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What is an 'Exchange'?

An exchange is a marketplace in which 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.

BREAKING DOWN 'Exchange'

An exchange may be a physical location where traders meet to conduct business or an electronic platform. They may also 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).

Electronic Exchanges

Trading is increasingly conducted on electronic exchanges as markets become more sophisticated; exchanges themselves can ensure fair trading without requiring all members to be 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 has resulted in a substantial increase in high-frequency trading programs and the use of complex algorithms by traders on exchanges.

Exchange Listing Requirements

Each exchange has certain 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.

Benefits of the Stock Exchange

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). Global stock exchange operator Bats Global Markets Inc. listed on the NYSE in 2016, helping the company to scale its business. 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.

Exchanges Give More Control

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.

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