The Role of the Floor Broker

The Floor broker is an agent standing in a physical market. Everything the NYSE rules ask of that role follows from one fact: the broker's bids and offers are spoken, so the Exchange makes the broker say them out loud in front of a Trading Official before it lets the broker trade with itself.

Who May Transact Business on the NYSE Floor?

Under the NYSE Floor dealings rule, only members are permitted to make or accept bids and offers, consummate transactions, or otherwise transact business on the Floor in any security admitted to dealings on the Exchange.

One narrow exception sits beside that limit. Notwithstanding the members-only paragraph, an appropriately registered and supervised booth clerk may process orders sent to the booth.

That permission is conditioned. The clerk must work in a member organization's booth premise that the Exchange's regulatory staff has approved to operate similar to that organization's "upstairs" office, and the clerk may process those orders only in the same manner an upstairs sales trader may.

Exam Tip: Gotchas

• The booth clerk exception reaches processing, not quoting. The exception lets an approved clerk process orders sent to the booth. Making or accepting bids and offers on the Floor stays limited to members.
• The approval attaches to the booth premise, not to the clerk alone. The Exchange's regulatory staff must have approved that booth premise to operate similar to the member organization's upstairs office.

What Is Floor Broker Interest?

The NYSE auction rules define Floor Broker Interest as orders represented orally by a Floor broker at the point of sale.

That definition is worth reading twice. It turns on how the order reaches the market, spoken at the point of sale, rather than on who sent it or how large it is.

Exam Tip: Gotchas

• Oral representation at the point of sale is the whole test. The definition names the manner of representation. It says nothing about order size, customer type, or the security involved.

How Must a Floor Broker Cross Two Orders?

Under the NYSE crossing rule, when a Floor broker has an order to buy and an order to sell the same security, the broker must offer that security at a price higher than the broker's own bid by the minimum variation permitted in the security, before making a transaction with itself.

All such bids and offers must be clearly announced to the Crowd in the presence of a Trading Official before the member may proceed with the proposed cross transaction.

The crossing rule applies only to manual transactions.

Exam Tip: Gotchas

• The offer must sit one minimum variation above the broker's own bid. A price equal to the bid does not satisfy the rule, because the rule asks for a price higher than the bid by the minimum variation permitted in that security.
• Two things must happen before the cross, not after it. The offer goes up first, and the bid and offer are announced to the Crowd in the presence of a Trading Official before the member proceeds.
• The crossing rule is limited to manual transactions. Its own closing sentence says so. The Cross Function sits inside that same rule as supplementary material, and it leaves the announcement to the Crowd and the cross itself with the broker.

What Does the Cross Function Add?

Floor brokers seeking to execute buy and sell orders under the crossing rule may enter those orders into Exchange systems. Those systems monitor protected bids and offers to determine when the limit price assigned to the proposed crossed orders lets the orders execute consistent with the order protection rule, part of the SEC's national market system regulations.

When the trade can be effected at or between the protected bid and offer, Exchange systems take four steps.

On receipt of an alert, a Floor broker using the Cross Function must first announce the bid and offer to the Crowd in compliance with the crossing rule, and then cross the stock before the 20-second timer expires. Exchange systems will not monitor protected bids and offers when the protected best bid and offer (PBBO) is crossed.

Eligibility for the Cross Function has a size test and an account test:

• Size: the proposed cross transaction must be for at least 10,000 shares, or for a quantity of stock having a market value of $200,000 or more.
• Accounts barred: it may not be for the account of the member or member organization, an account of an associated person, or an account over which the member, member organization or associated person exercises investment discretion.

Exam Tip: Gotchas

• The size test is a choice of two, not a pair of conditions. At least 10,000 shares qualifies on its own, and so does a market value of $200,000 or more.
• The alert does not replace the announcement. A broker who receives an alert must still announce the bid and offer to the Crowd, then cross before the timer runs out.
• Monitoring stops when the PBBO is crossed. The rule says Exchange systems will not monitor protected bids and offers in that condition, so the broker cannot rely on an alert arriving.
• The discretionary account bar reaches three account types. The member's or member organization's own account, an associated person's account, and any account over which the member, the member organization, or an associated person exercises investment discretion are all ineligible.

How Does a Floor Broker Differ From a Designated Market Maker?

The Floor broker represents orders. Under the NYSE designated market maker rules, the designated market maker (DMM) trades for its own book to support the market.

DMMs registered in one or more securities traded on the Exchange must engage in a course of dealings for their own account to assist in the maintenance of a fair and orderly market insofar as reasonably practicable.

The rule then adds that the responsibilities and duties of a DMM specifically include, but are not limited to, a further list. The first is to assist the Exchange by providing liquidity as needed to provide a reasonable quotation and by maintaining a continuous two-sided quote with a displayed size of at least one round lot.

The others are the continuous quoting percentages, the pricing obligations, and the duties to facilitate openings, reopenings and the close.

Any member who expects to act as a DMM in any listed security must be registered as a DMM. The same rule states that DMMs are designated as market maker on the Exchange for all purposes under the Securities Exchange Act and the rules and regulations under it.

The contrast that matters here is registration and a proprietary obligation on one side, oral agency and an announcement duty on the other. The separate net capital election open to an exchange floor broker is covered in this unit's lesson on net capital requirements.

Exam Tip: Gotchas

• The DMM duty is qualified, not absolute. The obligation is to assist in maintaining a fair and orderly market insofar as reasonably practicable, which is a standard of effort rather than a guaranteed result.
• The DMM responsibility list is open. The rule says the responsibilities and duties specifically include, but are not limited to, the items it names, so an option describing the list as complete misstates it.
• DMM status is conferred by registration and by designation. A member who expects to act as a DMM must be registered, and DMMs are designated as market maker on the Exchange for all purposes under the Securities Exchange Act.

What Should You Check on Exam Day?

• Confirm whether the actor on the Floor is a member. Only members may make or accept bids and offers, consummate transactions, or otherwise transact business there.
• Check that a booth clerk scenario stays inside processing orders sent to an approved booth premise, and never reaches making or accepting bids and offers.
• On a cross, confirm the offer sits one minimum variation above the broker's own bid and that both were clearly announced to the Crowd in the presence of a Trading Official before the member proceeded.
• For the Cross Function, test size as an either-or: at least 10,000 shares or a market value of $200,000 or more, and check the three barred account types.
• Read a DMM duty for its qualifier. The course of dealings runs insofar as reasonably practicable, and the listed responsibilities are not exhaustive.