Certainly the most famous securities exchange, The New York Stock Exchange, currently located at 18 Broad Street in New York City, was first organized in 1792 – when 24 securities brokers agreed to trade securities under a tree on Wall Street. Its first constitution was adopted in 1817, and the exchange was first incorporated on February 18^th, 1971.

The NYSE is an agency auction market. This means that trading takes place by the exchange of open bids and offers by exchange members. Prices are determined by factors of supply and demand.

Each listed security is assigned to a ‘Trading Post’. Each post is managed by a security ‘Specialist’. The Specialist is responsible for maintaining an orderly auction market for a particular security – or group of securities. Orders to buy and sell a particular security are maintained in the Specialist’s ‘book’.

Trades executed on the New York Stock Exchange are executed as either:

• Crowd Trades
• System Trades

Securities bought and sold by brokers on the floor – or Floor Brokers - of the exchange are referred to as ‘Crowd Trades’. Crowd trades are executed verbally between two brokers, or between the broker and a Specialist. The transaction is recorded on a Floor Report – which becomes the firm’s written record of the trade. Crowd Trades are often referred to as ‘Hand Held’ trades because of the hand written Floor Report.

The traditional paper floor reports are currently being replaced by mobile hand held devices – the device looks quite similar to a PDA (Personal Data Assistant) such as the Palm Pilot. The hand held device enables the floor broker to both receive orders and record executions electronically.

Upon execution, the Floor Brokers report the transaction to the specialist and to the NYSE OCS System.

In addition to specialist reporting, the Floor Brokers must report the transaction to the Exchanges Overnight Comparison System – OCS. OCS is a matching process through which the buyer and seller re-confirm the original trade details. The key trade elements are:

• Buy or Sell
• Quantity
• Security Symbol
• Price
• Contra Broker – with whom the trade was executed.

Each Floor Broker – the buyer and the seller – must report the transaction independently. If the two submissions agree, the trade is passed to the NSCC - see Exchange Utilities – for settlement. If the inputs do not agree on the important key elements, the trade is forwarded for reconciliation and resolution.

The Broker Booth Support System – or BBSS – is an electronic order management system provided to member firms that enable the floor broker to enter and receive orders, re-route orders, issue reports, review research and view other exchange services.

In addition to having direct representation on the floor of the exchange through membership, brokers can also utilize the services of a Two-Dollar Broker. A 2$ Broker is an exchange member that contracts his or her trading services out to other members and brokers.

The Two-Dollar Broker receives orders from the other brokers, and executes those orders in the crowd on the exchange floor. In turn, the 2$ Broker charges that broker a Floor Brokerage Fee or Commission.

The name Two-Dollar Broker is somewhat antiquated and refers to the $2 per trade flat fee that such independent contractors used to charge. With increased competition and improved billing capabilities, Floor Brokerage Commissions structures have changed significantly, and are no longer based on a flat fee. The name 2$ Broker, however, is still widely used in the industry.

The majority of trades executed on the NYSE never reach the crowd on the exchange floor. Trade orders are input into a highly sophisticated order routing system known as Super DOT. DOT is an acronym that stands for Designated Order Turnaround.

Both Market Orders and Limit Orders are entered into Super DOT and routed to the appropriate trading post. Upon execution, the trade details are transmitted back to the broker along the same electronic line.

Bond securities are also traded on the New York Stock Exchange. NYSE bonds are traded using the exchange’s Automated Bond System – ABS. ABS is an electronic bond trading system that matches bond sellers with bond buyers. Trade executions generated on ABS are routed to the NSCC for comparison and settlement.

The American Stock Exchange is the nations second largest floor-based exchange. In many regards, the AMEX is very similar to the New York Stock Exchange. For example, securities must be listed with the AMEX in order to be traded at the exchange. Further, both exchanges are agency auction markets and both execute transactions via Crowd Trading and System Trading. Crowd Trades must also be reported to the Overnight Comparison System.

Additionally, similar to their counterparts at the New York, specialists on the American Stock Exchange are also responsible for maintain an orderly market for their designated securities. The services of Two-Dollar Brokers are also available to members of the American Exchange.

The primary difference between the New York Stock Exchange and the American Stock Exchange is the system utilized for electronic order routing and trade execution. PER, the AMEX order routing system, works in the same manner as Super DOT, but is a proprietary AMEX system.

Another difference between the AMEX and the NYSE is that option contracts are traded on the American exchange. AMEX options are traded both in crowds on the floor of the exchange, and via a systemic order routing system.

Similar to equity floor trades, both the buyer and seller of an option contract traded on the floor of the AMEX must also report the trade for comparison. Option contracts executed on the floor of the AMEX are submitted to the exchange’s IDC comparison system. Comparison details are transmitted from the exchange to the Options Clearing Corporation – OCC.

The American exchange options trading system is the AMOS system. Brokerage firms use AMOS to route option orders directly to the option specialist for execution. Once executed, the trade details are transmitted back to the broker along the same electronic line. The trade details are routed to the OCC for trade comparison and settlement.

Regional Exchanges are US securities exchanges, other than the NYSE and AMEX, located throughout the United States. Although independent trading systems vary from one exchange to the next, the concepts and principals discussed above apply for the Regional Exchanges as well. As such, the regional exchanges are not discussed in detail here.

The same applies to the various Commodities Exchanges located throughout the United States.

The automated processing, comparison and settlement of securities transactions is facilitated through the various firms that act as utilities to the Brokerage Industry. The primary Utilities are:

The NSCC is the National Securities Clearing Corporation. NSCC provides centralized clearance, settlement and information services to the Financial Services Industry, providing connectivity between brokerage firms, mutual funds, banks and other financial institutions.

The NSCC clears the majority of equity, corporate and municipal bond and mutual fund transactions providing the following functions necessary to automated securities clearance:

• Trade Capture/Reporting
• Trade Matching
• Trade Netting
• Trade Settlement
• Trade Guarantee

Trade Capture/Reporting is the process through which the trade records for NSCC member firms are submitted to NSCC for matching, netting and settlement. In certain instances, trade records are 'Captured' by NSCC at the point of execution - ie. the exchange or market trading system passes the member firm trade data directly to NSCC. In other cases, member firms are responsible for the communication - 'Reporting' - of trade records to the clearing corp.

The NSCC trade matching process matches the trade submission of buying firms with the corresponding trade submission of the selling firms. Trades are matched based on the following criteria:

• Trade Date and Settlement Date
• The Security Traded
• Buy or Sell
• The Quantity of securities traded
• The Trade Execution Price
• The Contra Broker or Firm - with whom the trade was executed
• Accrued Interest - in the event of Fixed Income Securities

A successful match between buyer and seller along the above criteria results in a compared trade, that is forwarded to the NSCC Settlement System. Unmatched trade records - or Uncompared Trades - are returned to the originating brokerage firm for reconciliation.

Trade Netting - of function of the NSCC Trade Settlement System - is the first step in the Trade Settlement Process. The NSCC CNS System nets the member firm's buy and sell activity - in each security traded - to arrive at one net settlement quantity. A firm is either a net buyer (the firm's total buys are greater than its total sells) or a net seller (the firm's total sells are greater than its total buys) of a particular security.

Trade Settlement

The NSCC Continuous Net Settlement System (CNS) is the NSCC's settlement system for both security and trade related money settlements. After the Trade Netting process is completed, member firms settle one Net Position with the CNS System. Similarly, all of the member's trade related debits and credits are netted into one final net money settlement.

The NSCC's Trade Netting and Settlement processing can reduce the number of share and money settlements by up to 95% (taken from the NSCC web site).

The NSCC provides to its members the guarantee that all trades will be completed - settled- once they are entered into the NSCC system as a compared trade. This guarantee applies to situations - rare as they may be - where one party to a compared trade becomes insolvent, and, for that reason is unable to meet its obligation to settle the trade.

Other important NSCC member services include:

• ACATS - Automated Customer Account Transfer System
• RECAPS - Reconfirmation and Pricing Service
• PC Web Direct
• DSS - Dividend Settlement System
• The NSCC Envelope System

The NSCC is also the principal order routing and clearance system for the vast majority of US Mutual Fund transactions. NSCC's role in processing Mutual Fund related transactions is discussed in detail under the section - Mutual Fund Processing.

DTC offers its members a broad range of services - all of which relate to either:

• Custody and Safekeeping of Securities
• Securities Clearance and Settlement
• Accounting for Securities Deliveries and Payments
• Servicing of the Assets Held in Custody

DTC is akin to a large securities vault. The depository holds as custodian for its members a wide range of physical security certificates (almost 2 million different issues) and provides for book-entry delivery of those securities between member firms. In doing so, DTC largely eliminates the need for the physical movement of paper certificates in the trade settlement process by centralizing the handling and processing of the securities it holds.

The centralized security handling and processing functions performed by DTC make the depository the national clearing house for the settlement of most corporate and municipal securities transactions.

DTC provides its members with detailed records pertaining to the security issues held by DTC on behalf of the member and its clients, and the quantity of each held. Additionally, daily activity reports are generated that detail the member's book-entry deliver and receive activity for each security and any associated movement of funds processed.

Asset Services

In addition to the Custody and Safekeeping of assets DTC provides other services to its member firms to service the assets held in custody by DTC on the member's behalf:

• Principal and Income Distribution
• Corporate Action Processing
• Collateral Loan and Repo Services

DTC provides for the distribution of principal and interest to its members, of distributions received by DTC for the securities held on behalf of its members and their clients. Principal and Income distributions process by DTC generally include:

• Dividends (both cash and stock)
• Bond Interest
• Principal Paydowns - including Principal returned on debt maturities and calls

The amount allocated to the member firm by DTC is based on the firm's DTC position - the number of shares or bonds held in custody by DTC for that member - on the distribution Record Date.

DTC also provides for the announcement and processing of Corporate Reorganizations, such as:

• Voluntary and Involuntary Exchanges
• Mergers
• Conversions
• Put Options
• Warrant Exercises
• Right Subscriptions
• Stock Splits
• Spin-Offs
• Exercise of Voting and Consenting Rights

The results of Corporate Reorganizations are passed by DTC to its members based on each member's relative DTC position on the Affective Date of the Reorganization.

DTC provides collateral services that enable members to pledge securities held at DTC to banks and other funding institutions as collateral to support the member's financing activities. Members can also use securities held at DTC as collateral to satisfy margin requirements at the Options Clearing Corporation - OCC.

DTCC - The Depository Trust and Clearing Corporation

The Depository Trust and Clearing Corporation is a holding company, established in 1999, that oversees tow principal subsidiaries:

• The Depository Trust Company
• The National Securities Clearing Corporation

The two organizations have been integrated under the holding company to leverage on each's respective strengths and to support the constantly changing environment in the Financial Services Industry.

• Order Processing and Trading
• Market Data Reporting
• Trade Comparison, Clearance and Settlement

OCC serves its members as a centralized organization for both the issuing of option securities and the comparison and settlement of option security trades. Unlike DTC, OCC is not an option security and the option securities issues and cleared by OCC are strictly book entry securities - not shares on deposit.

OCC is equally owned by the American Stock Exchange, the Chicago Board of Options, the Pacific Exchange, the Philadelphia Stock Exchange and the International Securities Exchange, and is under the jurisdiction of the Securities and Exchange Commission.

In addition to the issuance, comparison and settlement of option securities, OCC acts as a guarantor of option trade contracts by ensuring the fulfillment of option contract obligations in the event that one of the contra parties to the contract becomes insolvent.