Role of the Stock Exchange

Stock exchanges have always served a vital role in bringing buyers and sellers together. However, unlike the exchanges of old, modern stock exchanges utilize leading edge technology to transmit data around the world nearly instantaneously. This has created jobs for workers and wealth for investors.

Importance of Exchanges

Stock exchanges efficiently unite buyers and sellers. Historically, stock exchange activity occurred on large, cavernous floors in major financial centers around the world. Trading featured men (very few women were floor traders) in brightly colored jackets gesturing wildly to execute trades for their customers. However, in the last several years, electronic exchanges and trading have become dominant.

Evolution of Electronic Trading

In electronic trading, all buy and sell orders are entered into a computer, with orders matched up nearly instantaneously. This reduces costs, adds liquidity to markets and minimizes expensive "outtrades," where buyers and sellers mis-communicate, and one party finds that it bought or sold something it did not want or executed a trade at an unintended price. Additionally, because computers can handle many more transactions than humans, electronic trading has enabled trading volumes to expand exponentially. This has been crucial, since more investors now realize the vital role equities play in hedging against inflation and providing for retirement.

Shifting Opportunities

The increased sophistication of the exchanges has created multiple opportunities for technically talented individuals. However, it has lessened the opportunities for those with only clerical or physical skills. The days of runners racing around the floor, or price reporters manually recording trade prices, have disappeared.

Benefits of Electronic Trading

Besides easing the clerical burdens on exchanges, electronic trading has given sophisticated investors new arbitrage opportunities. Therefore, exchanges with more sophisticated order systems have gained a competitive advantage over less sophisticated exchanges. This partially explains why many large companies, including Microsoft, Dell and Cisco, list on the NASDAQ, rather than on the New York Stock Exchange.

Conclusion

Overall, without exchanges and their technology, investors would find it much more cumbersome and expensive to trade any financial instrument.