Exchange

Exchange

Exchange Definition

Exchange, in commerce, generally, may be defined as a central office or place of business, such as a stock exchange or labor exchange. Specifically, the term is used to mean a business association, generally incorporated, the members of which meet at stated periods, usually at fixed hours daily, to trade in securities or commodities.

Organization

An exchange is administered by officers, a board of governors or managers, and special committees of members. Its main function is to furnish a central meeting place where businesspeople who own memberships, called seats, may trade when the exchange is in session; in addition, it collects statistics, publishes price quotations, and sets rules and standards for trading. The income of the exchange, as a business entity, is derived from the sale of seats, dues and assessments paid by members, and fees such as the transfer fee for the sale of seats.

The similarity of activities in all exchanges throughout the world has resulted in similar construction of most exchange buildings. A large open area, called the floor or pit, is reserved for members, who transact their purchases and sales by signals or vocal bids and offers. An announcement board prominently displays the records of transactions and prices.

History

Central meeting places, officially recognized as headquarters for commercial transactions, have been necessary to the economic life of every great city and state since ancient times. Athens has its emporion, and Rome its collegium mercatorum, where important traders gathered regularly at fixed hours. During the Middle Ages, the great fairs held periodically were the official meeting places for trading. The modern exchange dates from the trading centers originated in the 13th century in the commercial cities of Italy and Flanders.

The first modern exchange, in which commodities were sold by description and exchange of receipts rather than by the physical presence of the goods themselves, was the Antwerp, Belgium, exchange, built in 1531. During the 16th century such exchanges were established in many trading cities in Europe. The Bourse of Toulouse, France, was opened in 1549, and in 1571 the Royal Exchange of London, built by the English financier Sir Thomas Gresham in 1566, was opened. Other important exchanges were established in Amsterdam, Hamburg, and Paris.

In the United States, a central trading place in New York City known as the Meal Market functioned as early as 1734; it was the first securities trading place. In 1792 a group of 24 businesspeople formed an association that later became the New York Stock Exchange. The first official American commodity exchange was the Chicago Board of Trade, established in 1848. The New York Produce Exchange was organized in 1850, and the New York Cotton Exchange in 1870.

Commodities and Futures Exchanges

In general, prices on commodity exchanges are subject only to the free play of supply and demand except when limitations may be established by the U.S. Department of Agriculture or by similar agencies in other countries. Sales can be in two main classes: spot, or cash, transactions dealing with commodities available for immediate delivery; and futures transactions in which contracts are made for delivery of a commodity at a specified price and future time. The futures are the more important form of trading and are, in many cases, the instrument for highly developed forms of speculation.

Regulation

European governments have long played executive roles in the establishment and administration of their exchanges, most of which handle both security and commodity transactions in a single institution. In the U.S. and Great Britain, however, exchanges were established as private enterprises, and securities and commodities have always been traded in separate exchanges. In the U.S., the Commodity Exchange Authority was organized to prevent price manipulation and other illegal practices, and to supervise trading in the commodities; in 1974 this agency was superseded by the Commodity Futures Trading Commission. In Great Britain, the Capital Issues Committee controls security exchanges; in the U.S. they are regulated by the Securities and Exchange Commission.


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