Exchange (organized market)
An exchange (or bourse) is a highly organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.
Exchanges bring together brokers and dealers who buy and sell these objects. These various financial instruments can typically be sold either through the exchange, typically with the benefit of a clearinghouse to cover defaults, or over-the-counter (OTC), where there is typically less protection against counterparty risk from clearinghouses although OTC clearinghouses have become more common over the years, with regulators placing pressure on the OTC markets to clear and display trades openly.
Exchanges can be subdivided:
- by objects sold:
- stock exchange or securities exchange
- commodities exchange
- foreign exchange market - is rare today in the form of a specialized institution
- by type of trade:
- classical exchange - for spot trades
- futures exchange or futures and options exchange - for derivatives
In practise, futures exchanges are usually commodity exchanges, i.e. all derivatives, including financial derivatives, are usually traded at commodity exchanges. This has historical reasons: The first exchanges were stock exchanges. In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as options contracts. They are now generally known as futures exchanges.
The name bourse comes from the place where the traders met. It was the house of Ter Beurze in Bruges.
The New York Mercantile Exchange (NYMEX) is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City. Additional offices are located in Boston, Washington, D.C., Atlanta, San Francisco, Dubai, London, and Tokyo.
The company's two principal divisions are the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX), once separately owned exchanges. NYMEX Holdings, Inc., the former parent company of the New York Mercantile Exchange and COMEX, became listed on the New York Stock Exchange on November 17, 2006, under the ticker symbol NMX. On March 17, 2008, Chicago based CME Group signed a definitive agreement to acquire NYMEX Holdings, Inc. for $11.2 billion in cash and stock and the takeover was completed in August 2008. Both NYMEX and COMEX now operate as designated contract markets (DCM) of the CME Group. The other two designated contract markets in the CME Group are the Chicago Mercantile Exchange and the Chicago Board of Trade.
The New York Mercantile Exchange handles billions of dollars worth of energy products, metals, and other commodities being bought and sold on the trading floor and the overnight electronic trading computer systems for future delivery. The prices quoted for transactions on the exchange are the basis for prices that people pay for various commodities throughout the world.
The floor of the NYMEX is regulated by the Commodity Futures Trading Commission, an independent agency of the United States government. Each individual company that trades on the exchange must send its own independent brokers. Therefore, a few employees on the floor of the exchange represent a big corporation and the exchange employees only record the transactions and have nothing to do with the actual trade.
Although mostly electronic since 2006, the NYMEX maintains a small venue that still practices the open outcry trading system, in which traders employ shouting and complex hand gestures on the physical trading floor. A project to preserve the hand signals used at NYMEX has been published.