13

Here's the vid - about one minute into it, you can see the action I'm talking about.

I know basically zilch about the stock market. But I have seen something like the scene above in a few movies - somebody gets a hot tip on some stock, gets on the phone, and then there's shots of people shouting on the trading floor.

What's the process happening here? Why so many intermediaries (obviously this is less of a thing with modern computing), how do they interact back and forth, what are the people on the floor called if they're not brokers?

I have been doing some light research on the topic, but I still can't quite decipher how all the jobs/rolls in the footage interact with each other. Questions on relevant Reddits or Discords get ignored/deleted because it's not specific to stock advice.

EDIT! The following is my attempt to parse Bob Baerker's helpful answer:

EDIT #02 The following is refinement of my previous clarification, to ensure I understand everybody's answers.

To clarify: a broker in the office of Firm FBR (can be an independent brokerage or prop broker) has an external buyer/investor who's agreed to buy a certain amount of stock for a certain price (up to 18% of X at $2 per share, for example).

They then phone the exchange where the 'office' broker's order is written down and handed to a 'Runner' who carries the order to the FBR 'floor' broker, in the pit (an area designated for the trading of commodities AND/OR securities (eg. stocks, bonds, futures) are traded through open outcry (according to the instructions the traders have been given)).

If the pit/floor trader for the broker is handed an instruction by a runner to buy up to 18% of X at $2 per share, they will buy according to that instruction.

'Market Makers' are large banks or investors that buy a large amounts of commodities, stocks, bonds etc. in order to ensure that the markets always have a base of tradables so that trading can always continue. Market Makers profit by charging a markup (the spread) on the tradable when THEY sell it. So they might buy X at $2 per share, but they sell it at $2.10.

While runners return details of filed orders (as seen in Trading Places, with the filed orders being stamped), this does not put an onus on the party that made the order, allowing them to DK the broker.

I hope this is basically on the money!

9
  • 5
    Oddly enough another 1980s movie might help explain it. There is a scene in Trading Places where Louis explains to Billy Ray who is who and what their jobs are in the stock market. You will have to ignore that theres no way Billy Ray got a credential to be on the floor without knowing that already, but it's necessary to explain the action to the audience of a comedy. rottentomatoes.com/m/trading_places
    – Freiheit
    Jul 12 at 13:40
  • 2
    @Freiheit - Despite the dumbing down of the financial market details, it's a great movie, especially the ending in the uncut version :-) Jul 12 at 15:03
  • You might be interested in the party game Pit. Jul 12 at 18:59
  • @BobBaerker there's a great scene in "Coming to America" that references the ending of "Trading Places", but I don't know the difference between the regular and uncut versions. Jul 13 at 1:46
  • 1
    @Freiheit - The end of Trading Places was very helpful! Still a bit confused about securities and commodities, but otherwise very useful. Seeing the runners stamp the filed orders was clarifying. Jul 15 at 0:42
24

Wall Street was filmed in the late 80's and although Electronic Communication Networks (ECN) existed at that time, their usage was not widespread as they were more the exception than the rule.

At that time, the process for buying and selling stock was for a broker to call the exchange whereupon a runner brought the order to the brokerage firm's floor broker in the appropriate pit where the stock traded (open outcry). In the pit were the market maker and floor traders. The runners were usually responsible for returning the details of filled orders to the brokerage firm's clerk so that trade execution was verified.

3
  • "the process for buying and selling stock was for a broker to call the exchange whereupon a runner brought the order to the brokerage firm's floor broker" — Isn't more correct to say that the broker calls the brokerage firm's employees at the exchange? If not mistaken, runners are employed by the brokerage firm (not the exchange).
    – Flux
    Jul 12 at 8:48
  • Is it more correct or is it just adding additional information? Jul 12 at 19:51
  • 2
    More correct additional information. Jul 12 at 20:35
6

A lot of these are readily googleable, but:

What is the 'pit'?

The area where open outcry traders stand. Sometimes these are set into the floor or stepped down, so the people at the edges can see each other over the heads of those in the middle.

What's a 'market maker'?

What's a 'floor trader'?

Someone trading on the floor on their own account - the opposite of a broker, who is trading on behalf of other people.

Are these the people who represent the companies selling the stock or goods or futures?

Brokers are, yes.

As to why it's structured this way: the same physics of high-frequency trading applies, but done with physical humans. The advantage goes to those who can communicate fastest. So the pressure is for everyone to stand close together and shout. There may be more entities that want to get involved, but they can't all fit in the physical space, so they delegate to someone on the floor.

The system is very, very old; the London Stock Exchange dates itself back to a coffeehouse, but the basic format of open outcry trading for e.g. livestock is probably as old as currency.

Would this eliminate the possibility of a DK/Don't Know response from the investor on delivery of goods?

This I'm not sure about, but delivery/clearing/settlement takes place outside the order process, potentially days later, and tends to be run on the honor system. Failure to deliver would be sanctioned.

7
  • "Are these the people who represent the companies selling the stock or goods " While you are right, I think it's important to note that outside of a few scenarios like buy backs, on-market reinvestment plans, staff incentives etc. companies selling the "goods" don't trade in their own shares. If they do, they would go through a broker as you say but probably aren't really allowed to do so speculatively in most capacities. They got all their $ on the IPO. What we see is the secondary market. They're not the ones shouting & screaming to make $. Jul 12 at 10:27
  • 1
    Second point is that settlement in not exactly an honour system. Participants pay to be part of the market and settlement is on them. Part of the participant fees fund that participant's defaults. If the participant fails to deliver then the clearing house will wear it and, yes, sanction if required. (AU/UK). If their client defaults, it's their problem and generally nobody will know about it. Jul 12 at 10:31
  • @pjc50 Wait, I thought some of the floor traders were carrying out the instructions for the brokers of the companies they belonged to (identified by their vests and badges). Could you clarify? I do think I understand why it's done that way, and I understand the history of Open Outcry, but I'm just trying to pin down the exact operation...! Jul 15 at 0:47
  • @LoztInSpace Sorry, to clarify: "Are these the people who represent the companies selling the stock or goods" - I'm talking about the traders on the floor / in pits are representing their respective brokerages. I think. Still wobbly here. Jul 15 at 0:50
  • @LoztInSpace , on your second point, this relates to the DK/Don't Know problem, right? I think this aligns with what I know about the system. Jul 15 at 0:51

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.