An institution through which stocks, shares, and bonds are traded under standard rules. Originally a stock exchange would have a single building where deals were arranged in person; nowadays trading is normally by telephone and computer networks. Many major cities in the West have a stock exchange, Wall Street in New York City being the largest, and there are important stock exchanges in Tokyo, Hong Kong, and Frankfurt. The London Stock Exchange, located in the City of London near the Bank of England, deals in some 7000 securities. Until 1986, business was carried out on the floor of the House, ie in the Stock Exchange itself. Individuals and institutions wishing to buy or sell securities would contact a stockbroker, who would place the order with a jobber (a trader on the floor). 27 October 1986 was the date of the Big Bang when the distinction between brokers and jobbers was abolished, as were minimum commission scales; and a computerized system was introduced for share trading. Firms are now brokers/dealers; they may buy and sell on their own account as well as act as agents for others. The London Stock Exchange has some 5000 individual members and over 300 member firms.
A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as, other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Increasingly more and more stock exchanges are part of a global market for securities.
History of the stock exchange
In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks.
The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange.
The role of the stock exchange
Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.
Redistribution of wealth
By giving a wide spectrum of people a chance to buy shares and therefore become part-owners (shareholders) of profitable enterprises, the stock market helps to reduce large income inequalities. Both casual and professional stock investors through stock price increases and dividends get a chance to share in the profits of promising business that were set up by other people.
Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors).
Creates investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides an extra source of income to small savers. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government.
Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces.
International Stock Exchanges
The main stock exchanges in the world include:
American Stock Exchange Australian Stock Exchange Bombay Stock Exchange Euronext Frankfurt Stock Exchange Helsinki Stock Exchange Hong Kong Stock Exchange Johannesburg Securities Exchange Korea Stock Exchange London Stock Exchange Madrid Stock Exchange Milan Stock Exchange NASDAQ New York Stock Exchange São Paulo Stock Exchange Shanghai Stock Exchange Singapore Exchange Stockholm Stock Exchange Taiwan Stock Exchange Tokyo Stock Exchange Toronto Stock Exchange Zurich Stock ExchangeSee also: Category:Stock exchanges
Listing requirements
The listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange.
Requirements by stock exchange
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange:
London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing. NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years (). New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years ().Ownership
Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an Initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (2000, as of 14 June 2006 in talks to a proposed merger process with the New York Stock Exchange), NASDAQ (2002) and the New York Stock Exchange (2005).
Other types of exchange
In the 19th century, exchanges were opened to trade forward contracts on commodities.
The future of stock exchanges
The future of stock trading is electronic, seemingly pitting the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic Communications Networks, or ECNs.
Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders."
Electronic networks, by executing large trades at lightning speed, reduce the possibility of front running, or trading ahead of a customer's order, an illegal practice for which several NYSE floor brokers were investigated and severely fined in recent years. Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying.
Trading 25,000 shares of Lucent stock (recent quote: $2.80; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $88,710.00; For example, in its individual stock-brokerage accounts, Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post.
Fidelity says these arrangements are governed by a separate brokerage "order-flow management" team, which seeks to obtain the best possible execution for customers, and that its execution is highly rated.
The "upstairs market"
Recent research by Kumar Venkataraman, finance professor at SMU's Cox School of Business, and Hendrik Bessembinder offers insight and evidence into new possibilities and difficult issues facing stock exchanges. In “Does an electronic stock exchange need an upstairs market?” from the July, 2003 issue of Journal of Financial Economics, the authors find that a large proportion of institutional trading in electronic exchanges is executed away from the centralized book in the informal 'upstairs market', thus presenting new challenges.
Despite the efficiencies of computerized markets, virtually every stock market is accompanied by a parallel "upstairs" market, where larger traders employ the services of brokerage firms to locate counterparties and negotiate trade terms. Upstairs markets are based on relationships. An electronic trading system lowers the fixed costs of trading for relatively liquid stocks in block sizes not likely to overwhelm the current market. However, it does not allow for the informal exchange of information (?) that is important for certain types of large trades and for illiquid stocks.
In electronic markets, traders don’t get a sense of who they’re trading with, how much more the other party is trading, etc., and that information can be very important to some traders. Large (institutional) traders therefore seek other trading venues such as the 'upstairs market' to lower the risk of exposing their order positions, to insure symetric transfer of information, and to retain some of the give and take of the old open outcry market. Approximately 70% of block-size trade transactions are executed in the upstairs market in Paris.
The Paris Bourse provides an excellent illustration of the use of upstairs intermediation markets, because its electronic limit order market closely resembles the
downstairs (electronic) markets envisioned by theorists. The best evidence from the Paris Bourse is that:
(1) Upstairs brokers lower the risk of adverse selection by "certifying" block orders as uninformed (i.e., as not having access to nonpublic information).
(2) Upstairs brokers are able to tap into pools of hidden or unexpressed liquidity (they frequently 'go looking' for buyers or sellers not currently in the market).
(3) Traders strategically choose across the upstairs and downstairs markets to minimize expected execution costs (including slippage, etc.).
(4) Trades are more likely to be routed upstairs if they are large or are in stocks with low overall trading activity.
The second result is the most novel and arguably the most important. The upstairs broker completes transactions by searching for institutional investors who may be interested in the stock, but who have not as yet formally expressed their trading intentions. It is documented that executions costs of transactions completed by the upstairs broker average only 35% of what they would have paid if completed against limit orders in the centralized electronic exchange, suggesting that trading relationship and the informal exchange of information between upstairs brokers and institutional traders helps lower execution costs.
The Euronext market allows large transactions in some stocks to be executed outside the quotes. For eligible stocks in Paris, market participants agree to outside-the-quote execution mainly for more difficult trades and at times when downstairs liquidity is lacking. These findings are particularly relevant to U.S. markets because quoted spreads and depths have decreased substantially in the wake of decimalization.
The upstairs market in the Paris Bourse completes two-thirds of block trading volume, compared with 20% on the New York Stock Exchange (NYSE). If orders submitted to electronic markets do not allow block initiators to limit order exposure and trade strategically, then order flow is likely to migrate to alternative trading venues such as the upstairs market.
To compete with broker-intermediated markets, the next generation of electronic trading systems needs to include features that better meet the needs of large traders, particularly the lack of anonymity.
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