An exchange is either a tangible or virtual marketplace where members (either for their own accounts or for customers) buy and sell the securities or futures listed for trading there, as opposed to private OTC transactions. Exchanges that previously dealt securities/futures only on the trading floor through specialists/member firms are now giving way to electronic trading platforms that connect buyers and sellers directly, either over the Internet or via a private trading networks.
Major public stock and derivatives exchanges like the New York Stock Exchange and the Chicago Mercantile Exchange, where Boards of Governors sets stringent criteria for listing, deal mostly the larger and better-known publicly traded securities. Such exchanges often still conduct most of their business as marketplaces for transacting listed securities by the floor traders employed by seat-holding members of the exchange. Membership, which can cost upwards of $2.5 million annually on the NYSE, allows seat-holders to trade proprietary accounts or broker customer transactions directly with other exchange members. India's exchange traders were recently cheered by a Supreme Court ruling that such membership could not be inherited.
Since the expansion of the Internet in the 1990s, traditional exchange models have been undermined by several developments. Electronic OTC exchanges like NASDAQ list securities that don't necessarily make the NYSE cut, giving investors access to growth opportunities, while electronic communciation networks (ECNs) like Instinet and predecessor Island ECN allow traders and investors to bypass the specialists and trade publicly-listed securities directly. These developments have in turn led to the rise of recent market phenomona like round-the-clock trading, any-market trading and day trading.
In July 2008, America's equity and derivatives exchanges asked their regulator, the SEC, to exempt their market maker members from a new rule banning investors from trading naked shorts in troubled mortgage-broking giants Fannie Mae and Freddie Mac plus 11 other publicly-traded brokerages. The exchanges argued that restricting market makers' in this way could hinder their ability to keep transactions flowing and negatively affect liquidity.
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