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Financial exchanges typically operate on one of three trading systems. These systems are the Dealer Market, the Electronic Communication Market, and the Specialist Market. Over time, the markets have become less human operated and more electronic, which reduced spreads and costs. The remaining spreads and costs usually profit the exchanges running the trading systems.

Dealer

The Dealer Market consists of brokers registered as dealers who offer price quotations for buying and selling securities. Brokers execute requested trades by contacting broker-dealers who respond with quotes for desired investments, and fill deals if possible. Since dealer markets rely on quotations, a price which is quoted may be different than a price which is actually paid. These dealer markets are typically electronically matched so negotiation is rarely necessary in this system. In this case there are no bid ask spreads. If they are not electronic, the spread may exist, and provide brokers with profits. They may also receive commissions.

Electronic

The Electronic Communications Network allows orders to be posted via a series of digital networks. This market is a screen based electronic market that crosses trades without broker-dealers, which removes the need for price quotes. The human labor requirement is very low and trades are executed at very low costs. The lack of quotes removes the need for bid-ask spreads. There are two actual ECN styles that change the way trades are handled. In the first, an electronic market with no bid-ask spreads may match prices automatically by crossing the lowest sale with the highest buy price. Trades can be executed almost immediately. In the second style, the trades are recorded in a transaction book which is executed at certain times during the day. These are not continuously traded. If an electronic communication network does not have any market matchers, this market may occasionally have transactions that fail to find a match. In this case buyers and sellers will be unable to complete their trades.

Specialist

The last trading system is the Specialist market. This is a typical floor market, with a series of posts and a specialist that operates at each post. The specialist at this post handles purchases and sales of specific securities according to a limit order book, and buy-ask spreads. The specialist, by law, must match the highest purchase and lowest selling prices when handling transactions. They are legally required to narrow the spread of the market, and all transactions handled must keep bid-ask spreads narrow. These specialists are also market-makers, who match buyers and sellers. If a specialist cannot find a trader that matches the deal they will handle the deal themselves by supplying securities from their own accounts. The motivation for specialists to provide these services is provided by an income that is partially salary, partially commission, with some profits from the bid-ask spread.

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