Investment primer:What happens when a stock is traded

Ever wonder how a stock trade works? The following scenario traces a trade on the New York Stock Exchange.

Juanita Investito wants to go to Paris and has decided to sell her 100 shares of AT&T stock to finance the trip. She calls her stockbroker at the local Drexel Burnham Lambert office. The stock itself is on deposit in her account at the brokerage firm. Her broker, or ``registered representative,'' punches a few buttons on the computer terminal, probably a Quotron machine, and the latest trading information pops up on the screen. Two minutes ago, 300 shares of ``Telephone'' (AT&T) were sold at $23 per share. Juanita tells her broker to sell the stock now. She's not going to quibble if the stock drops or climbs one-eighth or one-quarter of a point between now and the time when the order reaches the exchange. So the broker fills out an order ticket to sell 100 AT&T shares ``at the market'' -- at the price it's trading at when the order reaches the exchange floor. The order ticket goes to Drexel's ``wire room'' or ``order room.''

(a) The order is transmitted by telephone or teletype to one of Drexel's open booths on the floor of the New York Stock Exchange (NYSE). These booths ring the perimeter of the exchange floor. A large brokerage may have up to a dozen booths around the floor.

At the booth, either a Drexel clerk or a Drexel ``floor broker'' picks up the order. If a clerk gets the order, he will retrieve the floor broker with a beeper or perhaps walk the order over to the floor broker. Then the floor broker walks (or runs) to one of 14 trading posts on the floor to sell Juanita's 100 shares of AT&T.

If the Drexel floor broker is busy, a ``$2 broker'' may take the order. This broker is a sort of free-lancer and is so named because his fee was once $2.

(b) Alternatively, Drexel's order-room operator may decide to bypass the firm's own floor broker. Perhaps the floor broker is swamped with larger orders. Instead, Juanita's sell order may be directed through the SuperDot 250 system. This is a computerized system for matching up small buy and sell orders -- any market order for 1,099 shares or less.

For example, on the other side of town, George Dialtone has told his Prudential-Bache broker to buy 100 shares of AT&T at 22 7/8 ($22.88) per share. His order has also been sent through the SuperDot 250 system. Because George's buy order is within one-eighth of a point of Juanita's sell order, the computer will automatically match the two orders. George will end up buying Juanita's 100 shares of AT&T for 22 7/8, unless there is another buy order already in the system for $23 or 23 1/8.

If George Dialtone's order hadn't been sent through the SuperDot system, and the computer does not have a buyer for Juanita's AT&T stock, then her order gets printed out at the trading post.

If Juanita's order was not sent through the SuperDot system, then the Drexel floor broker trots over to where AT&T stock is traded. There are 14 trading posts in three rooms on the floor of the NYSE. At each post, about 100 designated stocks are traded, and every stock has a specific place at its post where it is traded.

The trading post looks something like a concession stand with boxes bearing computer screens suspended overhead. And sticking out from the stand are long spider legs, each with a computer terminal foot. The computers are used to track trading in specific stocks.

There at the trading post are several other floor brokers that constitute ``the crowd.'' Each has an order for various amounts of AT&T stock at various prices. The best price the Drexel floor broker can get for Juanita's 100 shares is 22 7/8. It turns out the buyer is the Pru-Bache floor broker filling George Dialtone's order for 100 shares of AT&T.

If there were no buyers in the crowd for Juanita's AT&T stock, the ``specialist'' in AT&T stock might step in and buy the stock for his own account.

The AT&T specialist is there all day. His primary job is to maintain a stable, continuous market; that is, to ensure that trading doesn't come to a halt or that prices don't drop precipitously. If a buyer comes in and no one wants to sell at that price, the specialist may sell him stock to bridge to the price gap. Or if all the floor brokers want to sell, he may step in and become the only buyer.

A specialist can also wear the hat of a floor broker at times, taking a commission for a trade. For instance, if Juanita's order came to the trading post via the SuperDot system, the specialist would make the trade.

And the specialist will take and hold orders that floor brokers are unable to trade right away. For instance, a floor broker may have a buy order for 500 shares of AT&T at $25. The price is $23 now. So he leaves the order with the specialist. Once the price rises to $25, then the specialist will make the trade.

When Juanita's stock is sold -- only three to six minutes after she has given her broker the sell order -- an exchange reporter fills out a card noting the number of shares and the transaction price. The card is inserted into an electronic card reader and the trade is flashed within seconds to the ``tape.''

The symbols ``T 7/8'' slide across the electronic board simultaneously on the exchange floor, back in the Drexel office, and in brokerage offices nationwide. The symbols indicate that 100 shares of AT&T have just been traded at $22 7/8.

On the trading floor, the Drexel floor broker or clerk returns to the booth and reports the trade to the order room.

The phone company and Western Union give orders headed into the exchange precedence over outbound calls. So it may be a half hour or so before Juanita's local broker is notified that the trade is complete.

Within about a week, Juanita's account will be credited with the sale, minus commission fee. But it may be a month before George Dialtone can actually hold his AT&T stock certificate. The 100 shares go to his brokerage firm, then to AT&T to be reissued in George's name, and then back to the brokerage.

Regional stock exchanges work similarly but may have fewer positions and skip some steps because they are smaller. Over-the-counter trading is done in an altogether different manner.