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From Wikipedia:

A transaction on a stock exchange must be made between two members of the exchange—an ordinary person may not walk into the New York Stock Exchange (for example), and ask to trade stock.

If I understand correctly, even when I issue a buy/sell order via a computer, it is ultimately delivered to a person that does the actual transaction or places the order.

Am I right? Why is there a middleman here - is it just legacy from before we had computers? Why aren't all trades done directly software-to-software, mediated by the central computer of the exchange? Why the need to human middlemen?

  • Just to add here, if you deal with a direct access platform like IB, then it goes directly to the market maker, bypassing the broker. So there are ways to bypass the middleman – Victor123 Feb 11 '14 at 19:27
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Actually, they are done computer to computer, but only between authorized companies.

The Wikipedia article is correct in its overall statement, in that only licensed people and companies are allowed to trade on the exchange. That can indeed, however, be between the computers of those companies and the computer that is the central matching engine of most exchanges these days.

The usage of brokers is, in effect, a distributed trust model. The Exchange can vet and certify a certain number of serious people/companies. Those companies in turn can vet more people (their clients). The brokers on the exchange therefore don't have to worry about the clients of the other broker's exchange, but only the other broker, and they trust that broker because of the Exchange's oversight.

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    +1 for distributed trust model; ensuring that the losing party has the resources to settle is a big part of any trade. – kdgregory Dec 4 '11 at 17:20

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