A stock exchange is a forum for trading in securities representing shares of firms. An exchange provides ways by which financing is raised by the sale of shares to outside investors. It provides a mechanism for the valuation of companies through the process of price discovery and a means by which such information is disseminated.
A formal definition of the term exchange is a critical component of law and regulation regarding securities trading markets, discussed by Domowitz (1996) and Lee (1998). In the United States, the New York Stock Exchange (NYSE) is legally an exchange, while the markets operated by the National Association of Securities Dealers (NASDAQ) and Instinet, an electronic communications network (ECN), are not. All three examples nevertheless satisfy the definition of a stock exchange given above. Given differences across countries with respect to legal definitions, a more unified approach is needed to focus the discussion.
The approach taken here is to identify important attributes and functions of institutions satisfying the basic definition in practice. Exchanges provide trading systems and may offer more than one. Types of trading systems are sometimes differentiated by the form of market intermediation provided by entities with direct access to the system. The nature of competition between exchanges is a defining feature, since exchanges may adopt varying market structures in order to compete in different fashions. A stock exchange is a business entity, and the form of its governance arrangements is important in understanding its nature and conduct.
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