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According to Wikinvest, nearly every country has its own stock exchange. Why should a company choose a stock exchange over another for trading its stocks? Aren't they conceptually the same nowadays, given the widespread use of electronic trading?

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    Surely the answer is because they want to list in their own country with their own currency and getting support in their own language and using their local investment banks for the IPO. Also some exchanges specialise or have special rules for membership. I'm not sure that this is really a personal finance question so I'm not answering properly – MD-Tech Oct 18 '16 at 15:14
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    This is on-topic. Questions about investing are on-topic here, and certainly questions about stock exchanges would also be on-topic. – Ben Miller Oct 18 '16 at 15:46
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    Maybe a more "personal finance" angle is why would an investor choose to use more than one stock exchange? What are the advantages and risks of doing so? – MrChrister Oct 18 '16 at 17:18
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    @MrChrister I just don't understand the utility of this site where financial related topics can't be discussed, and personal questions have answers that routinely hide behind disclaimers about not being legal advice and that the OP should get a lawyer. A strict interpretation of your rules makes this site completely useless. – CQM Oct 18 '16 at 18:01
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    @BenMiller: yeah, it's not a question about economics – John Pirie Oct 18 '16 at 18:17
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Nearly every country has its own exchange because so many countries have their own currency, and currency permeates every part of an exchange's business.

Generally, an exchange will support transaction and settlement only in local currency. Securities (except those that explicitly enable FX trading) are denominated and will trade in a single currency-- you can only buy a share of IBM in U.S. dollars. Securities trading always seeks to be a clean, frictionless, scalable process, and adding cross-currency translation to the mix would just complicate things. So it's one exchange, one currency.

In most countries, citizens and even businesses are largely restricted to having bank accounts in local currency. There are various political reasons for this, but there it is: it is difficult or impossible to open a domestic bank account in a foreign-denominated currency. A public company headquartered in a given country will be required to publish financial statements in local currency, will be more likely to do business with the local citizenry and businesses in that currency, and so will likely look for investors from that same pool-- which generally means listing in local currency, which means on an exchange in that country.

There are exceptions, of course. Big multinationals do business all over the world, and many seek investors all over the world as well. Mechanisms have been created to permit this (American Depositary Receipts or ADRs, for example). But once again, cross-currency translation makes things more complicated, so ADRs and their like are only practical for very big international players.

As to why there may be many exchanges in a single country, IMO Nick R has it right. Read "Flash Boys"; many market makers profit from trading between exchanges, and so have an interest in there being many of them. And in the U.S., regulators have expressed an interest in "innovation" in the exchange space, and so permit them. There is also an argument to be made against having a single "Too Big To Fail" exchange just like the argument for banks, but I wouldn't call that a "reason" for the current state of affairs.

  • Actually you can by a share of IBM in other currencies. It's listed on certain foreign stock markets like the London Stock Exchange or the Börse Frankfurt. These aren't ADRs, and IBM shared can be bought and sold on these markets, using the local currency, just like any other company listed on the exchange. – Ross Ridge Oct 18 '16 at 20:25
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Stock exchanges have been undergoing a period of consolidation for the past hundred years for the exact reasons you mentioned.

The existence of digital trading, harmonized laws and regulations, and fewer relevant currencies have made it more practical for mergers and acquisitions between exchanges.

Stock exchanges are most often times private companies that compete with other exchanges, so that also promotes the existence of many exchanges.

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Why are there so many stock exchanges in the world? The simple answer is that there is a lot of money to be made by charging fees to facilitate the trading of securities, but there are other factors at play here relating to new technologies.

Trading volumes have increased rapidly in recent years. According to this ITG data, in 1997, 6.5 billion shares were traded on US exchanges. By 2015 this number had increased to 40.8 billion shares. There are a number of reasons for this rapid increase in volumes. Most significant would be the introduction of new technologies that allow for high volume, high frequency trading.

This increase in activity has be accompanied by an increase in the number of stock exchanges. As CQM points out in his answer, there has been considerable consolidation in the ownership of "legacy" exchanges. For example, the NYSE merged with EuroNext in 2007, and the combined group is now owned by the Intercontinental Exchange, which also owns numerous smaller stock exchanges as well as a number of derivative/commodities exchanges. However, this consolidation in ownership has been more than matched by the creation of many "virtual" exchanges.

In North America these virtual exchanges are called "Alternative Trading Systems". In Europe, they are called "Multilateral Trading Facilities".

These new virtual exchanges, sometimes referred to as "dark pools", have begun to significantly eat away at the volumes of the legacy exchanges. If you look at the ITG data (linked above), you will see that the total volume of shares traded on legacy exchanges actually peaked in 2008, and has since then has decreased. This coincides roughly with the appearance of the virtual exchanges and the new high frequency trading methods. According to this paper from the SEC site, dated 2013, Alternative Trading Systems accounted for 11.3% of total volumes in 2012. This will have increased rapidly in the years since 2012. It is this loss of business that has prompted the consolidation in the ownership of the legacy exchanges.

These new exchange are "conceptually the same" as the legacy exchanges and must play by the same regulatory rules.

  • I thought about going into those details, but instead I just pointed out that there are private companies and that promotes competition, as well as discretion in accepting buyout offers deterring more consolidation, something that each company evaluates individually. Since it is a very broad question I didn't want to focus on just the US, but I did want to point out that in the US there were many more regionally relevant exchanges at one point in time. – CQM Oct 18 '16 at 17:57
  • @CQM The new virtual exchanges are not restricted to the US. They are even more prevalent in Europe. Here in Canada, when I execute a trade in Toronto, there is a 50-50 chance it will be filled on one of the virtual exchanges. When I execute a trade on the US market I assume it is a similar situation but my broker does not provide exchange details for my US orders. – Nick R Oct 18 '16 at 18:06
  • I'm aware, you went into details about US data in your answer. – CQM Oct 18 '16 at 18:12

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