Hybrid Market Defined

What Is a Hybrid Market?

A hybrid market is an exchange through which traders can use both automated trading systems and traditional floor brokers in order to execute transactions. In the United States, the most famous example of a hybrid market is the New York Stock Exchange (NYSE).

Understanding Hybrid Markets

Hybrid markets offer market participants the option to choose between human floor brokers, who execute transactions on the physical trading floor, and fully automated electronic exchange systems. Although both of these approaches have distinct advantages and disadvantages, there has been a general movement toward purely electronic order fulfillment in recent years.

Although they are slower and more expensive than purely electronic systems, the benefit of using floor brokers is that they can exercise human judgment in the manner and timing in which they enter trades. Generally speaking, their use is limited to large institutional clients and a small number of high-net-worth individuals. For these clients, it may be necessary to rely on the human judgment and experience of a floor broker in order to make trades that are sensitive in nature.

For example, investors placing large orders may want to avoid their order becoming public knowledge to other investors, for fear that they may try to front-run the transaction. Floor brokers may be able to assist in such a transaction by seeking out potential counterparties to that transaction within their network of institutional clients.

Advantages of Electronic Trades

The key advantage to electronic trades is speed — they take less than one second to execute, while the average floor broker trade typically takes about nine seconds.

In other instances, clients may simply trust in the experience of floor brokers to spread out their trade executions over time in order to avoid affecting the price of the security while the trade is being executed. For instance, if an investor wishes to buy a large quantity of shares in a thinly-traded stock, placing the entire purchase through a single order might cause the price to jump before all the shares can be purchased — thereby increasing the total cost of the transaction. A floor broker may be trusted to carefully monitor this transaction and gradually place the purchase orders so as to minimize their total cost.

Retail investors, on the other hand, often have no need or capacity to rely on floor brokers. Because of their small transaction sizes, these investors will seldom be concerned with affecting the market price of the securities they buy.

Real World Example of a Hybrid Market

The NYSE, one of the world's oldest and most prominent stock exchanges, operated for most of its history using human trade brokers on its physical trading floor. In Jan. 2007, however, the NYSE made almost all of its listed stocks available for electronic trading.

Although these stocks could still be traded by brokers on the trading floor, clients now have the choice of opting for electronic executions. In practice, the vast majority of market participants place trades electronically today, with human brokers mainly representing large institutional clients. Indeed, many exchanges throughout the world have now eliminated their physical trading floors entirely, citing the increased efficiency of electronic trading.