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A look into the Exchanges

An exchange is a marketplace in which securities, commodities, derivatives and other financial instruments are traded. Whenever someone talks about the stock market as a place where equities are exchanged between buyers and sellers, the first thing that comes to mind is either the New York Stock Exchange (NYSE) or Nasdaq, and there’s no debate over why. These two exchanges account for the trading of a major portion of equities in North America and worldwide. But, of course, it wasn’t always this way; there were many steps along the road to the current system of exchange. You may be surprised to learn that the first stock exchange thrived for decades without a single stock being traded. Exchanges have evolved from the Venetian States to the British coffeehouses, and finally to the NYSE and its brethren (I would like to skip the history lessons and go straight to current events).

Both the NYSE and the Nasdaq markets accommodate the major portion of all equities trading in North America, but these exchanges are by no means the same.  The NYSE is generally considered as the largest and arguably the most powerful market in the world. Even though Nasdaq has more companies listed, the NYSE has a market capitalization larger than Tokyo, London and Nasdaq combined and it’s merger with Euronext makes it literally impossible for any other exchange dislodge NYSE as the largest exchange in the world.  Nasdaq on the other hand is the new kid on the block: it came to the party with the novel idea of electronic exchange: removing the presence of the physical barrier. Nasdaq’s consistent innovation and competition forced NYSE to go public in March 2006 and merge with Euronext to stay on top of the Exchange business.

However, whether a stock trades on the Nasdaq or the NYSE is not necessarily a critical factor for investors when they are deciding on stocks to invest in. Nonetheless, because both exchanges are perceived differently, the decision to list on a particular exchange is an important one for many companies. A company’s decision to list on a particular exchange is also affected by the listing costs and requirements set by each exchange. The entry fee a company can expect to pay on the NYSE is up to $500,000 while on the Nasdaq, it is only $50,000 to $75,000. So we can understand why the growth-type stocks (companies with less initial capital) would be found on the Nasdaq exchange.

Just as discussed in class, NYSE uses a matching and auction system to match potential buyers and sellers. On the NYSE, the traffic controllers ( people who are at the “intersection” where buyers and sellers “meet” and place their order) are known as specialist and they are responsible for matching highest bidding price with lowest asking price. Nasdaq on the other hand uses a dealer’s market system where transactions are not directly between buyers and sellers but through a dealer known as the market marker.

 

link: http://www.investopedia.com/terms/e/exchange.asp

 

 

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