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Major Securities Exchanges

securities exchanges

Organizations that provide the marketplace in which firms can raise funds through the sale of new securities and in which purchasers can resell securities.

Securities exchanges provide the marketplace in which firms can raise funds through the sale of new securities and in which purchasers of securities can maintain liquidity by being able to resell them easily when necessary. Many people call securities exchanges "stock markets," but this label is somewhat misleading because bonds, common stock, preferred stock, and a variety of other investment vehicles are all traded on these exchanges. The two key types of securities exchanges are the organized exchange and the over-the-counter market.

Organized Securities Exchanges

Organized securities exchanges are tangible organizations that act as secondary markets in which outstanding securities are resold. Organized exchanges account for about 59 percent of the total dollar volume of domestic shares traded. The dominant organized exchanges are the New York Stock Exchange and the American Stock Exchange, both headquartered in New York City. There are also regional exchanges, such as the Chicago Stock Exchange and the Pacific Stock Exchange (co-located in Los Angeles and San Francisco).

organized securities exchanges

Tangible organizations that act as secondary markets where outstanding securities are resold.

The New York Stock Exchange

Most organized exchanges are modeled after the New York Stock Exchange (NYSE), which accounts for about 90 percent of the total annual dollar volume of shares traded on organized exchanges. To make transactions on the "floor" of the New York Stock Exchange, an individual or firm must own a "seat" on the exchange. There are a total of 1,366 seats on the NYSE, most of which are owned by brokerage firms. To be listed for trading on an organized exchange, a firm must file an application for listing and meet a number of requirements. For example, to be eligible for listing on the NYSE, a firm must have at least 2000 stockholders, each owning 100 or more shares, a minimum of 1.1 million shares of publicly held stock, a demonstrated earning power of $2.5 million before taxes at the time of listing and $2 million before taxes for each of the preceding 2 years, net tangible assets of $18 million, and a total of $18 million in market value of publicly traded shares. Clearly, only large, widely held firms are candidates for listing on the NYSE.

Trading is carried out on the floor of the exchange through an auction process. The goal of trading is to fill buy orders (orders to purchase securities) at the lowest price and to fill sell orders (orders to sell securities) at the highest price, thereby giving both purchasers and sellers the best possible deal. The general procedure for placing and executing an order can be described by a simple example.

EXAMPLE

Meredith Blake, who has an account with Merrill Lynch, wishes to purchase 200 shares of the IBM Corporation at the prevailing market price. Meredith calls her account executive,* Howard Kohn of Merrill Lynch, and places her order.

Howard immediately has the order transmitted to the New York headquarters of Merrill Lynch, which immediately forwards the order to the Merrill Lynch clerk on the floor of the exchange. The clerk dispatches the order to one of the firm's seat holders, who goes to the appropriate trading post, executes the order at the best possible price, and returns to the clerk, who then wires the execution price and confirmation of the transaction back to the brokerage office. Howard is given the relevant information and passes it along to Meredith. Howard then does certain paperwork to complete the transaction.

Once placed, an order either to buy or to sell can be executed in seconds, thanks to sophisticated telecommunications devices. Information on the daily trading of securities is reported in various media, including financial publications such as the Wall Street Journal.

The American Stock Exchange

The American Stock Exchange (AMEX), now owned by the Nasdaq market, is also based in New York, but is smaller than the New York Stock Exchange. Its trading is also conducted on a trading floor.

 
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