Exchanges exist to facilitate transactions between buyers and sellers and ensure that all parties can access fair, organized, and efficient information related to the products being traded. Most developed countries have financial exchanges and offer multiple avenues through which to execute orders. Exchanges formerly only existed as a physical location where traders gathered and negotiated prices in person or via phones through brokers. However, exchanges are now primarily offered electronically and allow investors worldwide to come together in a virtual marketplace.
When traders enter market orders, the orders are routed to exchanges. The order may be sent to a specific exchange selected by the trader or to whichever exchange has the best price quote for the order, known as smart order routing.
New York Stock Exchange (NYSE)
The New York Stock Exchange (NYSE) is the largest stock exchange in the world. The New York Stock Exchange was founded in 1792. Located on Wall St. in Manhattan, the NYSE is home to the largest market capitalization of listed companies. Publicly traded companies are listed on the exchange, including many of the U.S.’s oldest and largest companies.
While the exchange floor is still open for live open outcry trading, the majority of transactions are conducted electronically. In 2007, the NYSE merged with the largest stock exchange in Europe, Euronext, to form NYSE Euronext.
American Stock Exchange (AMEX)
The American Stock Exchange (AMEX) was once the third-largest stock exchange in the United States. NYSE Euronext acquired AMEX in 2008 and it is now known as NYSE American. The exchange is primarily focused on small-cap companies in the United States and is fully electronic. AMEX was responsible for introducing the first publicly traded ETF in 1993.
Chicago Board Options Exchange (CBOE)
The Chicago Board Options Exchange (CBOE) is the world’s largest options exchange. The CBOE provides trading for numerous securities types beyond options, including futures, domestic and international equities, foreign exchange currencies, and volatility products.
The CBOE has evolved into a multi-functional business operation known as Cboe Global Markets, Inc. The exchange is now an asset of a larger corporation, including an educational department (The Options Institute) and a clearinghouse for all options trades within the United States (the OCC).
The NASDAQ exchange is an electronic marketplace. It was the first entirely computerized exchange to allow investors to trade securities electronically and has no trading floor like the NYSE. NASDAQ stands for National Association of Securities Dealers Automated Quotations.
Since its inception, the NASDAQ exchange has specialized in the technology sector. The NASDAQ lists more than 3,000 companies on its exchange and commodities, ETFs, and other products.
The NYSE Arca is an electronic exchange that trades securities in the United States. NYSE Arca specializes in Exchange Traded Products (ETPs) such as Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs) and Exchange Traded Vehicles (ETVs), as well as equities. NYSE Arca handles the most daily ETF trading volume in the world and lists more than 2,200 ETFs, nearly 20% of the global market share.
Market makers provide bids and offers to ensure the marketplace has the proper liquidity to conduct transactions. Market makers can be individuals or firms and are responsible for quoting two-sided markets for a security. Market makers must be willing to buy and sell assets to keep markets fair. Market makers accommodate orders that would otherwise not be available in the market.
Once a market maker has purchased shares of a security at the bid price, they then offer the shares at a higher price (the ask) and therefore create a new market. Market makers profit by purchasing assets at the lower bid price and selling at the higher ask price.
After the stock market crash of 1987, regulators instituted circuit breakers to help rapidly moving markets remain orderly. Circuit breakers were created for individual securities and market indices. Individual securities have circuit breakers for rising and falling prices, while the indexes are only protected from falling prices.
Index circuit breakers automatically initiate a trading halt to assist markets in recovering from panic selling. There are three levels of index circuit breakers. Level 1 and Level 2 circuit breakers halt trading on all exchanges for 15 minutes during regular trading hours, unless the level is triggered in the last 35 minutes of trading, in which case the market is kept open until the end of the day. If the Level 3 circuit breaker is triggered, trading is halted for the remainder of the day.
Level 1 is defined as a drop of 7%. Level 2 refers to a decline in prices of 13%. Level 3 occurs when an index has dropped more than 20%.
For individual securities, including ETFs, circuit breakers are established if prices exceed a specified percentage range. Excluding the first 15 minutes of trading and the last 25 minutes of trading, circuit breakers will activate for most securities listed if intraday trading exceeds 5% up or down for a sustained period of 15 seconds. Trading will automatically halt for five minutes if the circuit breakers trigger.
Limit up and limit down are a type of circuit breaker that defines the maximum amount a futures contract price is allowed to advance or decline in a day. Limits are put in place to curb excessive buying or selling in a market and seek to keep markets orderly amid the resulting margin calls that may ensue from news or events.
The limits keep pricing fair and efficient. If the limit price is triggered, trading is halted on the exchange.