Exchange

Back in the 16th century, an exchange (or bourse) meant a place or building where traders, agents, and stockbrokers gather within specific time periods for transactions with securities or commodities. Since that, this meaning has slightly changed but is basically the same.

What Is an Exchange?

It is a legal entity that ensures the regular operation of an organized market for commodities, currencies, securities, and derivatives. Trade is carried out by standard contracts or lots, the size of which is regulated by the normative documents. Before the internet era, the parties agreed on at deal verbally.

Now the trading is mostly digital and takes place online, so many exchanges have abandoned trading rooms. In their own or the customers’ interests, the brokers apply for the purchase or sale of commodities via trading systems. Counter orders of other traders accept those applications. Exchanges typically receive a commission on each transaction - this is the main source of their income.

History of Exchanges

• In the 16th century, the first two stock exchanges in Antwerp and Lyon were opened, trading the bills of exchange and government loans.

• In the 17th century, the world's oldest Amsterdam SE was created. The Dutch were the first to use the stock market to finance companies.

• At the end of the 17th century, the London Stock Exchange (LSE) was established.

• On May 17, 1792, The New York Stock Exchange (NYSE) was founded.

• In 1878, the Tokyo SE started working.

Types of Exchanges

Depending on the assets being traded, there are the following types of exchanges:

• commodity;
• currency;
• futures;
• optional;
• labor;
• rates.

There are also universal exchanges that combine the trading with different assets within the same organizational structure, often in different sections.

Functions of Exchange

The exchange typically has the following functions:

• Recording the executed transactions.

• Implementation, organization, and a guarantee of settlements (clearing).

• Providing a mechanism for “delivery versus payment” (DVP) interaction.

• Organization of trading.

• Establishment of trade rules, including the standards for goods sold through the exchange.

• Development of model contracts.

• Settlement (arbitration) of disputes.

• Informational activities.

• Quotation.

Other sources may include membership fees, payment for access to trading, and selling the stock information. There are two types of exchange transactions:

• Long position: Buying an asset - stocks, bonds, currencies, futures, options, etc. - based on the growth of its value.

• Short position: Securities are borrowed and sold assuming that their value will drop. As a rule, the depreciated asset is redeemed and returned to the creditor.

Listing Requirements

To offer securities for trading, a company must meet the listing requirements that are different depending on the exchange. Some exchanges are more rigid than others, but the basic requirements include earning reports, minimum capital requirements, and regular financial reports. For example, the NYSE requires that a company must have a minimum of $4 million in shareholders’ equity.

Companies listed on a stock exchange typically have an enhanced profile, which may help them to attract new customers, employees, and suppliers. Private companies often rely on venture capitalists for investment and thus may lose operational control. Alternatively, companies listed on a SE have more autonomy because investors who buy their shares have limited rights.

Top 10 Stock Exchanges

Here is a list of the world’s 10 major SEs as of May 2019, according to market capitalization:

1. NYSE: $30,923

2. NASDAQ: $10,857

3. Japan Exchange Group: $5,679

4. Shanghai SE: $4,026

5. Hong Kong SE: $3,936

6. Euronext: $3,927

7. London Stock Exchange Group: $3,767

8. Shenzhen SE: $2,504

9. TMX Group: $2,095

10. Bombay SE: $2,056

And here is the Top 10 according to the monthly trade volume:

1. NYSE: $1,452

2. NASDAQ: $1,262

3. Shenzhen SE: $763

4. Shanghai SE: $536

5. Japan Exchange Group: $481

6. Korea Exchange: $277

7. London Stock Exchange Group: $219

8. Bombay SE: $210

9. National Stock Exchange of India: $196

10. Hong Kong SE: $182

Summary

An exchange is a marketplace for trading stocks, bonds, commodities, and other securities or assets. The first exchanges started appearing in the 16th century in Europe. The typical tasks of exchange are:

• transaction recording;

• settlements implementation;

• organization of trading;

• trade rules establishment;

• model contracts development;

• arbitration of disputes;

• informational activities;

• quotation.

The world’s most powerful SE is the New York Stock Exchange (NYSE). Having existed since 1792, the NYSE has a market cap of $30,923 and a monthly trade volume of $1,452 as of May 2019. To list its securities for trade on the NYSE, a company must have a minimum of $4 million in shareholders’ equity.