Electronic commerce has forever changed the stock order process. 100 years ago, the process of buying stocks was much different than it is today. Back then, each trade order was placed through a broker, called a broker order, which had to be purchased through a specialist on the trading floor. The financial specialist on the trading floor used his or her own stock inventory to cover the trade for the broker. The specialist then sold the inventory purchased from the broker to another client or investment firm — the process is called a write out. A write out transaction is not as common as it used to be due to the Internet and the advent of electronic trading platforms, but financial specialists continue to use write outs to transact complex or unconventional trades.
The role of the financial specialist originated in 1872. Specialists are members of an exchange that help manage the flow of a particular stock. While financial specialists are generally well-compensated, the goal of the financial specialist is not to make a profit; to the contrary, it is to maintain an orderly market by acting as a market maker when demand or supply for a particular stock becomes unbalanced. They do this by issuing write outs.
Profits created from doing a write out are generally driven by the number of transactions rather than changes in security prices. Today, specialists are not as integral to the stock order process as they were in the past; their services, however, are still needed for block, or large, trades. In this case, a specialist holds the inventory in his or her own stock inventory and manages the flow of bid and ask prices for the stock with write outs until the trade is fully executed. In general, there is one specialist per stock.
Any licensed broker or dealer of securities can be a market maker. There are more than 500 broker-dealers registered with the Nasdaq. Each one has a financial specialist who represents the firm on the floor of the exchange. Both the broker-dealer and the financial specialist act as market makers and have the ability to do a write out. The market is considered orderly when the bid and ask prices of a particular stock are balanced due to good liquidity. If the market needs help in establishing order, the market maker will use his or her own stock to improve liquidity in the market. Liquidity is measured by calculating the difference between the bid and ask price of a stock.