Beginners in Stock Trading
What "the stock market" actually means
- The actual structural components of "the U.S. stock market"
- Why there isn't one stock market — there are many, networked together
- How the order book works mechanically
- Why this matters even if you'll never see the order book directly
This is Day 8, the start of Week 2. Last week we covered what stocks are; this week we cover the machinery they trade in.
THERE ISN'T ONE MARKET
When financial media says "the market closed up 0.4% today," that phrase obscures a lot of structure. There is no single "stock market." There is a network of exchanges, market makers, electronic communication networks (ECNs), and clearing infrastructure that together form the system.
The two largest exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq. Each is a separate, privately-operated business that runs its own matching engine — the software that pairs buyers with sellers. NYSE was founded in 1792 and historically had a physical trading floor (still exists, mostly ceremonial now). Nasdaq, founded in 1971, was the first all-electronic exchange.
Most large U.S. stocks list on one of those two. Apple lists on Nasdaq. JPMorgan lists on NYSE. The choice of where to list is partly historical (Nasdaq attracted technology companies in the 1980s and 90s), partly cost-related, and partly about the listing standards each exchange enforces.
But there are more. NYSE Arca, NYSE American, CBOE BZX, IEX, MEMX, and a dozen others. Each is a registered exchange. When you place a buy order, your broker doesn't necessarily route it to the "primary" exchange where the stock lists — it routes it to whichever venue has the best price at that moment, using a system called the National Best Bid and Offer (NBBO).
In addition to the registered exchanges, there are dark pools — private trading venues where large institutional orders match without showing up on the public order book. About 40% of U.S. equity trading volume happens in dark pools, off the visible exchange feeds. This is legal and regulated, but it means that when you watch a stock's volume bar, you're seeing a portion of total trading, not all of it.
THE ORDER BOOK
When you place an order to buy a stock, your order goes into the order book — a continuously-updated list of all the buy orders ("bids") and sell orders ("offers" or "asks") for that stock, sorted by price.
A simplified order book for a hypothetical stock might look like this:
| Side | Quantity | Price |
|---|---|---|
| Sell | 200 shares | $25.12 |
| Sell | 500 shares | $25.11 |
| Sell | 100 shares | $25.10 |
| Best ask | 300 shares | $25.09 |
| Best bid | 400 shares | $25.08 |
| Buy | 250 shares | $25.07 |
| Buy | 600 shares | $25.06 |
| Buy | 100 shares | $25.05 |
The best bid ($25.08) is the highest price any buyer is currently willing to pay. The best ask ($25.09) is the lowest price any seller is currently willing to accept. The gap between them — one cent in this example — is the spread.
If you place a market order to buy, you'll cross the spread and pay the best ask: $25.09. If you place a market order to sell, you'll cross the spread and receive the best bid: $25.08. The spread is the cost of immediate execution; tomorrow's lesson is dedicated entirely to understanding it.
If you place a limit order — "I'll buy at $25.08 or better" — your order joins the order book at the bid level and waits. If a seller comes along willing to sell at $25.08, your order fills. If not, your order sits there until you cancel it or the day ends.
MARKET MAKERS
There's one more important participant: market makers. These are firms whose business model is to continuously post both a bid and an ask for thousands of stocks, profiting from the spread between them.
When you see a stock with very tight spreads (Apple trades at a 1-cent spread on most days), that's a market maker at work. They post a bid and an ask, you cross one of them, and they earn the cent. Then they instantly re-post a new bid and ask, hedging their inventory in the background. Over millions of trades a day, those cents add up to billions in revenue.
The largest market makers in U.S. equities are firms most beginners haven't heard of: Citadel Securities, Jane Street, Virtu Financial, Two Sigma, DRW. These firms trade against you on every market order, but they also provide the liquidity that makes the market function. A stock with no market makers wouldn't have continuous quotes; you'd post an order and wait minutes or hours for a counterparty.
Market makers are why you can buy or sell almost any large-cap U.S. stock in milliseconds, at any moment during market hours. They are also why thinly-traded stocks (small caps, foreign listings, illiquid sectors) have wider spreads — there's less market-maker activity providing tight quotes.
WHY THIS MATTERS FOR YOUR TRADING
Three practical implications you should internalize, even if you never look at an order book directly:
First: in liquid stocks (large-cap, IBD-50-style names), the spread is essentially negligible — a penny on a $200 stock is 0.005% of the price. You can use market orders without much concern.
Second: in less liquid stocks (small caps, especially anything trading under $5 or below $1B in market cap), the spread can be 1–3% or more. A market order in those names is expensive; limit orders are required to avoid getting filled at a bad price.
Third: your broker is making routing decisions on every order, and they earn revenue from where they send the flow. This is called "payment for order flow" — your broker gets paid by market makers for routing your order to them. The practice is legal and disclosed, but it does create a small structural conflict: your broker has an incentive to route to whichever market maker pays them the most, not necessarily to whichever venue gets you the best fill. In practice, the price-improvement rules baked into the regulations mean retail traders generally get filled at or better than the NBBO, but the system isn't fully neutral.
"The tape tells the truth."
Jesse Livermore, via Reminiscences of a Stock Operator (Lefèvre, 1923)
Wall Street came back from the long weekend buying: all three major indexes rose, and the Dow tapped a fresh record high before easing a touch into the close.
| S&P 500 | 7,537.43 (+0.72%) |
| Nasdaq | 26,121.16 (+1.12%) |
| Dow | 53,055.91 (+0.29%) |
Monday's close: the first trading day back after the long Independence Day weekend.
What drove it: Stocks reopened in a risk-on mood. Per Investor's Business Daily, the indexes popped after President Trump made bullish remarks about U.S. equities, with chip names like Micron Technology among the winners and the Nasdaq leading the way. The Dow briefly touched a record near 53,060 before settling just beneath it. It's the kind of broad session that keeps the market's uptrend intact heading into a new week.
Today's lesson named the firms sitting on the other side of most of your trades: the market makers. Here's the twist: one of them is a stock you can actually buy.
Virtu Financial · VIRT · $62.97 (+1.94%) · Market cap ~$13.5 billion · Financial services / market making
In the lesson we listed the biggest market makers: Citadel Securities, Jane Street, Virtu Financial. Most are private. Virtu is not. Its entire business is the bid-ask spread you just learned about. It posts a buy price and a sell price on thousands of stocks at once, and when you fire off a market order, a firm like Virtu is often the one on the other side, collecting a fraction of a penny. Do that millions of times a day and the pennies add up to a $13 billion company. No forecasting, no long-term bets: just the plumbing of the market, turned into a business. Virtu rose 1.94% to $62.97 on Monday, near the top of its 52-week range.
- Price: $62.97 at Monday's close, up 1.94% on the day
- Market cap: about $13.5 billion
- 52-week range: $31.55 to $64.88 (trading near the high)
- What it does: a market maker, it earns the bid-ask spread rather than betting on which stocks rise
- Valuation: roughly 10 times earnings
- Listed on: Nasdaq (ticker VIRT)
This is today's lesson made real. Every time you buy a liquid stock and it fills in an instant, someone supplied that liquidity, and firms like Virtu turned a one-cent spread into an actual business. Knowing who is on the other side of your order is an edge most beginners never pick up.
Tomorrow is Trader Tuesday — and we're meeting Jesse Livermore. Livermore is the first of the foundation legends we'll feature in Month 8, but his story shows up earlier this week because his life is the lens we use to understand how exchanges actually work. He started his career copying ticker tape at a Boston bucket shop in 1891 and ended it as one of the most famous (and tragic) speculators of the 20th century.