[0:08]Our chapter today is floor markets. The starting point of stock exchanges and capital markets.
[0:19]Floor markets, or the floor, is simply that central place where people go to trade. Keep in your mind that at that time there was no technological progress. There was no computerized trading system. We could not trade virtually. We have to be present in the market, physically present in the market in order to trade. Practically, we trade through our brokers. So the brokers were obliged to be there. Traders are present in the markets in the floor in the stock exchange building. They meet face to face. They bargain and negotiate. Also, they try to find an agreement on the terms of trade, in terms of quantities, in terms of prices. The negotiation in the negotiation process takes place, takes place in a crowd. So this is a transparent environment. Why I said transparent environment of trading, because we use our voice, we use our hand, that is shouting and hand signaling. And everyone present in the floor can hear and see the trading process, proposed prices, proposed quantities, the moves of each trader. So this is a transparent environment where we can trade. What of the most transparent form of financial market organization is the floor market. Okay. This is a floor. You can think of it as a place in the stock exchange where people go to trade. And inside that floor, that large space, we have various spots here, or pit, trading pit. So as example, in Pit 1, you can trade a limited number of stocks, one, two, three or four. Also, in the pit four, you can trade also a particular number of stocks and so on. This is to structure and organize the trading environment. Because inside the floor, if I want to trade stock A or stock B, I know well where I can trade it. This is how the floor was organized. In real word, this is the floor. Large area where very with a particular number of pets where you can trade. And you have to be physically present. negotiation takes place in a crowd like this. But it is so important to know that this is an organized, yeah, there is a people, plenty of people there. They shout, they they are shouting, hand signaling, they negotiate. They use their voice, but what is important is the trading process and the rules of trading are well determined. We call that the outcry procedure. So what is the outcry procedure? The outcry procedure is that mode of trading where the traders use their voice and hand in order to negotiate in a crowd, of course. And this is the basic organization of floor market. As you know, we cannot have a direct access to the capital markets. Ordinary traders, or everyone has the right to trade in financial markets, but not directly. Also, in that first first form of financial market organization, no one has the right to intervene directly to the market. Only the people who have the status of brokers can be present there. They receive their customers' orders by phone and convey that order to the market by shouting and hand signaling. And we can imagine that like this, in this graph, we can see how the broker received the order and that order is conveyed to the market. Customer, which is the off-floor trader, please, when you hear the term off-floor trader, it means simply that trader who has not the who don't have the status or doesn't have the status of broker. Here, this is an off-floor trader because simply he don't he doesn't have the right to intervene directly and to be present in the trading floor. That's why we call it the off-floor trader. The off-floor trader send or simply give an order to the broker by phone. Buy 100 shares of GM, limit $50. That is no paid more than $50. This is a cap. This is a maximum price. This is a bit. Broker received that that order and conveys the order to conveys the order to the market by shouting bidding $50 for 100 shares. This is how the orders were processed in the markets, in that environment of floor markets where we apply the procedure of outcry. Also, for the sell order, the off-floor trader or the customer, give the order to the broker by phone. Sell 120 shares of General Motor, limit $60, which mean that don't accept less than $60. This is a minimum price since we have a buy order. The broker received the order and shout offering 120 shares at $60. Okay. No. We will try to understand some rules. That that traders were obliged to respect inside that environment of outcry transparent environment of floor market. Rule one: bid shall be made only when it is the best bid available in the pit. So we can no allow to anyone to shout and his price in the market, in the floor. Why? Because simply we need to organize the trading process since all people use their voice, all people have all people shout in order to trade. So, we cannot give them all that right to state their prices publicly. Only the price is stated publicly, so a bid shall be made only if this is the best available bid in the market, best available market of course, suppose that we have the last the last order stated by the last bid stated by a trader at $50. If I want to intervene in the market, I need to propose a better price than $50, which is as example $60. And when I tell you better price, better price from the sellers point of view, which means simply if I want to propose a better bid or better price, I need to propose a higher price as example here $50. I can propose $52. Another trader, in order to get the right to intervene, he's obliged to propose a better to make an effort to spend effort in order to uh propose a better price from sellers point of view, which is in our case $54. Respecting the same principle for the sell orders, that is you have the right to intervene and state your price in the market. Only if your bid, if your ask in this case is the best available ask in the market. Suppose that the last the last sell order proposed prices, which is the ask, of course, is $60. In order to get the right to intervene, you should to propose a better price from the buyers point of view, which means simply here better price from the buyers point of view. The better price from the buyer's point of view is a lower price of course, don't forget that because if I want to really encourage the buyer to accept my bid, I need to propose better price than uh compare to what is available in the market. In our case, here, the first order was priced at $60, followed by the second order at $58. $58 is less than $60, which means we have in the second case a better bit, better ask than the first ask and so on. We have it decreasing uh prices and decreasing prices means simply there is a sort of competition between the trader and they have respected the rule of an ask, an offer shall be made only if it is the best available offer in the pit. We start by $60, another trader try attempted to propose a better price $58 from the buyer's point of view. A third trader also proposed another price by of course, proposing $56, which is less than $58 and so on. The rule as a recapitulation, in order to organize the trading process, the negotiation process, the bargaining process, we cannot give all the traders the right to intervene, whatever the price is, whatever the bid is, whatever the ask is. No. An ask or bid, an ask or an ask we can say an ask and say an offer, an offer or a bid shall be made only if they are respectively the best available bid and the best available ask in the market. That is to spend more an effort in order to make the trading process organized.
[10:40]Finally, since we are in a floor market and important condition in order to be a successful trader in the market, because the trading process is an oral trading process. You use the outcry, outcry procedure. You use your voice. So, you have to build your reputation as a trader who respects his oral commitment. Because if we conclude an agreement, and and I suppose that I propose a bit of $50, and another in the other direction, another buyer, potential buyer, another trader, accept my my ask, my price, my offer. So, I need in this case, I am obliged to respect my commitment and execute the transaction against this potential seller. On the opposite direction, suppose that I proposed an ask as a seller $40. Another in the other direction, another buyer, potential buyer, another trader, accept my my ask, my price, my offer. So, I need in this case, I am obliged to respect my commitment and execute the transaction against that potential buyer. Why? Simply because it is so important, all the trading process is an oral trading process, and the trading process is sustained by reputation. I have to build my reputation as a trader in the market, as someone who has that ability to respect his to honor his commitment and to conclude his transaction after giving first agreement, after concluding the oral agreement. So please, when you hear the term oral, we are in the trading process of we are in the context of floor markets, we are in the trading process of outcry, based on outcry procedure, and all of this activity is sustained and based on reputation. This is the most important and key element that you should keep in your mind and understand before going directly to the automated trading system called the limit order market.
