An exchange is a centralized or electronic venue that publicly lists current bids (the highest amount participants are willing to pay) and offers (the lowest amount participants are willing to accept) for a security. A matching engine applies rules to pair compatible orders and generate trades, with each execution reported for clearing and settlement. The venue typically maintains an order book that shows market depth and price levels, supporting transparent price formation.
Participants route orders to the exchange through brokers or electronic gateways. The exchange uses price-time priority and other rules to match orders, producing a trade when interests intersect. The best bid and best offer indicate current liquidity, and the depth of the order book reflects how easily a participant can transact without moving prices. Market makers and other liquidity providers may contribute two-way quotes to improve depth. Exchanges may be fully centralized, or electronic platforms that operate sophisticated matching engines. Some trades occur on off-exchange venues, which operate apart from the public order book.
By gathering orders across participants, an exchange supports price discovery and liquidity provision. Its rules, transparency, and trading processes influence how information is incorporated into prices and how quickly trades are settled.
During a trading session, the exchange matches compatible orders from participants, resulting in a trade and an updated set of quotes in the order book.
Order book · Liquidity · Bid-ask spread · Market maker · Trading venue · Price discovery