New York Stock Exchange

Trading Basics

New York Stock Exchange

Brief summary: The NYSE is the largest equities-based exchange in the world based on market capitalisation. The NYSE became a public entity in 2005, and merged with the Euronext exchange in 2007. For years the NYSE relied solely on only floor trading, however now more than half of the trades placed on the exchange are electronic.

Full overview: The New York Stock Exchange (NYSE) is the world’s largest stock exchange by total market capitalisation of listed companies that are trading on the exchange. Currently located at 11 Wall Street, Lower Manhattan, it is often referred to as “The Big Board”. The NYSE is owned by the American holding company Intercontinental Exchange (ticker, NYSE: ICE).

NYSE has a very long history as it dates back to 1792 when 24 stockbrokers and merchants from New York City decided to sign the so-called Buttonwood Agreement. Since then, much has changed in the way NYSE operates.

Here, we’ll take a deeper look at the New York Stock Exchange.

The Beginning of the NYSE

The beginning of the NYSE is considered to be the 1792 Buttonwood Agreement at 68 Wall Street. 24 stockbrokers from New York agreed to cooperate to organise securities trading. The main two rules they agreed upon are:

  1. Brokers are allowed to only deal with each other, therefore, eliminating the need for auctioneers.
  2. Commission were set at 0.25%

Additionally, restrictions on manipulative trading, as well as first forms of governance were set in place.

The first securities that the NYSE traded include government War Bonds and stock of First Bank of the United States as well as The Bank of North America. Shares of the Bank of New York are considered to be the first non-governmental security traded. Since then, the list has changed and expanded with the daily trading volume of the exchange measured in billions of shares.

In 1864, the Open Board of Stock Brokers was established as a competitor to the NYSE. However, shortly after in 1869, both entities merged. This minimised any competition at the time and allowed the NYSE to provide higher trading liquidity.

Since then the New York Stock Exchange has continued to operate during several market crashes, including the 1930s Great Depression. Those large swings in the market eventually led to the introduction of government regulations on security trading. As a result, on October 1st, 1934, NYSE registered as a national securities exchange with the Securities and Exchange Commission.

How to Get Listed on the NYSE?

Since one of the main goals of the NYSE is to maintain its worldwide reputation of trading only high-quality stocks, companies that want to get listed on the exchange have to meet strict financial and non-financial requirements, such as the number of shareholders, stock price, and earnings.

  • Shareholders: To be listed on the NYSE, companies must have at least 400 shareholders and 1.1 million publicly-traded shares with a market value of at least $40 million. The minimum stock price must be $4.
  • Basic Earnings Standard: Another requirement is profitability. To qualify for a listing, a company needs to have a pre-tax income of $10 million for the previous three years, with at least $2 million of earnings in each of the last two years.
  • Worldwide Trading: Requirements for worldwide trading include at least 2.5 million shares outstanding with at least 5,000 public shareholders.

If a company meets all listed requirements, the company can start trading on the NYSE in four to six weeks by simply filing an application with the NYSE. Nevertheless, the exchange has broad discretion in listing companies and can still reject potential candidates, even if all requirements are met.

Recent Mergers

In the 2000s, several consolidations were made and the NYSE became a for-profit company for the first time in its history.

First, NYSE and ArcaEx merged, creating a publicly owned NYSE Group, Inc. Later in the year, the exchange merged with Euronext, creating the NYSE Euronext Inc, which is now the world’s largest and most liquid exchange group. In December of 2012, the Intercontinental Exchange (ICE) acquired NYSE Euronext for 8.2 billion USD.

Other Interesting Historical Facts

1867 – Stock tickers are introduced

1896 – The Wall Street Journal publishes the Dow Jones Industrial Average (DJIA) for the first time.

1906 – The DJIA exceeds 100 on January 12.

1907 – Panic of 1907, resulting in an almost 50% drop for NYSE traded stocks.

1923 – “Composite Index”, today referred to as the S&P 500 is introduced.

1966 – NYSE creates a composite index of all listed common stocks. It is later renamed the NYSE Composite Index. It reflected the value of all stocks trading at the exchange as opposed to only the 30 stocks included in the Dow Jones Industrial Average.

1977 – Foreign brokers can now be part of NYSE.

1987 – Membership in the NYSE costs 1.5 million USD.

How Does Trading on the NYSE Work?

Today, most of the shares listed on the New York Stock Exchange can be traded by two methods. First, by brokers, as it had been before and second, through the newly developed electronic hybrid market. This development has improved trade execution times and, in the first three months since its introduction, 82% of all order volume was traded through the electronic hybrid market.

The exchange operates as a continuous auction floor where brokers, who trade either on behalf of their investment firms of their firm’s clients, bring buy and sell orders to specialists who manage the actual auction. Each specialist deals in a specific set of stocks, depending on their trading volume. The specialist’s job is also to maintain an active market for their stocks – When liquidity gets lower, they’ll invest their firm’s money to maintain the market’s liquidity.

Today, most of the trading is done electronically as it is faster and cheaper than using a regular stockbroker. Brokers mainly trade for large institutional clients that require large and complex orders to be executed. That’s why most of the major exchanges around the world have closed their trading floors, but the NYSE remains an exception as it still operates a physical trading floor.

Opening and Closing Hours

The NYSE opens trading from Monday through Friday from 9:30 am – 4:00 pm ET and averages 253 trading days per year. Besides the main trading hours, the NYSE also offers after-hours trading. Post-market trading usually starts at 4:00 pm and ends at 8:00 pm, while pre-market trading takes place between 4:00 am and 9:30 am.

After-hours trading became popular in the 90s with the development of electronic communication networks. Trades that are placed during post-market or pre-market trading don’t go through the NYSE – Instead, they routed through ECNs where buy orders get matched with sell orders and vice-versa.

One of the main advantages of after-hours trading is that traders are able to quickly react to breaking news, important market reports, or other unexpected developments in the global markets. In addition, after-hours trading on the NYSE provides some anonymity for large institutional investors who want to trade large order sizes.

A major disadvantage of after-hours trading is lower liquidity. The absence of market makers after regular market hours means that volatility and spreads can be quite high.

Exceptions to this are publicly declared holidays such as:

  • New Year’s Day
  • Martin Luther King, Jr. Day
  • Washington’s Birthday,
  • Good Friday
  • Memorial Day
  • Fourth of July
  • Labor Day
  • Thanksgiving
  • Christmas.

Additionally, the Exchange closes early on the day before:

  • Independence Day
  • the day after Thanksgiving
  • the day before Christmas.

The Opening Bell

One of the most publicly known features of NYSE is the famous opening bell. While it used to be done by the exchange floor manager, special guests are opening the market by ringing the bell each day since 1995.

Due to the publicity that this event reaches, it is usually coordinated with an IPO or a new product launch with the representative of the company attending the market opening. Notable bell ringers include famous athletes, entertainers, and politicians.

Trading Curb

After the Black Monday in 1987, during which the market saw massive volatility and panic, NYSE introduced trading curbs. The main idea is that trading is halted for a period of time after a certain threshold of loss is reached due to increased volatility. Therefore, the nickname “circuit breaker” is often used.

Since the 2011 rule change, the NYSE sets three circuit breaker levels at 7%, 13% and 20% from the closing price of the S&P 500 for the preceding trading day. The first two trading curbs result in a 15-minute pause in trading. If the 3rd level is reached, the market trading is closed for the rest of the day.

Key Takeaways

  • The New York Stock Exchange (NYSE) is the world’s largest stock exchange by total market capitalisation of listed companies that it offers
  • NYSE is often referred to as “The Big Board”
  • It is currently owned by the American holding company Intercontinental Exchange
  • The beginning of NYSE is considered to be the 1792 Buttonwood Agreement
  • Shares listed on the NYSE can be traded by two methods – by brokers and the electronic hybrid market.
  • Today, most of the daily trading volume is done electronically
  • NYSE sets three circuit breaker levels 7%, 13%, and 20% away from the previous day’s closing price of the S&P 500
  • The NYSE opens trading from Monday through Friday from 9:30 am – 4:00 pm ET

Final Words

The New York Stock Exchange is the leading stock exchange in the world and a landmark American institution. There are around 2,800 stocks listed on the NYSE, ranging from newly-listed high-growth companies to multinational blue-chip corporations.

To maintain the high-quality of listed stocks, companies that want to get listed on the NYSE must meet strict financial and non-financial requirements, including the number of shareholders, earnings, and stock price.

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