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Explaining exchanges

The best way to think of an exchange is to imagine a huge swap meet taking place in a supermarket.

Let’s say we’re in a Whole Foods. Anyone can set up a stall, or shop at the store, so long as they’re members.

And there are two types of product for sale on the stalls: There’s the supermarket’s own 365 line, which is always available, and there could be products from other markets, if someone’s selling them. So instead of Whole Foods, think of the New York Stock Exchange.

The NYSE’s name-brand goods are the shares of companies listed on the exchange. Like Bank of America or AT&T. You can always buy or sell those shares: the exchange has arrangements with certain companies to make a market in them. But you might be able to buy Apple or Microsoft there, too, even though they’re listed on another exchange (the Nasdaq).

It’s a bit like being able to buy Trader Joe's pretzels at Whole Foods, or Kroger yogurt at the Safeway.

Some exchanges don’t have any listings. They’re like big supermarkets that sell goods from all sorts of other stores, but have no lines of their own.

The exchanges are all connected, and they’re committed to getting customers the best possible deal. That means an exchange may have to send a buyer or seller to a competitor, if they offer a better deal -- imagine that happening at Whole Foods. That’s the upside to connectedness.

The downside is that if one part of the system fails, the whole thing could be affected. And that could leave us very badly needing a drink.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101

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