Stock trades - How do they work?

[WilsonTung]

How do stock exchanges like NASDAQ and NYSE coordinate trades between millions of individuals and entities?

For example, if I place an order with my broker (lets say Etrade, for the sake of argument) for 100 shares of IBM @ X $US, how is my request for a purchase matched up with someone willing to sell at X $?

What if no one has 100 shares to sell at X $, but someone has 500 shares to sell at that price? How is it all coordinated?

Is anybody here in this line of work?

 

[Handle]

I'm not in the line of work and I'm no expert, but below are a couple of links that should help:

Note though that the NYSE functions very differently from the NASDAQ. NYSE is a specialist and floor based trading system. The NASDAQ, as its name suggests, is an electronic system. Note that NASDAQ stands for National Association of Securities Dealers Automated Quotation System.

NYSE
NASDAQ

 

[AmbitV]

the US securities markets use a dealer-based system, meaning there is a dealer that holds inventory of stock.
On the nasdaq, there are many dealers called "market makers". They compete with each other to provide the best bid/ask. On the NYSE, there is only one dealer - the "specialist".

The alternative is a call-market system where buyers and sellers must gather at prearranged times and a price is found where the buys and sells match up.

The benefit of the dealer system is liquidity - you can buy/sell during anytime of the trading day, whereas in a call-market system there is usually two calls a day (morning/afternoon)

Of course, the dealer takes on risks by holding an inventory of stock. He makes money off the bid-ask spread, and to lower his risk, when someone sells he will lower the bid and the ask (giving someone else more incentive to buy and the seller less incentive to sell) and vice versa when someone buys.

You might be thinking, well what if there are many sell orders in a row? Or many buy orders in a row? This can happen randomly, and this is precisely where daytraders come in play. When, for instance, many sell orders come in, the dealer is forced to lower the bid and asks. If a daytrader correctly perceives this to be a random fluctuation in order flow, he can profit by buying now and selling later when buy orders come in.
Of course, the daytrader could be wrong and there might be something that has fundamentally changed about the stock in investors' minds.

hope this helps