Exchange

The floor of a stock or futures exchange operates on the "auction market" principle, whereby brokers meet face-to-face on the floor of the exchange to execute buy and sell orders.

Futures exchanges operate on a pure auction system, often referred to as the open outcry system, where all trading takes place on the floor of the exchange, or "in the pit." Buyers and sellers in the pit use hand signals and oral communications to place buy and sell orders simultaneously, acting for themselves and as agents for others.

Securities exchanges operate on an auction-style system, where the market prices for securities are set by buyers and sellers meeting on the floor of the exchange. In contrast to futures exchanges, securities exchanges also employ specialists, who stand ready to buy or sell orders at market prices when there is, for example, a seller and no buyer for a particular security. In this capacity, specialists act as dealers, using their own capital to make bids and offers for stock. They can also act as brokers, holding limit orders (requests to buy or sell a security when it reaches a predetermined market price) for other brokers and executing those orders when the market moves up or down to the desired price. Specialists permit for a more orderly and continuous securities market and prevent wild price fluctuations due to imbalances in supply and demand.