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The Bell Tolls for the Big Board

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Which leads to a broker's other key skill -- figuring out what the other guys are up to. Sometimes, it behooves a broker to execute a big order all at once, depending on the market. Good brokers provide clients what is known as a "look," a quick snapshot of activity on the floor, a sense of who is buying or selling what and how much. It comes from knowing what other brokers are doing and who they tend to represent. "That is one of the big services we provide," says McSherry. If a large fund gives a $2 broker a big order to buy Merck, the broker will sometimes warn other favorite clients who call about Merck that he has "a size buyer," so they know not to sell right away -- they stand to get a higher price after Merck is bid up. This is a breach of fiduciary duty, McSherry says, but traders who call the floor say it happens all the time. (Distrust is a part of the system, too: From a portfolio manager to his trading desk to the brokerage firm to its trading desk, and all the way down to its floor broker, everyone splits up orders and tries to hide their size, in an effort to prevent leaks. "Sell these and let me know how it goes" is the standard refrain. "I might have some more later.")

Thus, a floor broker's craft takes a knack for "multitasking," McSherry explains. "See that guy over there?" he says, pointing twenty feet away. "While we were talking, I just heard him say, 'Sell 10,000 LU.' It's just a skill you develop. At a cocktail party I follow four conversations at once. It drives my wife crazy."

The web of relationships is further complicated by the fact that a surprising number of the brokers on the floor are related. "I used to know 50 blue-blood-type guys, who inherited their seats from their dad," McSherry says, as we stroll the floor. "There is less blue blood now, but there are still a lot of fathers and sons in the business." There is almost nowhere else to learn floor-trading skills, and to get even a clerical job on the floor it helps to know someone. As a result, there are a lot of cousins trading with cousins. Some families, like the Hendersons, the Schuberts, or the LaBranches, have been on the floor for generations.

The elite among the traders on the floor -- and the best or worst aspect of the NYSE's system, depending on whom you ask -- are specialists, members who are assigned by the exchange to manage trading in each particular stock. Essentially, they're auctioneers. Robert Seijas, who helps manage Fleet Bank's operations on the floor, is the specialist for Johnson & Johnson, or, in the parlance of the exchange, "Johnny John." Each morning, after a quick swig of mouthwash -- "an essential part of the face-to-face auction system" -- Seijas takes his place in front of a teller-style window in a round kiosk on the floor of the exchange, surrounded by computer screens pointing in all directions.

All trading in Johnson & Johnson takes place at Seijas's post, right in front of him. Brokers trade with each other, or hand him slips of paper with orders to buy or sell if the stock is at a certain price (limit orders). He displays the best bid to buy or offer to sell, and a clerk keeps track of the trading behind the window. Floor brokers try hard to stay on Seijas's good side because, in a world where information is the key to success, a specialist has the most. "I work hard on my relationship with the specialists," McSherry says. "If I'm a seller, a specialist can say to me, 'Goldman was buying yesterday when the stock was at 42, and it's around 42 now, so they might be interested.'"

The virtue of the specialist system is that Seijas is expected to step in when there is an imbalance of buyers and sellers in order to keep the price of the stock moving smoothly; they help make the Big Board much less volatile than the NASDAQ. The controversial aspect of the specialist system, however, is that specialists are allowed to use their unique vantage point to make as much money trading their assigned stock as they can. The exchange enforces certain fairness rules -- a specialist, for instance, can't ever step in front of another broker who wants to make a trade. And the advantage isn't perfect: These days, specialists also customarily show their electronic order book to any floor broker who asks, and, consequently, brokers reveal as little as possible in the book. But seeing all the orders first is still an edge similar to being the only poker player at the table who gets to see the next few cards coming up in the deck.

Specialists are only required to maintain enough capital to buy at least 25,000 shares of a stock -- just a tiny drop in the bucket of most companies. Some also wonder how much price stability they could provide in a big downturn; their capital hasn't kept up with the growth in the market, and if they can't keep the markets moving smoothly, why give them such a trading advantage?

By 9:45, Seijas has bought 8,000 shares for his account at $97.50 a piece, and the price has fallen 25 cents -- four sixteenths, known as "teenies" or, occasionally, "steenths," on the floor. The price is going down, but Seijas can't unload his shares even if he wants to because a broker from Merrill Lynch is loitering in front of his station, and every time an order to buy shows up, she sells. (By waiting for buy orders, she can sell at the price of the best offer rather than capitulate to the prevailing bid.) Finally, she is done selling, and when the next big bid comes in, Seijas turns to me, "Should I sell now or hope the price moves up?"

I swallow hard and try to demur, but he insists. Sell, I say, breaking a sweat. He does. Thirty minutes later, the price is back up to $97.5625 a share -- up a teeny from where he bought it. But with my help, Seijas managed to unload them down four teenies. "That's a stone-cold loss of $2,000," he says. "Get a hunch, lose a bunch -- you can't stress it. You should try it when there are a few more digits."


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