SIC 6231 Securities and Commodities Exchanges
SIC 6231
This category includes establishments primarily engaged in furnishing space and other facilities to members for the purpose of buying, selling, or otherwise trading in stocks, stock options, bonds, or commodity contracts.
523210
Securities and Commodity Exchanges
This classification is divided into two distinct industries: stock exchanges and commodities exchanges. Each of these industries has its own structure, history, and participants. Modern securities exchanges in the United States are voluntary entities organized for centralized trading. These organizations' constitutions, bylaws, rules, and regulations govern the members and the trading of issues listed by the exchange. These organizations do not trade the listed securities themselves; rather, they provide the facilities required for organized trading. Stock exchanges also aid the marketability of their listed issues by providing the facilities required for high-volume trade and by requiring the firms listed on the exchange to observe standards in accounting and reporting. These functions make the issues accessible and enhance public confidence in the exchange and its listed securities.
The Securities Exchange Act of 1934 regulates the trade of securities in the United States. This act created the Securities Exchange Commission (SEC) and required any brokers or dealers engaged in the exchange of securities to report these transactions to the SEC, unless the exchange was registered as a national securities exchange, was specifically exempted, or was not practicable and necessary or in the public interest for the protection of the investors to require such registration.
In addition to these formal exchanges, the over-the-counter market is also very significant. Over-the-counter transactions do not have a central market in which they are executed. Instead, they are negotiated over the phone or, more commonly, electronically. The NASDAQ (National Association of Securities Dealers Automated Quotation), in particular, has grown in importance, gaining market share of stock listings over the regular exchanges.
Bonds, too, are an exception. Although various stock exchanges list bonds, they are traded primarily by bond houses and major commercial banks. The bond market is primarily institutional, with commercial banks as the primary investors. It is not heavily regulated, and there is no federal agency dedicated to overseeing the bond market other than the SEC.
Commodities exchanges are typically organizations that are owned by trading members and are organized to facilitate transactions between buyers and sellers of various commodities. These exchanges are regulated by three different acts. First, the Commodity Exchange Act of 1922 established the Commodity Exchange Commission, which consisted of the U.S. Secretary of Commerce, Secretary of Agriculture, and Attorney General. Second, the Commodity Exchange Act of 1936 attempted to limit fraud, manipulation, and excessive speculation. Finally, the Commodities Futures Trading Commission Act of 1974 created the Commodities Futures Trading Commission, which succeeded the Commodity Exchange Commission.
Securities exchanges are governed by the Securities Exchange Act of 1934 and regulated by the SEC. The SEC has three major responsibilities: ensuring the provision of full and fair disclosure of all material facts concerning securities offered for public investment, pursuing litigation for fraud when detected, and registering securities offered for public investment. The SEC's activities are similar to judicial proceedings, and appeals from its decisions are taken to the U.S. Court of Appeals. Structurally, the SEC is composed of five commissioners appointed by the president for five-year terms. No more than three of these commissioners may be from the same political party. The chairperson is also designated by the president.
Commodities exchanges are regulated by the Commodities Futures Trading Commission subject to the Commodities Exchange Act of 1922. This act, along with its later amendments in 1936 and 1975, subjects commodities, commodity futures, and option trading to federal supervision and restricts trading to futures exchanges designated and licensed by the commission. The Commodity Exchange Commission was originally established by the Security Exchange Act of 1922 to supervise commodity exchange, but the commission was succeeded by the Commodity Futures Trading Commission upon the passage of the Commodity Futures Trading Act of 1974.
In general, both the stock and commodities exchanges are governed by a board of directors who are elected from the membership of the exchange. In some cases board members are also selected from outside the exchange's membership to represent the public. The members are individuals or other legal entities who own a "seat" on the exchange. Seats are generally acquired by purchasing existing seats from previous members. The individual exchanges derive their income from membership dues, listing fees, and specialized services. This income is used to cover the operational expenses of the exchange.
Prior to 1934, the exchange of stocks in the United States was unregulated. The exchanges that existed at the time were only limited by a sense of duty to their members and concern for their reputation. This system was sufficient through the bull market of the 1920s; however, the 1929 stock market crash and resulting Great Depression brought this system under renewed scrutiny.
In 1933, Congress passed the Securities Act, establishing disclosure requirements. This act was followed by the Securities Exchange Act in 1934, which brought stock exchanges under federal regulation. The act created the SEC and required all transactions to be completed on exchanges registered with the SEC. This registration required the exchange to file a registration statement containing various information and documents. Every corporation listed on the exchanges was also required to register with the SEC and to file annual reports and other periodic updates.
In 1975, amendments to the Securities Exchange Act mandated the creation of a National Securities Market by the SEC. This system is composed of automated linking of various stock exchanges. The links were created to stimulate competition in the market. These changes were implemented due to the increased volume of trading, as individual investors were slowly being replaced by institutional investors. The exchanges adjusted to this new market by altering their rules and adopting automation. From 1975 to 1987, the yearly volume of trade on the New York Stock Exchange increased tenfold.
Despite comprehensive automation, the market strained to handle the volume of transactions caused by the market collapse on Black Tuesday, October 19, 1987. That crisis led to the adoption of circuit breaker mechanisms, which halt trade when prices fall too quickly. The exchanges have also increased floor space and computer system capacity, and have raised specialists' capital requirements. Many experts believe that these changes have made the U.S. exchanges more reliable and resilient.
One major development during the 1990s was the advent of communications technology that enabled trading to be conducted off exchange floors. Electronic Communications Networks (ECNs) are alternative trading systems that function much like stock exchanges—collecting, displaying, and automatically executing customer orders. In 1994, charges were made that NASDAQ market makers were charging excessive markups on trades they executed. In response, the SEC effectively forced the adoption of Order Handling Rules in 1997. The rule requires dealers to post customers' orders on NASDAQ's screen or send them to an electronic communications network that would post them for everyone's viewing. ECNs were thus inadvertently allowed into the exchanges.
Day-trading firms, which for years had sought greater market access to NASDAQ, soon rushed in to set up ECNs. The oldest and largest of the ECNs is Reuter Group PLC's Instinet. ECNs, which are regulated by NASDAQ's parent, the National Association of Securities Dealers (NASD), accounted for nearly 30 percent of NASDAQ's share volume in 1999.
Competition from the ECNs also caused the exchanges to expand the hours of trading. Because ECNs are set up to offer round-the-clock trading, exchanges would have to do the same to protect their market from eroding. Most of the world's largest stocks already trade in three major time zones, namely, the United States, London, and Tokyo. Related changes as a result of continuous trading would mean further growth for discount brokers and Internet trading. Newspapers and television networks would adjust their financial reporting to fulfill the demand, and more people would be added to the workforce to cater to the trading activities.
In 1999, a new SEC rule commonly known as "Reg ATS" (Alternative Trading Systems) took effect. This regulation allows ECNs and other electronic trading systems to become actual stock exchanges. ATSs are small, private systems that are lightly regulated and are able to make quick innovations. They serve to drive down the cost of trading and to spur innovations such as extended trading hours and online trading via the Internet.
The rise of the Internet as a revolutionary new form of interactive communication has also affected the delivery of financial information by providing investment tools or executing...
To continue reading
Request your trial