The Role and Functioning of Stock Markets


Stock exchanges play an important role in contemporary economics. Evolutionally, they hail from the stock markets. This paper is focused on the New York Stock Exchange (NYSE), the US major stock exchange. Being the largest in the world, it became a beacon of the US financial strength. In terms of capitalization, the New York Stock Exchange is the biggest on the globe, harboring around 60 percent of the world’s aggregate volume of shares (Silber, 2009, p. 38). It allows one to speak of the NYSE as the most influential organization involved in stock trading. More than 3,500 companies from around the world are listed on the NYSE (Terrell, 2010, p. 154). This stock exchange is also the most liquid in the world, which means that time necessary to carry out an operation is measured in nanoseconds. The NYSE has proved to be the least exposed to the abrupt fluctuations of share prices. Consider the following situation: while in the spring of 2007 the Hong Kong Stock Exchange could lose nine percent of capitalization, Moscow Exchange eight percent, the NYSE lost only three percent (Silber, 2009, p. 77).

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Speculation in stocks and bonds is much more venturesome than commerce, manufacturing, or provision of services, though it is the most lucrative legal undertaking at the same time. The stock exchange is not tantamount to a casino. It rather takes a lot of effort (intellectual and emotional) to attain the necessary results. There are many reasons behind shares’ going up and down, and comprehension of these reasons amounts to 50 percent of success (Sloane, 1980, p. 203). In other words, the stock exchange is the whole complex of opportunities to convert intellectual advantages into cash.

The main aim of this paper is to study the phenomenon of the NYSE. To achieve this aim it is necessary to address the following tasks:

  • To trace the NYSE history (it will help to understand the essence and purpose of this financial institution and trace its tendencies);
  • To examine the purpose of the NYSE;
  • To become familiar with the main functions of the NYSE;
  • To explore its administrative structure; and
  •  To examine current problems and plans of the NYSE.


The origin of the New York Stock Exchange can be traced to the 18th century. Alphin (2008, p.56) states that “fist transactions in securities in New York had been carried out in 1725.” On an auction market in downtown New York, along with wheat and tobacco (and slaves until 1788), it was possible to trade securities. New York newspapers mentioned the first distinctive securities market in 1792. The population of New York City was equal to 35,000, and only one bank (Bank of New York) was registered (Sobel, 1975, p. 61).

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According to Terrell (2010), “24 brokers agreed on the foundation of the first organized platform for stock trading.” Signing the Buttonwood Agreement of 1792, they aspired to limit the commission deductions in the process of security trading. This agreement may be considered the first milepost in the history of the NYSE. In 1817, the organization drafted its charter and renamed itself the New York Stock & Exchange Board (NYS&EB) (Buck, 1992, p. 116).

In 1853, the NYS&EB introduced a notion of listing (Sobel, 1975, p. 87). To be listed on the NYS&EB, companies had to meet specific capitalization requirements. Geisst (2004, p.114) wrote that “capitalization is the total value of the issued shares of the publicly traded company.” In 1863, the NYS&EB renamed its name into the New York Stock Exchange (Buck, 1992, p. 210).

On October 24, 1929, a series of large-scale losses resulted in a plethora of big shareholders declaring themselves bankrupt, and the whole American economy slipped into a long-term depression (Silber, 2009, p. 155). The graph below clearly demonstrates the behavior of annual changes in the Dow Jones Industrial Average. The US has experienced a little slighter slump in the securities market in the early 1970s and 1987.

In the early 1940s, Wall Street remained in the shadow of 1929 (Diamond, 1967, p. 184). The Great Depression, initiated by the collapse of the stock market in 1929, marked the incipience of serious changes in the country’s stock trading. It was a period of lull on the stock market. Wall Street companies did not even try to attract individual investors from the range of ordinary Americans. The menace of investigations and legal proceedings, which took place in 1929, forced publicly traded companies to minimize or even wind down advertising campaigns. It took the NYSE nearly 20 years to brisk up its attraction of investment activities.

In 1975, the NYSE became a non-profit corporation with a simultaneous fall in the number of board members (Buck, 1992, p. 139). In 2006, the NYSE completed a merger with the electronic securities exchange Archipelago Holdings, and for the first time in its history proposed shares to the investors having become a for-profit publicly traded company (Terrell, 2010, p. 200).

Nowadays there is a ramified network of stock exchanges in the US, which are located in New York City (two), Chicago, Boston, San-Francisco, Kansas City, Los-Angeles, Detroit, New Orleans, Dallas, Philadelphia, Cincinnati, and Salt Lake City. The NYSE, where more than 70 percent of exchange transactions are carried out, is the most prominent one. It consists of 1366 members. 1226 of them represent the interests of 523 private corporations, while 140 members trade on their behalf. In December 1999, the membership could be purchased for $2.6 million (Terrell, 2010, p. 117).

Kent (1990, p. 135) argues that “a stock exchange is an organized market designed to trade standard financial instruments.” It is created by the professional participants of the stock market to carry out mutual wholesale operations. The main function of a stock exchange is to take care of the capital flow, which mediates the allotment of national income in the economy in general, and between social groups and branches of the economy in particular. The stock exchange performs mobilization and concentration of temporarily free capital accumulations and savings using selling securities to the brokers on the primary and secondary stock markets (Diamond, 1967, p. 83). Also, it credits and bankrolls the state or private sector using buying their securities on the primary market and reselling these securities on the secondary. Under the primary market, specialists understand a market where securities that haven’t been in circulation earlier are sold, while the secondary market trades both old and new securities.

The NYSE is an association, therefore, the government cannot control its activities. It is a legal entity, which enjoys full independence over the issues of organization and functioning. Only stock exchange members (its shareholders, permanent and temporary members, who buy a right to conduct transactions for a certain period) have a right to transact business on the stock exchange (Gilson, 1998, p. 18). The stock exchange members trade securities on their behalf as well as on behalf of their clients, who do not have their membership. Thus, they play the role of intermediaries: brokers, dealers, jobbers.

Both physical and legal entities may participate in stock exchange operations (Gilson, 1998, p. 37). Individual securities traders (specialists in financial and investment issues) constitute the first group. Legal entities are represented by specialized financial institutions (brokerage firms, investment banks, and commercial banks).

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Stock exchange members are divided into two categories: stockbrokers and dealers. According to Berlin (2008, p.15) “a stockbroker is an agent who mediates the conclusion of transactions between buyers and sellers of securities, currency, and other financial assets.” Stockbroker receives a certain amount of remuneration for his services (commission, or brokerage by the imposed percentage). The overwhelming majority of intermediary operations are carried out by brokerage firms with a vast network of subsidiaries closely tied to the banks.

Dealers (jobbers and specialists) belong to the second category of persons who have membership on the NYSE. In its turn, dealers encompass the whole range of individuals, firms, and banks involved in the purchase and sale of securities. They act on their behalf and at their own expense. Dealers may conduct transactions only with stockbrokers or other dealers. Dealers as a rule are not engaged in the intermediary transactions and have not a right to transact with the clientele directly. These agents derive profit because of the difference in the seller and buyer’s rates, that is to say, they sell securities at higher prices in the end.

The New York Stock Exchange has specially-appointed premises, called the trading floors, where all the transactions are executed. Separate trading floors for transactions with bonds and securities exist (Sloane, 1980, p. 125). The NYSE shareholders determine what directing bodies should be institutionalized, regulate activities of the traders, and impose the services fee. They appoint the leadership of the stock exchange, as well as nominate the staff of boards and committees, which oversees the overall stock exchange activities. For instance, the quotations committee promulgates trade turnover figures every day.

The NYSE securities trading session lasts for 6,5 hours from 9.30 a.m. to 4.00 p.m. It facilitates the highest possible concentration of transactions and mobility of prices (Kent, 1990, p. 72). As a rule, the NYSE allows admission only to those companies, whose shares are popular with the traders. Thus, operations with them are carried out at least once a day. Terrell (2010, p.154) argues that “there are 3,500 companies listed on the NYSE.” However, not all companies are willing to pay for quotations or to undergo the process of listing. Securities of these companies are transferred to the non-stock exchange circulation. The major purpose of a stock exchange is to serve as a secondary market for the stock valuables, where the purchase and sale of securities sunk in the bank portfolios take place. In the framework of this function, the NYSE majorly conducts cash trade and limits urgent transactions to optional ones. The NYSE accumulates the supply and demand of securities and facilitates the formation of their rate, which allows it to play a role as the barometer of some companies’ state of affairs (Kent, 1990, p. 98). It furthers the rational orientation of capital and savings, as it steers them into those branches of the economy, where they can bring the highest yield, increasing the net income of the society at the same time. Urgent transactions are restricted by the legislation: they amount to less than five percent of the securities turnover on the NYSE (Kent, 1990, p. 186).     

To be listed on the NYSE, companies must satisfy several requirements:

  • Clear profit of $2,5 million during the last fiscal year;
  • The company must have earned at least $10 million over the last three years;
  • The net value of the company’s tangible assets must be no less than $18 million;
  • The average monthly trading volume of the emitter must be no less than $100 thousand over the last six months;
  •  A minimal amount of stockholders, who possess 100 or more shares, must be observed.

In countries with a developed stock market, the listing is construed as an admission of certain securities to the stock exchange quotation and their subsequent inclusion in the quotation list. On the NYSE, their number is 250 percent less than on other stock exchanges. A company must necessarily have a financial guarantor: bank or stockbroker (Gilson, 1998, p. 139). Also, the current leadership of the company must be in charge of it for at least three years.

The procedure of listing is aimed at:

  • Creation of favorable conditions for the organized market;
  • Detection of the most qualitative and reliable securities;
  • The rise in liquidity of these securities;
  • Ensuring the security of the depositors;

Trading volumes in the NYSE have increased since the beginning of the 21st century. Some of the reasons for the rise in trading volumes include high volatility in the markets, investor anxiety, high-frequency trading, short-term trading by hedge funds, etc (Terrell, 2010, p. 247). The graph below shows the change in trading volume at NYSE vs. NASDAQ from 2001 to 2010:


Under the conditions of a full-fledged stock market, the prestige of issuers amidst potential buyers increases significantly, when securities of the former appear on the stock exchange quotation list. The existing interest is largely connected with the willingness to reassure oneself of the stability of one’s financial position using undergoing either open or closed expert examination, which is conducted upon the request of the client (Gilson, 1998, p. 190). Of course, this procedure is not a solution for either the issuer or the investor. Moreover, comprehension of the necessity of this process is peculiar only to the large issuers, who are eager to settle themselves cozily in a certain stock market niche. Many medium-sized businesses are not on fire with enthusiasm to face such problems.

Conducting transactions on the NYSE always entails a certain amount of risk. To minimize this risk, a process of hedging was introduced. Gurudeva (2008, p. 240) states that “hedging is a risk-management strategy used to limit or offset the probability of loss from fluctuations in prices of securities.” In other words, an investor can be a buyer and seller of his securities simultaneously. The price of securities changes constantly on the stock exchange. An investor can conclude a transaction on the purchase of a large amount of stock at a certain price and for a certain term. If the stock price rises, he will derive profit. Otherwise, he will incur losses. The utilization of hedging allows investors to execute the purchase and sale of their securities, which makes them immune to fluctuations in the rate. Hedging is not a panacea against losses, though it ensures the stability of the portfolio on the whole. According to Zhukov (2012, p. 76) “portfolio comprises all the securities at the discretion of an investor.”

As large credit and financial institutions became the main player on the NYSE, computerization of their transactions has had a great impact on the securities market (Silber, 2009, p. 161). Banks started to allocate a great deal of wherewithal for the modernization of their businesses. “Nowadays banks rely on the automated systems (Mars, Cash Connector, Cemlink, Swift)” (Terrell, 2010). The rise in securities turnover and internationalization of transactions resulted in the necessity to use the most sophisticated electronics. That is why the NYSE, which keeps abreast of the latest developments, is equipped with complicated communication systems, which are connected to the analogical systems of non-stock exchange circulation.

With a soaring level of separateness and the growing importance of quotation for dealers, the NYSE has faced the necessity to employ contemporary means of communication and information processing (Terrell, 2010, p. 230). The New York Stock Exchange has a single electronic, visual, and computer system. Application of the achievements of computer science improved the process of orders’ passage from the investors to the trading floor. Stockbrokers in possession of a department united their field representatives with the dealers on the stock exchange. These systems function on the NYSE.

Reconstruction of the organizational and legal form is the main development tendency of the NYSE. In the 1970s, it was widely believed that the organization should be organized as a non-profit corporation, for this status could prevent the collision of interests amidst its members and participants (Buck, 1992, p. 177). In the 1990s, the process of demutualization took place. Silber (2009, p. 27) states that “demutualization of the stock exchange is the process by which a non-profit organization changes legal form to a joint-stock company.” Several factors loomed large in the appearance of demutualization. Under the conditions of growing competition, the NYSE was interested in the attraction of significant financial resources for the introduction of brand-new technologies. The form of non-profit organization impeded progress. On the other hand, transformation into a joint-stock company substantially alleviated the process of stock exchanges’ mergers. The NYSE availed itself of this possibility in 2007 when it merged with the fully electronic stock exchange Euronext (Terrell, 2010, p. 239).

The intensified competition between stock exchanges is another development tendency. Under the conditions of financial globalization, the stock exchanges began to vie for both emitters and investors. The merger boom became a direct repercussion of the cutthroat competition. The aforementioned merger of the NYSE with the electronic stock exchange Euronext demonstrates this point.

The full-scale transition of the largest stock exchanges to the electronic trading system is the third development tendency. The NYSE stayed true to its traditional “vote” trading system until recently. However, after the demutualization and merger with the electronic securities exchange Archipelago, the NYSE opted for the electronic trading development (Silber, 2009, page. 210).

Universalization of the stock exchange activities is the fourth development tendency. The NYSE maintains the world’s highest capitalization. It has gained such a high market value because it trades in different kinds of securities. Tendency to universalization is becoming overwhelming for other stock exchanges as well (Gilson, 1998, p. 130).

Hardware errors, that take place from time to time, constitute a serious threat to the NYSE. As a result of the hardware error on 13 November 2012, the NYSE suspended the trading in the stock of 216 companies including US Steel and Travelers (Zhukov, 2012). Hacker activities are another daunting challenge that the NYSE needs to grapple with.   


Around 23 percent of American householders and 50 percent of grown-ups possess stock (mainly chronologically gifted citizens, who are in arrears). Both social and pre-election echoes can have harmful consequences for the stock exchange. The quantity of problems that the NYSE faces is constantly growing in the process of its development. The NYSE tailors to the contemporary conditions and assumes more mobility. It is demonstrated by the NYSE’s application of sophisticated means of communication.

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