Exchange

Computer technology has been introduced in the major exchanges to automate certain aspects of transactions, but the auction process remains the predominant method of trading securities in these forums. In fact, the statutory definition of an exchange in the Securities Exchange Act has been consistently interpreted not to include computerized trading.

Stocks not traded on an exchange have historically been termed over-the-counter (OTC) stocks because they are sold over the counter (or desk or telephone) of individual brokers. The NASD once published the quotes of willing buyers and sellers of OTC stocks in what were called pink sheets. In the early 1970s, the NASD computerized this service and called it the National Association of Securities Dealers Automated Quotations System. This decentralized method of trading stocks has grown in efficiency and popularity in the decades since its introduction, but it has never been held to constitute an exchange because it does not facilitate the physical meeting of buyers and sellers. Like specialists in stock exchanges, who often are called upon to "make the market" (purchase and sell securities with their own money) in the absence of willing buyers and sellers, multiple "market makers" in the OTC market use their own capital to respond to fluctuations in the market.

One of the more recent developments in the exchange of stocks has been the use of Electronic Communications Networks (ECNs), which became popular in the United States and Europe in the late 1990s. ECNs are similar to stock exchanges in that they allow for stock transactions through a third party. They match orders to buy and sell at specified prices. They are also faster and more efficient than the traditional stock exchange. In 2000, the NYSE repealed a rule that limited member firms to trade only in stocks listed on the exchange. This has allowed securities listed on ECNs to become more competitive with stocks from larger companies. ECNs are required to register with the Securities and Exchange Commission as broker-dealers.