Answer: The NYSE and AMEX are the two largest auction markets for stocks (NYSE is a
modified auction, with a “specialist”). Participants have a seat (or trading rights) on
the exchange, meet face-to-face, and place orders for themselves or for their clients;
e.g., CBOT. Some orders are market orders, which are executed at the current market
price, some are limit orders, which specify that the trade should occur only at a
certain price within a certain time period (or the trade does not occur at all). In dealer
markets, “dealers” keep an inventory of the stock (or other financial asset) and place
bid and ask “advertisements,” which are prices at which they are willing to buy and
sell. A computerized quotation system keeps track of bid and ask prices, but does not
automatically match buyers and sellers. Some examples of dealer markets are the
Nasdaq national market, the Nasdaq small cap market, the London SEAQ, and the
German Neuer market. ECNS are computerized systems that match orders from
buyers and sellers and automatically execute the trades. Some examples are Instinet
(US, stocks, owned by Nasdaq); Archipelago (US, stocks, owned by NYSE); Eurex
(Swiss-German, futures contracts), sets (London, stocks). In the old days, securities
were kept in a safe behind the counter, and passed “over the counter” when they were
sold. Now the OTC market is the equivalent of a computer bulletin board, which
allows potential buyers and sellers to post an offer. However, the OTC has no dealers
and very poor liquidity.