What Is an Exchange?

An exchange is a marketplace where securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to the investing public.

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Exchange

Exchanges Explained

An exchange may be a physical location where traders meet to conduct business or an electronic platform. They also may be referred to as a share exchange or "bourse," depending on the geographical location. Exchanges are located in most countries worldwide. The more prominent exchanges include the New York Stock Exchange (NYSE), the Nasdaq, the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE).

Key Takeaways

  • Exchanges are marketplaces for the trade of securities, commodities, derivatives, and other financial instruments.
  • Increasingly, exchanges are becoming sophisticated electronic trading platforms.
  • Companies may use an exchange to raise capital.
  • A company must have at least $4 million in shareholder's equity to be listed on the New York Stock Exchange.
  • More than 80 percent of trading on the New York Stock Exchange is done electronically.
  • The New York Stock Exchange has been around since 1792.

Electronic Exchanges

Trading is increasingly being conducted on electronic exchanges. Sophisticated exchanges can ensure fair trading without requiring all members to be physically present on a centralized trading floor. As of 2016, the floor of the NYSE processes less than 15% of the overall volume of stocks traded in the United States. Transactions are now spread across multiple exchanges. This use has resulted in a substantial increase in high-frequency trading programs and the use of complex algorithms by traders on exchanges.

Listing Requirements

Each exchange has specific listing requirements for any company or group that wishes to offer securities for trading. Some exchanges are more rigid than others, but the basic requirements for stock exchanges include regular financial reports, audited earning reports, and minimum capital requirements. For example, the NYSE has a key listing requirement that stipulates a company must have a minimum of $4 million in shareholder’s equity (SE).

Exchanges Provide Access to Capital

A stock exchange is used to raise capital for companies seeking to grow and expand their operations. The first sale of stock by a private company to the public is referred to as an initial public offering (IPO). Companies listed on the stock exchange typically have an enhanced profile. Having more visibility may attract new customers, talented employees, and suppliers who are eager to conduct business with a prominent industry leader.

Private companies often rely on venture capitalists for investment, and this usually results in the loss of operational control. For example, a seed funding firm may require that a representative from the funding firm hold a prominent position on the board. Alternatively, companies listed on a stock exchange have more control and autonomy because investors who purchase shares have limited rights.

Real World Example of an Exchange

The New York Stock Exchange is perhaps the most well-known of exchanges in the U.S. Located on Wall Street in Manhattan in New York, and it saw its first trade in 1792. The floor of the NYSE sees stock transactions taking place in a continuous auction format Mondays through Fridays from 9:30 a.m.-4 p.m.

Historically, brokers employed by members of the NYSE would facilitate trades by auctioning off shares. The process started to become automated in the 1990s, and by 2007, nearly all stocks became available via an electronic market. The only exceptions are a few stocks with very high prices.

Until 2005, only owners of seats on the exchange could trade directly on the exchange. Those seats now are leased on one-year terms.