What are the Stock Exchanges, Anyway?

Meir Barak |

Stock_Exchange.jpgIf you’re looking to invest for the first time, there is plenty you need to know, and for many of us, there are some questions that are so basic, you might not feel comfortable asking them at all.
For instance…what is the stock exchange, anyway?

Before even answering that question, though, it’s important to note that the stock exchange isn’t one single thing at all. Several different stock exchanges make up the overall stock market. A stock exchange is a business like any other. It makes a profit from commissions and services. The stock exchanges compete among themselves, appealing to different business niches. Each stock exchange has its own uniqueness, technology, advantages, and of course, its typical disadvantages. I’ve illustrated each major US stock exchange below.

The New York Stock Exchange (NYSE)

The NYSE is located on the corner of Wall and Broad Streets. The market value of the companies traded on the NYSE is greater than that of any other stock exchange in the world. The market value, known as market capitalization or “market cap,” multiplies the number of shares of stocks held by the public by their stock exchange-traded price. If you calculate the market cap of stocks traded in the NYSE, you will reach a peak period combined value of more than ten trillion dollars! Overall, the NYSE trading list consists of more than 3000 different companies.

Prior to the terror attacks of September 11, 2001, it used to be possible to stand at the stock exchange’s gallery window and watch traders in action. Now, to enter the gallery, you need to get a special entrance license, or become a photographer for CNBC, Bloomberg or others, or know someone with a key function who can request a permit for you. Once in the gallery, you'll see something amazing that is part of a disappearing world – traders scurry among dozens of work stations, broadcasting commands with odd hand signals. They navigate their way through mountains of notes transferred from buyer to seller that are often carelessly let to fall to the trading floor.

Because I was acquainted with the well-known television commentator who goes by the name “Dr. J,” I was lucky enough to receive the amazing opportunity to join a CNBC photo shoot of S&P 500 options traders in the Chicago Stock Exchange.  I stood, fascinated, surrounded by dozens of traders shouting and pushing as though in a football game.  Later, I learned from Dr. J, a former pro-football player, that one of the conditions of acceptance for work on the trading floor known as “the pit” is the height, weight, and physical ability to push aside competing traders!

Of course, the unavoidable march of technological progress is occurring to the biggest stock exchange in the world, too. Computers are slowly taking over all processes, despite strong opposition by the traders. Computerized trading brings greater competition, fewer commissions, and greater transparency for the public, as well as higher execution speed: exactly what the public wants, and precisely what the companies that employ floor traders don’t want.

It started small. NASDAQ, the first computerized stock exchange in the US, became the model. The NYSE was then forced to respond to public pressure and incorporate automatic systems that initially managed only a small part of the turnover of high-volume stock trading. Over the years, this was used to silence the public. Political pressures were handled on the quiet through phone calls between CEOs of the mega-corporations and the appropriate politician. Despite the opposition, the revolution was actually completed over the past few years, and currently most of the NYSE operations are computerized. Now, when I buy or sell a stock at the speed of a  nanosecond, I remember a distant bad dream of just a few years ago, when I taught Tradenet students that the execution time of a NYSE transaction could take up to two minutes from the time the button is pressed!

The AMEX Stock Exchange

The American Stock Exchange was established in New York in 1842. AMEX is the third-largest stock exchange in the US, after the NYSE and NASDAQ. Trade there focuses mainly on stocks of small to mid-size companies and a range of ETFs (Exchange Traded Funds), about which we will learn more later. AMEX operates similarly to the NYSE, using the tender method of their market makers (we’ll learn more about them later, too). AMEX belongs to NASDAQ, and its volume of activities is relatively low. AMEX, like NYSE, has also moved most of its processes to quick, effective computerized execution.

The Founding of NASDAQ

1971 saw an important change take place. The NASDAQ stock exchange was established, and unlike the NYSE, NASDAQ computerized all its trade processes. The NASDAQ computers are in Connecticut, and link to more than 500 market makers’ computers, allowing electronic trade in one click. From that point on, market makers no longer needed to compete over each other’s shouts on the trading floor. Everything was push-button, with the result being commissions costs slowly dropping, improved quality of service, more competition, and companies of a new type issuing stocks and raising trillions of dollars. Within two decades, and with the proliferation of the Internet, NASDAQ was accessible in the home of every trader. For the first time, the road to private trading was opened. 


To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer".  


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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