A trading exchange is a marketplace where different assets, such as stocks or oil, are traded. These peer-to-peer exchanges, mostly digital, centralize the buying and selling of assets, and ensure fair and transparent settlement of buy and sell orders.

This article at a glance:

  • Trading exchanges are marketplaces that centralize the process of buying and selling different assets.
  • They are also tasked with ensuring fair and transparent trade execution.
  • While some exchanges still operate in physical locations, today’s trading exchanges are largely digital.

What is a trading exchange?

A trading exchange can either be a physical location or a digital platform. These marketplaces are designed to pair buyers and sellers for all manner of assets.

Exchanges centralize the process of trading assets, including the involvement of different brokers, dealers and clearing institutions. Their job is to match buying and selling opportunities, and ensure fair execution of trades.

Each trading exchange has its own set requirements for new assets to be listed on its marketplace. These include minimum compliance targets, such as audited and periodic financial reports.

Where are trading exchanges located?

Trading exchanges were historically located in physical trading floors. In fact, some market orders are still handled in physical trading exchanges, such as the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE).

However, the advent of digital financial trading has brought automation to the fore, making physical trading floors increasingly redundant. In the last decade, most trading exchanges have gone exclusively digital, driven by algorithms and electronic technology. NASDAQ is an example of a popular digital-only exchange.

Example of a trading exchange

The NYSE is the largest trading exchange across the world, and trades in USD. Its equity market capitalization – the value of all stocks listed on the exchange – equates to approximately 26.11 trillion USD as of 02 April, 2022. Apart from equities, you can also trade options, exchange-traded funds (ETFs) and bonds on the NYSE. 

How do trading exchanges work?

Here’s what trading exchanges are largely responsible for:

Executing market orders

Trading exchanges facilitate order execution at fair prices. Unlike physical trading floors, where brokers were forced to shout loudest to get their orders heard, digital trading exchanges make the process of price confirmation entirely digital.

Matching the order book

All market orders on a trading exchange are submitted onto the market’s ‘ledger’. This is the order book consisting of all the buyers and sellers, and the prices they have agreed to. A digital trading exchange has an autonomous matching system, pairing buyers and sellers at the right price to facilitate a trade.

Taking on the role of market makers

In ‘illiquid’ markets that don’t have a high volume of buyers and sellers, market makers help to provide the liquidity needed for a trade to happen. They act as middlepersons, offering money on both sides of the book (buy and sell) to ensure traders get the best possible price, and have an entity to trade with.

Types of trading exchanges

These are the common types of trading exchange available to retail traders across the globe:

  • Stock exchanges: Traders can buy and sell stocks of different companies, depending on whether they are listed on the stock exchange.
  • Commodities exchanges: A commodities exchange sees traders buy and sell commodities such as precious metals, oil, or agricultural products.
  • Futures exchanges: A futures exchange allows buyers and sellers to trade futures contracts, which are legal contracts obliging individuals to buy or sell an asset at a pre-agreed price within a set timeframe.
  • Decentralized exchanges: A decentralized trading exchange is a peer-to-peer (P2P) marketplace that works largely without regulatory oversight (although this is slowly changing). Crypto exchanges such as Binance are a prime example of such an exchange.

How to trade on a trading exchange

You can gain access to trading exchanges through a broker. These brokers offer real-time multi-asset trading services, along with a choice of trading softwares that connect you to the exchange itself. Remember to look for one that is regulated, provides access to the instruments of your choice, and has reliable customer support processes in place.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.