allowed the New York to grow to the prominence that it had.
Later on, as electronics and other things came in, they determined it was still a good idea to centralize the pricing so that the buyers would compete with each other to try and get the best price for somebody on the other side. So what we have there is centralized places where each stock individually trades. People will then perhaps get an electronic order in their handheld device. It may come from anywhere in the country; it may come from outside the country. But you want to get into that auction, that competition going.
Now it is still quite convenient, even though you can do a lot of that electronically, to go into that crowd, to that central place to tray and get on behalf of your client a sense of exactly what is going on here. Is the trading active? Has there been recent news? Is there anything I might have missed, as much as I try to keep track of everything that's going on, because to represent you, the client, best, I have to be as well informed as I can. And so that ability to get in there and get a sense of what's going on, not just electronically, but get a little human interaction, to get a feel for it is good.
In many ways, when something happens, the floor is not necessarily conducive to reflective thought. If an event takes place, you and I don't get a chance to sit down and say, Gee, what do you think that means? My client and your client will expect us to react immediately. If something happens at General Motors, I'm supposed to know what it means for Ford, if I've got an order in Ford. Or I've got to know what it may mean someplace else, so you wind up scenario building, and you do that over years of going into a crowd, getting a sense of how animated they are, how aggressively will people pay up, and what does that mean for your client.