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How to Beat the Market Makers at Their Own Game: Uncovering the Mysteries of Day Trading by Fausto Pugliese

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CHAPTER 2 The Stock Markets

Before we get into the details of direct access, I want to make sure that you understand that there are two types of markets in which stocks are traded: exchanges and negotiated markets. These two types of markets are significantly different, as you will soon see.

When you trade shares of stock through a broker, the difference between these two markets is not immediately apparent; all you do is place a buy or sell order, and your task is complete. However, these two markets do operate in distinct ways, and understanding exactly how they vary is crucial to making money as a day trader.

Exchanges

An exchange is a physical meeting place where buyers and sellers congregate in an arranged location to trade stocks. North America's largest exchange is the New York Stock Exchange (NYSE)—usually referred to either as the “Big Board” or “The Exchange.” Billions of shares are traded on the NYSE every day. Amazingly, this incredible volume of trading is all conducted within the confines of the NYSE building in lower Manhattan. This building is essentially a large auditorium with booths, each representing a different company. At one booth, you can trade AT&T, at another, IBM, and so forth. The specialist, who manages the stock trading booth, acts as an auctioneer. Other investors put their stock up on the auction block (so to speak), and buyers review the stock and make offers. Of course, with billions of shares being traded every day, the specialist doesn't ...

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