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Ah yes, the New York Stock Exchange, while it’s the epicenter of the trading universe, it looks a bit more like an amusement park or a playground doesn’t it? Close your eyes and you can picture it, the hustle, the bustle, the screaming traders on the floor, the grown men sweating through suits and button up shirts gesticulating like a wild pack of children playing tackle football on an open field.
But why, in this modern-day and age, do traders and brokers still act like an angry mob? Don’t we use computers for most trades these days anyway? Isn’t this the information age, an era dominated by sterile, instant communication? How did this madness start? Why does it still go on? This article will examine and explain the reasons why Wall Street and many other trading pits resemble a riot after a soccer match more so than a gathering of grown business majors trying to amass a fortune for themselves and their clients.
In the first place, there are a number of trading exchanges and trading pits, from the bond pits in Chicago to the Nikkei in far off Japan, but the most famous trading exchange in the world, beyond a shadow of a doubt, exists at the intersection of Wall Street and Broad Street in Manhattan. The New York Stock Exchange (NYSE) had existed since 1792 when the famed Buttonwood agreement was signed by 24 New York brokers and businessmen. Most people think of the Dow-Jones Exchange when they think of the stock market. This consists of thirty of the largest businesses in the United States, from GE and McDonald’s to Walmart.
The principle is simple; people use stockbrokers to buy stocks, or percentages of ownership of a company (and its profits or losses) in exchange for cash. The money is and always has flown around the room at a fast and furious pace, and so has the action, hence the total hubbub. Essentially these stocks are “auctioned” off to the highest bidder who agrees to a purchase price, so each broker is trying to get their bid in and accepted before the price of a stock rises. This is where the yelling originated, with brokers trying to shout their price and acceptance as loudly as possible in an attempt to drown out and beat the competing brokers to the purchase price that they want. Getting a bid in a split second earlier at pennies per stock can mean the difference between millions of dollars of profit on one large stock purchase, so the immediacy and force used can be understandable when so much is on the line.
Originally, the tenor of the room was more gentlemanly, as respected businessmen and brokers traded stocks at a reasonable pace and wealth simply moved amongst wealthy individuals, from one family to another. A Rockefeller might buy a piece of a Ford or a Vanderbilt’s interests, knowing that these successful, wealthy men would generate more wealth.
As America grew, though, and the American Dream was born, the common folk wanted in on the action. After the Industrial Revolution in America took place in the late 1800’s, a middle class emerged, as factory workers fought for more of the company pie and finally won better wages and working conditions. The idea that any American could get rich and get rich quick took root, and what better way than through the New York Stock Exchange.
By the 1920’s, many Americans were investing in the stock market. The New York Stock Exchange was booming. Instant millionaires were popping up all over the place. There was a whole new level of wealthy Americans with ticker tape machines in their living rooms giving them instant market price updates. This is when the screaming and gesticulating began in earnest, as brokers were overwhelmed by buyers, new clients and purchase orders. They screamed and hollered and waved their arms to get their orders in first. The country’s stance was positive. The era was known as the Roaring Twenties, and its theme song was Blue Skies because everything was coming up roses for most Americans. Consumer credit was born to help sell products being over produced thanks to massive stock investments. The only problem was this whole explosion of wealth was built on a house of cards almost like a Ponzi scheme. Stocks were being sold for start-ups companies that weren’t making profits, they were just filling their coffers with investment cash, and too many people were downright leveraged in the stock market. For 9 years, from 1920 to 1929, stock prices went straight up with no end in sight.
That is until October 24 of 1929, better known as Black Thursday. That was the day of the Great Stock Market Crash that signaled the beginning of the Great Depression, the greatest economic catastrophe the United States has ever faced. The pits exploded with noise as brokers screamed “sell, sell, sell,” trying to cut losses before it was too late, but there were no buyers. Investors fled en masse, most of them were bankrupt, broke and penniless.
Nonetheless, the New York Stock Exchange persevered, and as with any exchange or market, has had its turbulent ups and downs ever since. There have been a number of peaks and valleys on the New York Stock Exchange over the years. The most recent crash occurred in 2008 after the housing bubble burst. The market is still recovering. There have been numerous regulations put in place to make the trading fairer and more acceptable. Day traders’ trade from their home computer signaling buys and sells in an instant. In fact, most trading is transacted through computers these days.
So why are grown men in suits still yelling, screaming and gesticulating like a five-year old throwing a temper tantrum? That’s the one thing that never seems to change.
Because at its heart, the New York Stock Exchange is still an auction house system, and every single DOW trade occurs at the end on that famous floor. Even if, you make a purchase on E*Trade, the trade is accepted and consummated on the floor of the New York Stock Exchange, facilitated by a broker. The screaming isn’t as necessary, nor as prevalent as in the past, thanks to computers and technological advances in communication systems, but there are still brokers on the floor who have to overcome their competition to the punch. In fact, hand signals are more important now to pit stockbrokers, so they can quickly signal floor specialists who put in the actual buy or sell order. That explains all the crazy gesticulating..
“Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers.”
By using wild obvious gestures and screaming when necessary, so the order can be heard brokers are communicating with their own partners these days not so much with the auctioneer. The noise and fury gets so strong at time, the old mass havoc rears its ugly head and to an outsider it appears as though a rugby scrum has broken out. In fact, it simply means that a large number of trades are transpiring right before your eyes, and to the detriment of your ears.
Probably there will come a day when all is quiet at the New York Stock Exchange, but it certainly wouldn’t be as entertaining. In all likelihood though, there will always be human traders on the floor making sure that their transaction goes through, and that will always mean yelling and hand signs. So now you know, the next time you see a frenzied video clip from the New York Stock Exchange, the brokers aren’t practicing to become professional wrestlers or politicians. They are not learning how to guide a plane down the runway, or imitate their favorite NFL Head Coach on the sidelines of a close football game. They are just trying to make money or save money for their clients. If you turn out to be one of those clients and it’s your money at stake, even if you only have a 401K or retirement fund, you might think that these transactions are worth the shouting.
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Source by Miriam B Medina
