Page 723 - Encyclopedia of Business and Finance

eobf_S 7/5/06 3:21 PM Page 700

Stock Exchanges

Floor of the New York Stock Exchange, October 19, 1987. AP IMAGES

In the United States, the Securities Exchange Act of to compete in different fashions. A stock exchange is a
1934, the primary legislation covering the securities mar- business entity, and the form of its governance arrange-
kets, undertook to update the regulatory requirements for ments is important in understanding its nature and con-
the buying and selling of securities. After the exposure of duct.
a concept release in May 1997 to gather ideas from inter- The nature of allowable messages varies with the trad-
ested parties, final rules effective as of April 1, 2000, were ing system’s (exchange’s) rules and technology. A typical
adopted. The regulations for alternative trading systems message consists of an offer to buy, or to sell, a given num-
were promulgated to strengthen the public markets for ber of shares at a certain price. The New York Stock
securities, while encouraging innovative new markets. Exchange (NYSE), for example, permits such messages, as
These new regulations more effectively integrated the well as orders, to buy some amount of stock at current
growing number of alternative trading systems into the market prices.
national market system, accommodated the registration of The transformation of messages and information
proprietary alternative trading systems as exchanges, and from the system into a price and a set of quantity alloca-
provided an opportunity for registered exchanges to better tions is governed by another set of rules. In open outcry
compete with alternative trading systems. auctions, bids and offers are orally exchanged by traders
Exchanges may offer more than one trading system. standing in a single physical location. The acceptance of a
Types of trading systems are sometimes differentiated by bid or offer by another trader generates a transaction. In
the form of market intermediation provided by entities dealer systems, such as NASDAQ, dealers accept orders
with direct access to the system. The nature of competi- by telephone or computerized routing, and transact at
tion between exchanges is a defining feature, since prices they themselves set. In batch auctions, such as that
exchanges may adopt varying market structures in order of the Arizona Stock Exchange, price is set by maximizing

700 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION