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An association, organization, or group of persons, incorporated or unincorporated, that constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of Securities or commodities futures.

A security is a written proof of ownership of an investment, usually in the form of shares of stock, which are fractional units of ownership in a company. Commodities are raw materials, like wheat, gasoline, or silver, that are sold either on the spot market, where cash is paid "on the spot," or through futures contracts, where a price for a contract is set in advance, not to be changed even if the market price for the commodity increases or decreases by the time the contract comes due.

Stock Exchanges

The New York Stock Exchange (NYSE) and the American Stock Exchange are located on Wall Street, in New York City. Wall Street (named for a stockade built to protect the original settlers) is the busiest hub of securities trading in the United States. There are five other, smaller, regional exchanges: the Pacific (in Los Angeles), Cincinnati, Chicago, Philadelphia (at the site of the first stock exchange in the United States), and Boston. These stock exchanges are private associations that sell memberships (seats) for a price, which can fluctuate based on the price of stocks and the volume of trading.

The Securities and Exchange Commission, which was established pursuant to the Securities Act of 1933 (15 U.S.C.A. §§ 78a et seq., 78d), regulates the activities of securities exchanges (defined at 15 U.S.C.A. § 78c(a)(1)). Private associations such as the NYSE and the National Association of Securities Dealers (NASD) initiate and execute a significant amount of self-regulation and disciplinary activities with the full support of the Securities and Exchange Commission.

Futures Exchanges

Futures contracts for commodities are traded on one of 11 commodities exchanges in the United States, or on other exchanges throughout the world. Each futures contract is tied to the exchange that issued it. Exchanges specialize in various commodities, including currency and financial futures. For example, the Chicago Mercantile Exchange deals in meat, livestock, and currency, and the Minneapolis Grain Exchange focuses exclusively on grain. Other exchanges include the Chicago Board of Trade and boards of trade and exchanges in Philadelphia; Kansas City, Missouri; and New York City.

The commodities futures trading commission, which was established pursuant to the Commodity Exchange Act (7 U.S.C.A. §§ 1 et seq., 4a(a)), regulates the activities of boards of trade, defined as associations or exchanges established to trade commodities futures. Private organizations such as the Chicago Board of Trade and the National Futures Association provide significant self-regulation to the commodities futures trading market.

The Auction Market Principle

The floor of a stock or futures exchange operates on the "auction market" principle, whereby brokers meet face-to-face on the floor of the exchange to execute buy and sell orders.

Futures exchanges operate on a pure auction system, often referred to as the open outcry system, where all trading takes place on the floor of the exchange, or "in the pit." Buyers and sellers in the pit use hand signals and oral communications to place buy and sell orders simultaneously, acting for themselves and as agents for others.

Securities exchanges operate on an auction-style system, where the market prices for securities are set by buyers and sellers meeting on the floor of the exchange. In contrast to futures exchanges, securities exchanges also employ specialists, who stand ready to buy or sell orders at market prices when there is, for example, a seller and no buyer for a particular security. In this capacity, specialists act as dealers, using their own capital to make bids and offers for stock. They can also act as brokers, holding limit orders (requests to buy or sell a security when it reaches a predetermined market price) for other brokers and executing those orders when the market moves up or down to the desired price. Specialists permit for a more orderly and continuous securities market and prevent wild price fluctuations due to imbalances in supply and demand.

Computerized and Over-the-Counter Trading

Computer technology has been introduced in the major exchanges to automate certain aspects of transactions, but the auction process remains the predominant method of trading securities in these forums. In fact, the statutory definition of an exchange in the Securities Exchange Act has been consistently interpreted not to include computerized trading.

Stocks not traded on an exchange have historically been termed over-the-counter (OTC) stocks because they are sold over the counter (or desk or telephone) of individual brokers. The NASD once published the quotes of willing buyers and sellers of OTC stocks in what were called pink sheets. In the early 1970s, the NASD computerized this service and called it the National Association of Securities Dealers Automated Quotations System. This decentralized method of trading stocks has grown in efficiency and popularity in the decades since its introduction, but it has never been held to constitute an exchange because it does not facilitate the physical meeting of buyers and sellers. Like specialists in stock exchanges, who often are called upon to "make the market" (purchase and sell securities with their own money) in the absence of willing buyers and sellers, multiple "market makers" in the OTC market use their own capital to respond to fluctuations in the market.

One of the more recent developments in the exchange of stocks has been the use of Electronic Communications Networks (ECNs), which became popular in the United States and Europe in the late 1990s. ECNs are similar to stock exchanges in that they allow for stock transactions through a third party. They match orders to buy and sell at specified prices. They are also faster and more efficient than the traditional stock exchange. In 2000, the NYSE repealed a rule that limited member firms to trade only in stocks listed on the exchange. This has allowed securities listed on ECNs to become more competitive with stocks from larger companies. ECNs are required to register with the Securities and Exchange Commission as broker-dealers.

Further readings

Booth, Richard A. 1994. "The Uncertain Case for Regulating Program Trading." Columbia Business Law Review 1.

Gillette, Clayton P., and Steven D. Walt. 1999. Sales Law: Domestic and International. New York: Foundation Press.

Maynard, Therese H. 1992. "What is an 'Exchange?'— Proprietary Securities Trading Systems and the Statutory Definition of an Exchange." Washington & Lee Law Review 49.

Morris, Kenneth M., and Alan M. Siegel. 1993. The Wall Street Journal Guide to Understanding Money & Investing. New York: Lightbulb Press.

Romano, Roberta. 1996. "A Thumbnail Sketch of Derivative Securities and Their Regulation." Maryland Law Review 55.

Stockton, John M., and Frederick M. Miller. 1992. Sales and Leases of Goods in a Nutshell. 3d ed. St. Paul, Minn.: West.


Broker; Commodity Futures Trading Commission; Securities; Securities and Exchange Commission.


1) v. to trade or barter property, goods and/or services for other property, goods and/or services, unlike a sale or employment in which money is paid for the property, goods or services. 2) the act of making a trade or barter. An exchange of "equivalent" property, including real estate, can defer capital gains taxation until the acquired property is sold. 3) short for "Starker" exchange of investment real property to defer capital gains tax. (See: delayed exchange)


noun bargain, barter, bazaar, bourse, busiiess intercourse, buying and selling, change, commerce, commutation, conversion, deal, interchange, intercourse, market, mart, merchantry, permutation, reciprocation, reciprocity, replacement, reprisal, requital, retaliation, shift, shuffle, stock market, substitute, substitution, supplanting, swap, trade, traffic, transaction, transfer, transposal, transposition
Associated concepts: bill of exchange, exchange of property, reciprocal exchange, reciprocal transfers
See also: association, barter, business, change, commerce, communication, commute, conference, contact, conversation, convert, cover, deal, dealings, discourse, displace, finance, handle, interchange, market, market place, mercantile, mutuality, novation, quid pro quo, reciprocate, reciprocity, replace, replacement, respond, return, revise, sale, sell, store, subrogation, substitute, succedaneum, trade, vary



EXCHANGE, com. law. This word has several significations.
     2.-1. Exchange is a negotiation by which one person transfers to another funds which he has in a certain place, either at a price agreed upon, or which is fixed by commercial usage. This transfer is made by means of an instrument which represents such funds, and is well known by the name of a bill of exchange.
     3.-2. The price which is paid in order to obtain such transfer, is also known among merchants by the name of exchange; as, exchange on England is five per cent. See 4 Wash. C. C. R. 307. Exchange on foreign money is to be calculated according to the usual rate at the time of trial. 5 S. & R. 48.
     4.-3. Barter, (q.v.) or the transfer of goods and chattels for other goods and chattels, is also known by the name of exchange, though the term barter is more commonly used.
     5.-4. The French writers on commercial law, denominate the profit which arises from a maritime loan, exchange, when such profit is a percentage on the money lent, considering it in the light of money lent in one place to be returned in another, with a difference in amount in the sum borrowed and that paid, arising from the difference of time and place. Hall on Mar. Loans, 56, n.; and the articles Interest; Maritime; Premium.
     6.-5. By exchange is also meant, the place where merchants, captains of vessels, exchange agents and brokers, assemble to transact their business. Code de Comm. art. 71.
     7.-6. According to the Civil Code of Louisiana, art. 1758, exchange imports a reciprocal contract, by which. the parties enter into mutual agreement. 14 Pet. 133. Vide the articles. Bills of Exchange; Damages on Bills of Exchange and Reexchange. Also Civ. Code of Lo. art. 2630.

References in classic literature ?
Crude little telephone exchanges were being started in a dozen or more cities.
Several of his captains deserted, and he was compelled to take control of their unprofitable exchanges.
Hubbard had set a price of twenty dollars a year, for the use of two telephones on a private line; and when exchanges were started, the rate was seldom more than three dollars a month.
We see then: the means of production and of exchange, on whose foundation the bourgeoisie built itself up, were generated in feudal society.
Modern bourgeois society with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells.
For which reason others endeavour to procure other riches and other property, and rightly, for there are other riches and property in nature; and these are the proper objects of economy: while trade only procures money, not by all means, but by the exchange of it, and for that purpose it is this which it is chiefly employed about, for money is the first principle and the end of trade; nor are there any bounds to be set to what is thereby acquired.
He wished with all his heart that he had never been such a fool as to dabble on the Stock Exchange, but the only thing was to hold on; something decisive might happen any day and the shares would go up; he did not hope now for a profit, but he wanted to make good his loss.
Then, again, within the city, how will they exchange their productions?
Then they will need a market-place, and a money-token for purposes of exchange.
Suppose now that a husbandman, or an artisan, brings some production to market, and he comes at a time when there is no one to exchange with him,--is he to leave his calling and sit idle in the market-place?
In well-ordered States they are commonly those who are the weakest in bodily strength, and therefore of little use for any other purpose; their duty is to be in the market, and to give money in exchange for goods to those who desire to sell and to take money from those who desire to buy.
What redundancies and disaster planning exist for critical vendors on whom the exchange depends, specifically the hosting company?