How Exchanges Work
Stock exchanges match buyers and sellers under strict rules. Here is how today’s electronic exchanges work, who owns them, how prices are protected across venues and what happens when markets move too fast.
Electronic matching engines
An exchange is a regulated marketplace where orders meet. Today almost all U.S. stock trading is electronic: computers hold an order book of bids and offers and match them in microseconds. When your buy order meets a sell order at the same price, a trade happens.
An order book lists bids to buy and offers to sell.
Many exchanges, a few owners
The U.S. has about 17 stock exchanges. Most belong to three groups: Intercontinental Exchange, which owns the New York Stock Exchange and four sister exchanges; Nasdaq, with three; and Cboe, with four. A handful of independent exchanges compete too. Every exchange trades nearly every stock, so they compete on fees, speed and features.
Keeping prices fair across venues
- The national best bid and offer (NBBO) is the best available buy and sell price across all exchanges.
- Rules generally stop trades from happening at worse prices than the best displayed quotes elsewhere.
- Brokers must seek best execution for customer orders.
- Official opening and closing auctions set the day’s benchmark prices.
Circuit breakers
If the S&P 500 falls 7% or 13% from the prior close before 3:25 p.m. Eastern, trading pauses for 15 minutes; a 20% drop halts trading for the rest of the day. Individual stocks also have “limit up–limit down” bands that pause trading briefly when prices jump or plunge too fast.
| S&P 500 drop from prior close | Result |
|---|---|
| 7% (Level 1) | 15-minute pause, if before 3:25 p.m. ET |
| 13% (Level 2) | 15-minute pause, if before 3:25 p.m. ET |
| 20% (Level 3) | Trading halts for the rest of the day |
U.S. market-wide circuit breakers.
Key takeaways
- Exchanges match orders electronically in an order book.
- About 17 U.S. stock exchanges compete, mostly owned by three groups.
- The NBBO and best-execution rules protect prices across venues.
- Circuit breakers pause trading in sharp declines.