Exchanges

An exchange is a regulated marketplace that brings buyers and sellers together under one set of rules. It runs the order book and matching engine, publishes prices, lists securities that meet its standards and supervises trading. When people talk about "the stock market", they usually mean exchanges such as the New York Stock Exchange or Nasdaq, but exchanges exist for futures, options, currencies and crypto too.

What an exchange does#

1. Matches orders. Its matching engine pairs buy and sell orders under fixed rules such as price time priority.
2. Publishes prices. Every trade and quote is distributed as market data, so everyone sees the same prices.
3. Lists securities. Companies apply to list their shares and must meet standards on size, governance and reporting.
4. Sets and enforces rules. Trading hours, order types, tick sizes, halts and member conduct.
5. Runs auctions at the open and close. See Opening and Closing Auctions.

Clearing and settlement are usually handled by a separate clearing house, though some exchange groups own their own.

Major exchanges around the world#

Crypto exchanges such as Coinbase and Kraken perform some of the same functions but also hold customer funds and often act as broker and custodian, which traditional exchanges do not. See Centralized vs Decentralized Exchanges.

How exchanges make money#

• Trading fees charged to members, often with maker rebates and taker fees.
• Market data fees for real-time and historical data. See Market Data Fees.
• Listing fees paid by companies.
• Technology and connectivity, including co-location services. See Co-Location.

Exchanges and fragmentation#

In the United States, a stock listed on the NYSE can trade on many other exchanges and venues. Rules require trades to happen at or better than the best displayed price across all of them, called the national best bid and offer. Brokers use Order Routing and Smart Order Routing to find the best venue. Off exchange venues include ECNs, Dark Pools and wholesale market makers, and a large share of US stock volume now trades off exchange.

Members and access#

Only member firms can trade directly on most exchanges. Individuals reach the exchange through a broker that is a member or works with one. Professional firms may use Direct Market Access and Sponsored Access to send orders straight to a chosen exchange's order book.

Why it matters to traders#

• Where you trade affects your fees and fills, especially for active traders.
• Exchange rules determine trading hours, halts and order types you can use.
• Listing standards offer some protection: exchange listed companies must file regular financial reports. Stocks that trade off exchange, in OTC markets, often have weaker disclosure. See OTC Markets.

Frequently asked questions#

What is the largest stock exchange in the world?#

By total market value of listed companies, the NYSE is the largest, followed by Nasdaq.

Can I trade directly on an exchange?#

Individuals trade through brokers that are exchange members or route to them. Direct membership is for institutions.

What is the difference between an exchange and a broker?#

An exchange runs the market where orders are matched. A broker holds your account and sends your orders to exchanges or other venues.

Sources#

• U.S. Securities and Exchange Commission, How stock markets work
• Wikipedia, Stock exchange