Tradition, evolution: Markets march to modernity

London officially organized the world's first established stock exchange in 1773. Seven years later, the first US exchange opened in Philadelphia. And in 1792, 24 men gathered under a buttonwood tree on Wall Street to sign an agreement that set the groundwork for the New York Stock Exchange.

Today all trading has moved indoors, but the NYSE is still a place where buyers and sellers meet on a centralized trading floor, like an open-air market auction.

Almost all large Fortune 500 companies list themselves on the NYSE, although many computer and Internet firms prefer the Nasdaq, which is now the largest US market in terms of dollar volume of trade - and which is an electronic system.

But while the NYSE's auction system uses live people - a nod to tradition - the exchange has also undergone some radical changes.

The first ticker machine was introduced after being invented in 1867. It was supplanted by the black box ticker in 1930 and then the 900 ticker, which automated the trading floor in 1957, allowing investors to see current stock prices.

In 1984, an electronic routing system, called the Super DOT, let traders make computer trades, increasing the number of orders.

In 1991, off-hours trading began making the NYSE even more automated. Six years later, average daily volume topped 1 billion and the ticker was upgraded to a wireless system, putting an end to the 20-minute stock-quote delay.

At the turn of the millennium, the NYSE abandoned the long tradition of stock prices in fractions and switched to decimals.

"The biggest change on the markets was decimalization," says Junius Peake, a finance professor at the University of Northern Colorado and former vice chair of the National Association of Securities Dealers.

"It's as big as ending fixed commissions,"he says, "because you decrease the costs of trading."

Mr. Peake adds that trading is now much less customized, opening the way for more volume and even more automation.

He sees the future of stock exchanges as interconnected trading floors, resembling more the Nasdaq exchange site than the NYSE.

The Nasdaq stock market began trading in 1971 and became the first floorless exchange. Brokers, regardless of their location, can monitor prices, match orders, and make trades electronically via the Nasdaq trading system.

Nasdaq trading is through an open market, multiple-dealer system, with many marketmakers competing to handle trades in each stock.

The NYSE, on the other hand, requires all buy and sell orders in a stock to go through a specialist on the floor, a sort of broker to the brokers.

For Lawrence Glosten, a finance professor at Columbia Business School, markets are headed toward more computer trades, but he still values the function of the "real" floor.

"The information on the floor facilitates dealer functions," he says. When large orders come in, specialists are useful because they handle them better, Mr. Glosten says.

In his view, the greatest evolution on the exchange is the increased interaction between orders from retailers, the small customers.

To what do we owe this increase? Technology, of course, he says.

(c) Copyright 2001. The Christian Science Monitor

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