so "at the market." If the investor does not wish to execute at the market price, he may enter his own bid or offer to buy or sell at a particular price. This is known as a "limit" order. He may also enter a "discretionary" order, empowering his broker to decide the time and price at which to execute the transaction.

Trading in each security takes place at a specified place on the Exchange floor known as a "post." There are 18 posts on the floor of the NYSE, each with an average of about 75 stocks traded at it.19 A broker who is at a post to trade in a particular security is in "the crowd," which is merely a way of saying he is participating in the auction.20

When two or more parties have placed bids (or offers) in a security at the same price, technical rules determine who is entitled to the transaction. These are known as "priority," "precedence," and "parity." "Priority" holds that the bid or offer which is first in time is entitled to the first execution. If all orders were placed simultaneously, or if the party entitled to priority has effected his transaction,21 the principle of "precedence" becomes determinative, holding that bids (or offers) are to be executed in order of size.22 All bids for amounts as large or larger than the amount of stock offered are considered of equal size, or on a "parity." These bidders then "match" (flip a coin) to determine who is entitled to the execution. If none of the bids is as large as the amount offered (or no offer as large as the bid), they are executed in order of size, with parties having bids (or offers) of equal size "matching" to determine the order of execution.

The continuous auction method of trading, in which orders from the public to buy and to sell are often joined at a central locations, operates best when there are many participants in the auction. In recognition of this, the Exchange limits the issues which may be traded on its floor to those which meet its standards for distribution.23 It has also forbidden its members and member firms 24 from trading or executing orders in NYSE-listed issues off the NYSE floor, except on other organized exchanges 25 or with special permission.2

b. Mechanics of execution

26

In 1962, nonmembers were involved as buyers or sellers in about 76 percent of round-lot volume on the NYSE. In a typical transaction, a nonmember gives his order to an employee in the office of a member firm." The order is usually then wired or telephoned to the order room of the New York office of the firm, and transmitted from there to the Exchange floor by the direct telephone or teletype which each

19 In addition, a 19th post, known as "Post 30," has about 200 inactive stocks assigned to it. 20 The term "crowd" is a technical one and should not be taken to mean that there is always a large group of competing brokers in each or even most stocks. See pt. D of this chapter.

When an execution occurs, all other orders "on the floor" awaiting execution lose their priority and are treated as if they all arrived simultaneously. Because an execution thus clears the floor," the principles of precedence and parity assume importance. On the American Stock Exchange, unless one bid (or offer) has priority based on time, all are considered of equal status and "matching" determines their order of execution. 23 See ch. VIII.B.

24 The concept and composition of "member firms" is discussed in sec. below. See ch. VIII.B.

Rule 394. Members are permitted to trade "off-board" without special permission in about 200 preferred and guaranteed stocks, known as the exempt list.

"As pt. D of this chapter and ch. VIII.C.4.b point out, certain nonmembers have direct access to the Exchange through specialists. Also some nonmembers have direct access to floor brokers who are not members of commission firms.

member firm is entitled to operate from its office. 28 Some member firms transmit orders by teletype directly from the office of origin to their clerks on the floor; in such cases, the firm's central or main office is notified of the order by a duplicate machine.29 When the clerk receives the order by telephone, he writes it out on a small piece of paper showing the stock symbol, the number of shares, the type of order-buy, sell long or sell short--and the terms of the ordermarket, limit or discretionary. If he has received the order by teletype, he simply tears it off the teletype receiver. He then signals the firm's floor broker by having his number flashed on a large board in the trading area or floor. The floor broker picks up the order (or sends a page, an Exchange employee, to do so), and goes to the trading post where the particular stock is traded. A price indicator on the outside of the post, operated by the "reporter" (another Exchange employee), shows the price of the last sale of each stock assigned to the post and also shows whether that sale was higher, lower, or at the same price as the last sale. The floor broker determines the present quote in the stock, usually by asking the specialist.

Other members may also be present in the "crowd." It is the floor broker's responsibility to obtain the best possible price for his customer within the terms of the directions given by the customer-for example, if the member has a limit order, he is to execute it at a specified price or better. The broker makes a "bid" or "offer" for his customer within the framework of the rules of the auction market. If the order is "at the market," the broker, after ascertaining that he cannot receive a better price, will usually execute a buy order at the prevailing offer or a sell order at the bid. After the sale is consummated the members on both sides of the transaction complete their verbal agreement by noting each other's identity 30 and reporting the transaction back to their respective clerks. The clerks then notify their central offices, often by automated teletype, in which cases routing machines direct duplicate reports by teletype to the offices of origination, which inform the customers that their orders have been executed. Later in the day the selling firm "compares" the transaction with the buying firm and confirms the existence of the transaction.

An order of a member of the public may be executed against an order of another member of the public, or, as discussed below, with a specialist, floor trader, or odd-lot dealer on the other side.

c. Sales information

All published sales information, although disseminated in several ways, originates from the same source, the ticker tape. For regulatory purposes the Exchange also receives reports of executed transactions in various forms from its members and member firms.

28 Clerks may operate the telephones located at the walls alongside the floor, but may not move about the floor or execute orders.

Member firms having no New York office usually have a correspondent arrangement with a member firm which has a New York office or floor partner, under which the out-of-town correspondent transmits its orders over direct wires to the New York firm. The New York firm then handles the execution and clears the transaction and takes care of the bookkeeping involved.

In combination with the duplicate reporting of executions, this makes it possible to key the direct transmission to the floor into a central accounting system.

30 If the order has been left with the specialist (see see. 2.b, below), he takes the member's name and gives the other party's name.

As of January 31, 1963, there were 3,795 tickers in operation in 700 cities. The ticker tape is supposed to reflect most transactions 32 in each security in chronological sequence shortly after each transaction takes place on the floor. Reporters are stationed at each of the 19 posts. After a transaction takes place, the reporter records it on a slip of paper and gives this to a carrier page (also an exchange employee), who places it in a small plastic container which is carried by pneumatic tubes to the stock exchange ticker room.33 The reports coming from the various posts are divided among three control stations. The tape itself is produced at each of these stations by means of a mechanical device resembling a teletype, on which the sales data are typed. The tape from each of these control stations is fed into a central control station which automatically synchronizes the three sets of sales data so that sales appear on the tape in proper order. The central control station transmits the information over Western Union wires to tickers throughout the country. These tickers are able to print 500 characters per minute; their printing capacity is the limiting factor on the dissemination of sales information.34

An interval of several minutes normally elapses between the time a transaction takes place on the floor and its actual appearance on the tape. Because the capacity of the ticker is limited, heavy trading may cause additional delays. The exchange, attempting to keep prices as current as possible in times of delay, deletes the first digits of the prices, then deletes volume figures when the tape is 2 minutes late. When the tape runs 5 minutes late, the exchange gives "flash" prices in selected stocks.36

In replying to complaints of investors, the exchange takes the position that normal (and abnormal) delay in reporting is such that the tape cannot be used as a reliable source by investors to check whether their orders have been properly executed.37

Sales information for NYSE stocks also appears in the familiar form of stock tables in many daily newspapers. These tables may give the daily opening, closing, high, and low prices and the reported volume. The source of this information is the NYSE tape. Under

31 Approximately 20 percent of all tickers were leased to nonmembers. Of the 3,795 tickers, 3,650 were stock tickers; the remainder were bond tickers. NYSE rates for its ticker service are scaled on a geographical basis. There are seven zones and the change varies according to the zone, from a low of $55 per month in the New York City area to $130 per month on the west coast.

32 The NYSE makes it the selling broker's responsibility to notify the reporter of a transaction for publication on the tape (NYSE Guide, par. No. 2125A (1962)). Although certain instances of failure to report transactions come to the notice of the Exchange, such omissions apparently are not made the subject of disciplinary actions. For discussion of an instance in which a member failed to report transactions on the tape, see ch. XII.B. The Midwest Stock Exchange has recently imposed an automatic $5 penalty for failure to report transactions.

For a discussion of transactions which, under the rules, may be omitted from the tape, see below. According to the NYSE, tape volume is understated by about 5 percent due to such transactions. For a general discussion of the reliability of price and volume information, see pt. J of this chapter.

33 The carrier also calls out the sale to the odd-lot broker. See pt. E of this chapter. In addition to the ticker tape itself, many member firms utilize a device which projects a portion of the moving tape on a screen for the convenience of their employees and customers. This device, known as a Trans Lux, is attached to 2,622 of the operating tickers.

During the market break of May 1962, the abnormal volume on the Exchange caused the tape to run as much as four hours late. 38 When the tape is late the Exchange now gives flash prices in 100 active stocks. presenting them in groups of 50 at about 5-minute intervals. During the market break of May 1962, flash prices were given in 30 stocks at intervals which were more or less improvised throughout the day. Flash prices are obtained by collection from reporters on the floor, a process which in itself consumes some time with the result that flash prices are not as timely as are ordinary prices when the tape is on time. See pt. J of this chapter for a description of plans by the Exchange to automate part of the reporting mechanisms, including plans for a 900-character-per-minute ticker sometime in 1964. 37 This subject is more fully discussed in pt. J of this chapter.

one recently developed method this tape is "fed" into computers operated by press associations, converted into tabular form and sold to subscribing newspapers. Barring an abnormally late tape, afternoon newspapers can publish stock tables, lacking only individual stock volumes, by 4:15 p.m. (New York time), and complete tables have been published by 5:25 p.m. At last report, 526 newspapers carried exchange stock tables, of which 136 were complete tables and 176 showed fewer than 100 stocks.

Current sales information is also published by a daily market publication service known as the "Fitch Sheets," which lists, for each NYSE stock, the sale price and volume of each transaction in the order in which it appeared on the tape. The time of the transaction is not given, although the sheets are divided into two sections, one for sales occurring between 10 a.m. and 1 p.m. and the other for sales between 1 p.m. and the close.

The ticker provides information on whatever transactions may be currently taking place, and the publications previously referred to relate, in varying degrees of detail, the history of trading at the end of the day. There are also services by which an interested person can determine, during the day, the last sale price in a particular security. About 650 firms have installed Teleregister boards, rented from the Teleregister Corp., which provide such information. These boards differ in the number of stocks and the amount of information which they carry. Some boards provide opening, high, low, and last-sale prices; others provide only last-sale prices. The rental cost depends on the amount of information provided and the number of stocks covered, and on the volume on the Exchange.

The New York Stock Exchange has license agreements with three companies which use computers and other data processing techniques to digest and make available information from the ticker tape.38 By punching a few keys on a small office machine, a subscriber can obtain, for any NYSE security he selects, the last-sale price and other related information. As of January 31, 1963, 1,142 different offices had such units in operation. The cost to the subscriber (who may be a member or nonmember) varies according to the number of machines used and the information made available. The Exchange approves the subscribers on the same basis as its ticker subscribers and charges them a fee.

Another source of the last-sale information is the two major NYSE odd-lot firms. These firms use large Teleregister boards and also manually record the transactions as they appear on tape. They supply last-sale and similar information at no cost to all member firms who deal with them. Such information may then be passed on by a member firm to investors.39

d. Quotations

Quotations (the prevailing bids and offers) for NYSE stocks are disseminated by the Exchange to member firms over a private wire service. Nonmembers can receive quotations only from members.40

38 The companies are Scantlin Electronics, Inc., Ultronic Systems Corp. and the Teleregister Corp. See pt. E of this chapter for a more extensive discussion of this service.

40 The Exchange supervises the installation of private wires between members and nonmembers, to protect its claimed property right in Exchange quotations. The Exchange's approval is conditioned, in part, by the nonmember's entering an agreement which limits the further dissemination of quotations obtained by the nonmember from the member through use of wire connections.

During the course of an average day the Exchange system is called upon to supply about 100,000 quotations. Although members throughout the country may use this quotation service, the cost of longdistance telephone lines has generally limited its use to members' New York offices. Member firms which do not maintain New York offices generally obtain quotations through New York correspondents.

42

In order to obtain a quote, the member must dial the Telephone Quotations Service of the Exchange, which in turn has received the quote over a direct wire from a clerk at each of the trading posts on the Exchange floor. Two methods are used to transmit quotes to member firms. For about 300 of the most active stocks, quotations are recorded directly onto magnetic drums by quotation clerks on the floor 12 When a new quotation is established for a stock, the quotation clerk presses a key connecting the post telephone turrent with the proper magnetic drum which records the reporter's voice and erases the old quotation. A member desiring a quotation dials, on a special line, the code by which the stock has been designated. All other quotations are handled on a telephone operator system. About 50 clerks sit in a room facing a large electric panelboard on which the latest quotes are posted. This room is connected by telephone to the trading posts on the floor, and the quotation clerk at each post continually reports any changes in the quotations. Inquiries to this department are also made by means of private telephone lines.

The Exchange has permitted the data processing companies mentioned above to disseminate quotations through the same devices used for sales information. Of the 1,142 offices using such devices as of January 31, 1963, 699 were receiving quotations. The Exchange does not permit devices in the offices of nonmembers to receive quotations.

The Fitch Sheets, discussed above, also publish a daily list of quotations as of 11 a.m. Quotations at the close of the Exchange day are printed on the tape and also are furnished by the two major odd-lot firms. Some newspapers publish closing quotations in stocks which were not traded; these quotations are not current in the same sense as those previously discussed.

2. IDENTIFICATION OF EXCHANGE MEMBERS

Membership in the Exchange is achieved by purchase of a "seat." Each owner of a seat, who must be an individual, has the privilege of trading on the floor of the Exchange. For a brokerage firm to be an NYSE "member firm," at least one member of the Exchange must be a general partner or a director holding voting stock. At the close of 1962, there were 1,366 members of the NYSE, of whom 1,101 were affiliated with 672 member firms, 259 were unaffiliated, and 6 were inactive.

41 In 1962 the Quotations Service gave 25.9 million quotations to member firm offices. New York Stock Exchange, 1962 Annual Report, p. 11.

42 The quotation is obtained by a reporter who gets it either by asking the specialist or by listening to bids and offers being made in the crowd. The reporter gives the quote to a page who gives it to the quotation clerk.

43 As noted in ch. I.B.1.b, the Exchange uses the term "member organizations" to refer to both member partnerships, which it calls "member firms," and member corporations. Throughout this report, unless specific qualification appears, "member firms" is used to include both partnerships and corporations.

The general partners or voting stockholders of member firms who are not themselves holders of Exchange seats are denominated "allied members," described more fully in ch. XII.B.