HOW DOES THE STOCK EXCHANGE WORK?

The Exchange is a non-for-profit corporation run by a board of directors. Its member firms are subject to a strict and detailed self-regulatory code. Self-regulation is a matter of self-interest for stock exchange members. It has built public confidence in the L Exchange. It is also required by law. The US Securities and Exchange Commission (SEC) administers the federal securities laws and supervises all securities exchanges in the country. Whenever self­ regulation doesn't do the job, the SEC is likely to step in directly. The Exchange doesn't buy, sell or own any securities nor does it set stock prices. The Exchange merely is the marketplace where the public, acting through member brokers, can buy and sell at prices set by supply and demand.

It costs money to become an Exchange member. There are about 650 memberships or "seats" on the NYSE, owned by large and small and firms and in some cases by individuals. These seats can be bought and sold; in 1986 the price of a seat averaged around $600,000. Today the price of a seat is more than a million! Before you are permitted to buy a seat you must pass a test that strictly scrutinizes your knowledge of the securities industry as well as a check of experience and character.

Apart from the NYSE and the AMEX there are also "regional" exchanges in the US, of which the best known are the Pacific, Midwest, Boston and Philadelphia exchanges.

There is one more market place in which the volume of common stock trading begins to approach that of the NYSE. It is trading of common stock "over-the-counter" or "OTC" - that is not on any organized exchange. Most securities other than common stocks are traded over-the-counter. For example, the vast market in US Govern­ment securities is an over-the-counter market. So is the money market - the market in which all sorts of short-term debt obligations are traded daily in tremendous quantities. Like-wise the market for long- and short-term borrowings by state and local governments. And the bulk of trading in corporate bonds also is accomplished over-­the-counter.

While most of the common stocks traded over-the-counter are those of smaller companies, many sizable corporations continue to be found on the "OTC" list, including a large number of banks and insurance companies.

As there is no physical trading floor, over-the-counter trading is accomplished through vast telephone and other electronic net­works that link traders as closely as if they were seated in the same room. With the help of computers, price quotations from dealers in Seattle, San Diego, Atlanta and Philadelphia can be flashed on a single screen. Dedicated telephone lines link the more active traders.

Confirmations are delivered electronically. Dealers thousands of miles apart who are complete strangers execute trades in the thousands or even millions of dollars based on thirty seconds of telephone conversation and the knowledge that each is a securities dealer registered with the National Association of Securities Dealers (NASD), the industry self-regulatory orga­nization that supervises OTC trading. No matter which way mar­ket prices move subsequently, each knows that the trade will be honored.