An exchange is another name for a marketplace that trades in financial instruments such as securities, derivatives and commodities. The word “exchange” can refer to a physical location (such as the New York Stock Exchange) or as a trading platform (such as online trading). Electronic exchanges are quickly becoming the most popular way to make trades.
Exchanges exist for the same reasons that any marketplace does. They give buyers and sellers places to go in order to communicate with one another, and they impose rules to ensure fairness and a certain level of transparency. Ever since digital trading began, traders have been looking for ways to gain a competitive advantage. To that end, many have developed sophisticated software and algorithms to buy and sell in fractions of a second – far faster than humans could.
Investor One: “Have you ever owned stock in Apple?”
Investor Two: “Yes, and I made about $100,000. With the market so volatile, it was a scary four seconds watching the activity on the exchange. I thought about selling sooner, but I decided to play the long game.”