What are trading exchanges?
December 29, 2020 2021-01-25 20:28What are trading exchanges?
In this section of the Trading Gym, we will look at the workings of trading exchanges and the instruments they trade.
We’ll also spend a little time on the main stock, commodities and cryptocurrency exchanges and provide a list of the most active.
What is a trading exchange?
Each exchange is different, in size and format. Some are virtual and totally on-line while others still operate in live “face to face” trading pits. Sometimes you get a mix of the two.
A trading exchange is sometimes called bourse and is an organised market where financial instruments (commodities, foreign exchange, shares etc) are bought and sold. Trades can be carried out as cash assets or through derivatives like futures and options contracts.
The exchange is where brokers and dealers come together to trade, often through a clearinghouse whose job it is to underwrite the process and the transactions to reduce settlement risk.
The first trading exchange
The first trading exchange was opened back in the 17th century with the Amsterdam Stock Exchange. By the late 18th century exchanges had opened in the US and by the 19th century, they had become more sophisticated, trading forward (or futures) contracts on commodities as well as stocks.
Futures contracts enable buyers and sellers to agree on financial deals that will mature in the future. From simple commodity trades, exchanges later started to offer futures trading contracts on other products like interest rates, shares, and options contracts.
How do trading exchanges work?
The point of an exchange is to allow buyers and sellers to meet, either physically or virtually so they can exchange their products.
Today, in most markets, such as the NASDAQ tech market, stocks are traded electronically but there are still some futures markets that trade face to face or on the floor of an exchange. A big disadvantage of traditional, physical exchanges is that they operate only during business hours. By contrast, electronic exchanges operate 24/7. There is no rest for the committed trader!
Today, most exchanges are automated using algorithms which are based on a set of rules for processing orders. Any order you place goes straight into this kind of electronic system to be processed. The big advantage of automation is speed. So, when traders want orders processed as quickly as possible, they take whatever price the market quotes and this trade is executed by a market order.
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What are the different trading exchanges?
The most famous trading exchanges are stock exchanges but these aren’t the only ones.
Here’s a list of the different trading exchanges along with an example of each:
- Stock/shares exchanges (NASDAQ)
- Commodity exchanges (London Metal Exchange)
- Cryptocurrency exchanges (Binance)
- Options contracts exchanges (MIAX Options Exchange)
- Warrants exchanges (Direct Edge (EDGEA))
- Futures exchanges (CME Cryptocurrencies)
- Fixed income exchanges (Tradeweb US Corporate Bonds)
- ETF exchanges (Chicago Stock Exchange (CHX))
- Indices exchanges (Montreal Exchange (CDE))
The best estimate is that up to 95% of share trading on USA based exchanges such as the NASDAQ and NYSE (New York Stock Exchange) takes place electronically.
Did you notice which exchange was missing from the list above? Yes, it was the Foreign exchange market. This is because it is unregulated and decentralised. It is generally held that the task of trying to organise and regulate the foreign exchange markets of so many different jurisdictions and central banks would be impossible.
Major stock exchanges
You’ll find the major stock exchanges in the pre-eminent cities of the most developed economies like New York, London, Hong Kong, Tokyo and Frankfurt.
Most global trading takes place through just a handful of trading exchanges because these are the ones that are most trusted by investors and traders. Participants like the speed, location and the cost of the transactions they offer.
Below is a list of the major stock exchanges, ranked in terms of size, listed by abbreviated name, market capitalisation (2019), and the location.
Stock Exchange | Abbreviation | Market Cap | Location |
New York Stock Exchange | NYSE | $23 trillion | New York USA |
NASDAQ | NASDAQ | $11 trillion | New York USA |
Japan Group Group | JPX | $6 trillion | Tokyo Japan |
London Stock Exchange | LSE | $5 trillion | London England Milan Italy |
Shanghai Stock Exchange | SSE | $4 trillion | Shanghai China |
Hong Kong Stock Exchange | SEHK | $4 trillion | Hong Kong |
Euronext | ENX | $4 trillion | European Economic Area; Paris, Amsterdam, Brussels, Dublin, Oslo, Lisbon |
Toronto Stock Exchange | TSX | $3.3 trillion | Toronto Canada |
Shenzhen Stock Exchange | SZSE | $2.5 trillion | Shenzhen China |
Bombay Stock Exchange | BSE | $2 trillion | Mumbai India |
National Stock Exchange | NSE | $2 trillion | Mumbai India |
Deutsche Borse | FRA | $1.8 trillion | Frankfurt Germany |
The NYSE ranks as the largest exchange by market capitalisation followed by the tech index, the NASDAQ. Between them, these two have the market capitalisation of the other top ten global stock exchanges combined. This illustrates not just their popularity but their power in the market.
Major commodity exchanges
Alongside the financial exchanges, we have the global commodity markets dealing in agricultural products and other raw materials. In the early days, these were established close to where the commodity was produced. But today, the major commodity markets are electronic so physical location matters less though you tend to find them close to other major exchanges.
Several commodity exchanges are located in London allowing brokers to simultaneously access other exchanges thus improving convenience and efficiency. By contrast in some economically developing countries, commodity exchanges are still located close to farmland and oil and gas fields.
Below is a list of the world’s major commodity exchanges.
Commodity Exchange | Abbreviation | Location | Commodities |
London Metal Exchange | LME | London | Metals |
Chicago Mercantile Exchange | CME | Chicago | Derivative and commodity market, offering a range of future and option contracts |
New York Mercantile Exchange | NYMEX | New York | The largest commodity futures exchange in the world
|
Dubai Mercantile Exchange (DME) | DME | Dubai | DME was the first energy futures exchange for the Middle East |
Tokyo Commodity Exchange (TOCOM) | TOCOM | Tokyo | TOCOM regulates options and futures contracts of all commodities
|
Zhengzhou Commodity Exchange (ZCE) | ZCE | Zhengzhou | ZCE is a futures exchange in commodities like agriculture and chemicals |
Australian Securities Exchange (ASX) | ASX | Sydney | ASX is an electronic exchange for trading in various commodities |
Major cryptocurrency exchanges
Cryptocurrency exchanges are a pretty new development in the world of trading and they have increased rapidly in number since the launch of Bitcoin in 2009.
Although you would expect a cryptocurrency exchange simply to enable cryptocurrencies or digital tokens to be traded, they do also trade conventional fiat money (government backed cash currencies like the USD, GBP and EUR).
A cryptocurrency exchange can act as a market maker by deciding the spread of a transaction. It can also serve as a platform to match buyers and sellers.
Today, according to coinmarketcap.com there are more than 350 cryptocurrency exchanges in existence. Here’s their list of the top ten based on traffic, liquidity, and the trading volumes of spot markets.
Cryptocurrency exchanges | Trading Volume | Web Traffic | Ave. Liquidity | No. of markets | Launched |
Binance | $11,016,538,031 | 1000 | 568 | 843 | July 2017 |
Coinbase Pro | $560,350,302 | 978 | 426 | 99 | May 2014 |
Huobi Global | $11,177,646,282 | 837 | 582 | 813 | September 2013 |
Kraken | $505,668,267 | 903 | 424 | 185 | July 2011 |
Upbit | $233,779,929 | 946 | 165 | 231 | October 2017 |
Bitstamp | $228,649,583 | 836 | 267 | 42 | July 2011 |
Bithub | $178,500,48 | 869 | 191 | 119 | Jan 2014 |
Bitfinex | $188,532,276 | 847 | 438 | 297 | October 2012 |
Bitflyer | $109,780,005 | 828 | 141 | 14 | January 2014 |
Kucoin | $102,171,308 | 859 | 342 | 490 | August 2017 |
Below we’ve also listed the top ten cryptocurrencies by market cap. The data is from September 11th 2020, from the website CoinMarketCap.com.
Ranking | Cryptocurrencies | Symbol | Market Cap | Circulation |
1 | Bitcoin | BTC | $210,846,899,290 | 18,514,750 |
2 | Ethereum | ETH | $42,407,466,033 | 112,972,521 |
3 | Tether | USDT | $15,735,893,557 | 15,721,468,977 |
4 | XRP | XRP | $11,495,718,234 | 45,162,407,484 |
5 | Bitcoin Cash | BCH | $4,451,981,354 | 18,542,331 |
6 | Binance Coin | BNB | $4,343,170,936 | 144,406,561 |
7 | Chainlink | LINK | $3,943,586,224 | 350,000,000 |
8 | Polkadot | DOT | $3,745,200,431 | 852,647,705 |
9 | Caradono | ADA | $3,325,362,934 | 31,112,484,646 |
10 | Litecoin | LTC | $3,325,567,239 | 65,650,803 |
How to decide which markets to trade?
Some markets will suit your trading style better than others and you’ll find that with experience you’ll develop a preference. Your trading strategy might work better in certain markets or you might enjoy researching some markets more than others.
You might already be involved in some markets through your pension scheme or your ISA. Your pensions provider will be able to tell you which markets you’re invested in and you may want to take a closer interest in how these markets are performing.
As a beginner, which markets should I trade?
We can’t give you a right answer because each trader is different. But we can tell you that many beginners start trading the forex market in part because of its liquidity and in part because it’s available 24/5.
You might also want to look at trading derivatives like CFDs. These are also traded around the clock so that you can buy a share CFD even if the cash market is not open.
It is only you who can decide which markets to trade. But once you’ve decided the next task is to start to build your trading strategy.
Trading exchanges summary
We’ve guided you through the most well-known trading exchanges but remember there are literally thousands out there all offering different products in different regions. Brokers help provide easy access to these exchanges and sometimes they’re not even required.
When you sit at your desk and execute an order on your platform, your broker then routes the order to an exchange; physical or virtual. The best brokers ensure that this process is as transparent, speedy, and cost-effective as possible.
The next lesson in the Trading Gym covers the markets you can trade online.
