On May 17, 1792, two dozen stockbrokers and merchants sat under a buttonwood tree on Wall Street in New York City and signed what is probably the most important financial document in American history. The Buttonwood Agreement is recognized as the founding document of the New York Stock Exchange (NYSE).
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Known as the Big Board, the NYSE is the largest stock exchange in the world and the heart of Wall Street in Lower Manhattan’s Financial District but it’s not the only stock exchange by far.
What Are Stock Exchanges?
Don’t think of stock exchanges as stores for stocks and bonds. Stock exchanges themselves don’t sell anything. Think of them instead as being like farmers markets — places where lots and lots of different sellers gather so interested buyers can shop them all in one place.
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The sellers are publicly traded corporations that are “listed” on a given stock exchange — kind of like a merchant getting a stall in the hypothetical farmers market. The buyers are stockbrokers looking to purchase ownership shares of those companies for their client investors — people like you. Each exchange sets its own rules and listing standards, including things like the number of years a company has been in existence, its market capitalization, share price and the type of service or product it provides.
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What Are the Different Kinds of Exchanges?
There are four different kinds of stock exchanges:
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Auction markets: Exchanges like the NYSE fit into this category, which pairs buyers and sellers based on the highest price the buyer will pay and the lowest price a seller will accept.
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Electronic communication networks (ECNs): These subscriber-only exchanges are mostly closed to regular investors and serve only broker-dealers and certain institutional investors.
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Electronic trading: Electronic trading became popular in the 1990s and has now replaced most in-person floor trading.
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Over-the-counter (OTC) trading: Small companies that can’t get listed on the big exchanges often trade on OTC exchanges.
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How Many Exchanges Are There?
There used to be a nationwide network of bustling regional stock exchanges that operated in America’s financial hubs, including Philadelphia, Boston, Baltimore, Chicago, Cleveland, St. Louis, San Francisco, Los Angeles and beyond. They began to merge after World War II, and then the invention of the microchip eventually made a sprawling system of physical exchanges unnecessary.
