in this video we're going to take on a pretty crucial topic for equity investors and that is why the stock exchanges exist what are they for and how do they impact your investing life okay very simple example imagine if you will you've got a big block of shares to sell this morning so maybe 100,000 shares now you might say that's an artificially large amount there are people out there who trade that kind of volume in companies day in day out you're thinking right I'd like to dump 100,000 shares how am I going to do it now it might just be you know someone who wants 100,000 shares in which case I suppose you could go and haggle with them a career price and get on with the trade and in the financial markets finding your own counterparty and doing things away from a formal stock exchange if you like is known as over-the-counter trading and it's still perfectly possible but there are some problems with it number one it's not necessarily the quickest way to do a deal you may have to spend a little bit of time looking around for your counterparty secondly do you trust them what happens if you hand over the shares and they don't pay you and for them of course the reverse is true what if they hand over their cash and you never deliver the shares or I never deliver the shares so you've got back on a risk you've also got the issue of maybe I prefer to do this whole thing anonymously you know because it's quite a big trade I don't want word to get out through whoever this guy is I'm gonna sell to that I'm looking to dump 100,000 shares good enough people find out then I actually move the price down against me so maybe I'd prefer a way of doing it that doesn't sort of reveal my identity and yeah then there's the issue of the price I mean basically what price we're going to agree to sell these shares for what do I use as a reference you know do I find out what lots of other people are trading shares for and use that as a reference price for my little trade or how do I go about it now a lot of these problems can be solved by a stock exchange stock exchanges bring together lots of buyers and sellers originally in coffee houses if you're looking at the London market around but later formalized into proper buildings and of course now with sophisticated IT and all the rest of it but the principle is very simple you're basically bringing buyers and sellers together in one central marketplace if you bring enough of them together you'll get reliable prices for things like shares because you are lots of people trading you can reckon that the price being struck at any one point in time is representative for something like say a Tesco yet and these days exchanges as we'll see in a moment build in lots of extra features so for example you can trade anonymously if you need to and you also as a user of an exchange get a thing called a central counterparty guarantee which is a flash way of saying the risk of either the buyer not paying the seller or the seller not delivering the shares because you think about it those two things got to happen for a trade to work is nearly zero okay so lots of reasons for exchanges to exist how do they impact your life as an investor let's take a look at that okay so imagine here you are as an investor my graphics are not fabulous as anyone is watching my other videos we'll know by now and you're looking to make a share sale okay so who would you call well the answer is you won't ring the London Stock Exchange these exchanges as one in London one in Tokyo one in New York one in most of the major capitals are like clubs they have members okay they don't to let any old sausage in they want to make sure that only people who will on the trades and are known to them join as members and to be honest in a cost-benefit point of view it doesn't mean any sense for a very small trader to become a member so who would I phone if I'm looking to sell 50 or 100 or 200 shares this morning and the answer is a broker a broker will be a member of London Stock Exchange so they can start to get things going for me so let's Tim Bennett chances are I'm not going to have anything to do that I'm no Stock Exchange directly other than going on a kind of tourist tour of it what I'm gonna do is phone my bro let's broke up and give a sell instruction right now just worth mentioning brokers tend to be members of these exchanges so in London there are lots of brokers around or members of the London Stock Exchange other brokers remember the New York New York Stock Exchange and so on and my broker just worth noticing might offer me one of two or three levels of service and that's something I address in another video how to choose a broker but it might be but I'm just doing an electronic trade cheap and cheerful execution only in which case I just tap my instruction into a keyboard may go straight through to my broker my broker by the way could be one of the big banks it could be slightly more independent broker a brewing dolphin for example or a Charles Stanley alright but nonetheless lots of brokers in the market and in another video I address how to choose one but my trade could be done electronically it may be I pick up the phone if I've got a more expensive relationship my broker or I'm trying to trade something that's a little less popular and say Tesco shares or Vodafone but anyway have a look at my other video if you're interested in how to go about picking a broker but say I've got one I'm happy with whoever that is and I should sell instruction now the point is basically in this introductory video the broker either directly or indirectly will have a relationship with the London Stock Exchange and let's say the UK shares now you don't have to sell UK shares through London Stock Exchange's a broker there are other exchanges that list UK shares alright but the London Stock Exchange enjoys a pretty hefty share of the market so my broker he may aggravate my order with quite a few others coming in from clients because I'm not the only person selling today especially this popular share and then pump an order through to the London Stock Exchange now without going into too much detail here what's the point what's the role of the London Stock Exchange well of course what will be happening on the other side let's say is lots of investors will be pumping buy orders through their brokers for the same stock it was a popular stock like Tesco Vodafone so there'll be lots of people like me giving instructions their broker the broker will then be pumping orders through to the central marketplace for London Stock Exchange so you'd imagine a whole load of buys flooding in up to the central marketplace and what is the job of a London Stock Exchange well essentially it's very straightforward sound straightforward it's to match trade so basically the LSE tries to match as many buy and sell orders together as it can now how do you do that just a word about that if you go to the London Stock Exchange building you may be disappointed insofar as it's not as exciting as going to the New York Stock Exchange at the New York Stock Exchange you'll see lots of people seeming to kind of shout at each other a lot and a bell rings and it all looks quite exciting the London Stock Exchange is all very silent there are not many people around in reception and frankly everything seems quite quiet and under control despite the fact there are millions of trades happening as yeah as the bay goes on so what's going on there how're they doing this well just worth noticing the London Stock Exchange and awful lot of trades that are done are matched electronically through what's called an order book now I'm not going to take on the structure and workings of all the books in this video but basically an order book simply says well if enough people want to buy Tesco at around 2 pounds or enough people wanna sell Tesco at around 2 pounds can't you just use the internet or a computer program simply match those trades together ok there's no need for a middleman if you like however it is possible on exchanges to still have deals done through and what in the London market unknown there's market makers by now market makers won't thank me for this comparison they operate a little bit like second-hand car dealers if you like imagine you're trying as a broker to offload a slightly less popular less well-known stock or you've got a particularly big order and you're not sure it's going to clear through this electronic order book you could approach one of the LLC's market makers and market makers a bit like second-hand car dealers they match trades as well all right but they're a little bit more specialist if you're liking back some exchanges call them specialists so what they'll do is you contact one of these one of these market makers they will have a book of stocks that they're prepared to buy and sell they literally run a book a bit like a second-hand car dealer you pursue has a stock of cars they buy at one price and they sell at another price they buy low just like second-hand car dealers and they sell high because they want to make money all right and essentially brokers can put trades through these dealers if you like working on behalf of them and Stock Exchange to match trait because you know from exchanges point of view the more deals that get done the better okay because that obviously means that the reported volume going through the exchange compared with rivals looks a bit more impressive alright so in a nutshell one of the big jobs the London Stock Exchange that says to match trades a lot of them are done electronically all right and some are done on a slightly more old-fashioned way involving market makers but even where market makers are involved again the London Stock Exchange has an electronic system that allows you to place the trade so in either case you're not seeing the kind of colourful jackets and shouting of orders that goes on somewhere like the New York Stock Exchange or in Chicago for example so just be aware all I'm describing here isn't Universal insofar as over in America they still agree trades manually if you like face to face with hand signals and so on but in Europe this idea of electron Trading and electronic order matching is becoming more and more prevalent because it's fast it's cheap and it's totally anonymous okay in other words a broker can put an order through this order book without revealing who they are and that can be useful if you're trying to do a big or slightly awkward trade now just a few words about what else an exchange can offer is it just matching trades well no they can also offer a form of guarantee so remember that point I said about what happens if you're worried that whoever your counterparty to the trade is if you're selling whoever your buyer is won't pay you off if you're a buyer the worry is that the seller won't deliver the shares they've just promised to deliver when this deal was done all right so to get around that the London Stock Exchange like other exchanges has a relationship with an organization called lch.clearnet bit of a mouthful but essentially that contract means there is somebody out there guaranteeing that if the buyer doesn't pay effectively the exchange or the Clearing House will and if the seller doesn't deliver shares having agreed to then the Clearing House will so in other words you can be confident with someone using the exchange that deals will be honored okay so the final point is London Stock Exchange has an arrangement to allow for the settlement of shares I won't go into that any detail here cuz we're talking about exchanges but there is an organization out there called it Euroclear crest and in an in a nutshell that copes with the final stage of a shared transaction which is the fact that in the UK shares are registered like property basically a central electronic register has to be updated when you buy shares and update it when you sell shares and somebody needs to do that so to take away all that hassle the exchange say well if you do through us that's pretty much automatically taken care of all rights all the sort of administration that goes to the end of a share deal they effectively deal with two and all of this cost money so a broker will expect to pay to use the order book at the exchange for that guarantee but the settlement bit and that of course is why your broker charges you to do a deal so you know a little bit of that $9.99 per trade whatever your pain is going into the broker paying for this lot all right so let's just summarize why exchanges exist or two or three key points just recap on those and then I'll talk about the kind of one big current issue that worrying exchanges at the moment and then we'll leave it there anyone who wants to know more about shares themselves take a look at one or two of my other videos and if you want the background this whole video I've done an introduction to financial markets which covers where this kind of fits in okay so just to wrap up on those on those final couple of issues so in a nutshell what are things like the London Stock Exchange all about well price transparency in other words if I'm planning to buy or sell shares looking up a price the London Stock Exchange by the way the prices are quoted daily so the closing price of the exchange around 4:30 in the evening just slightly over five o'clock beings being technical about it it's published so people use that fund managers for example want to know at the end of the day what the closing price to say Tesco roller phone was so they can value their portfolios accordingly so exchanges or a useful reference point both for the price that people want to do a deal at and also the price that you know fund managers and investors will as they call it mark their portfolios to market at the end of the day so lots of price information from exchanges which is very useful and also information about how many deals are getting done on all the rest of it ah number two they can provide the anonymity some of the bigger players in the market like alright now there are other ways to achieve that in practice but if you don't want to have to go out and find a counterparty over the counter then exchanges offer you the ability to trade without revealing who you are and that can be useful doesn't matter if you're uploading five shares before uploading half a million anonymity is quite important otherwise people will start to move prices against you okay that's true in any market not just the shares um number three the guarantee and settlement arrangements the guarantee being that if you buy shares through an exchange basically the deal will be honored by the seller and vice versa and settlement being the fact that shares are legally registered in the UK so there's a bit of administration that goes with them and in exchange you can offer to cope with some most of that again most of its electronic in the UK market these days um so those are two or three key reasons why exchanges exist and perhaps going back to the origins of the exchanges when dealing in chairs moved out of coffee houses regulation in other words only certain people are allowed to join under the stock exchanges members and that hopefully imposes the degree of sort of regulation on the market makes it less likely that people will fail trades and so on and failed trades when trades were done in coffee houses informally or a big feature of the market and one that exchanges tried to kind of eliminate okay so that gives you a flavor for the main reasons or some of the main reasons why exchanges exist and of course we've got exchanges all over the world now you've got the New York Chicago some of them some of them have stock exchanges some of them are walk sort of derivatives focus I've done some videos on derivatives those people interested some of them focus on commodities the exchanges in Chicago for example and some markets don't really have an exchange or is not an obvious big exchange for example in the foreign exchange market traders are quite happily to do deals over the counter most of the time so in London for example it's quite hard to find to put it mildly a foreign exchange exchange alright where you will you will find a London Stock Exchange okay so these things have sprung up basically as demand has dictated now just close out what's the big issue in the headlines around exchanges well there are several exchanges like to advertise themselves as being it fast cost-efficient offering a massive range of services for London like exchanges they come to us because we offer a low-cost electronic dealing platform okay and that's attractive to members of the exchange for example and we also offer a wide range of different securities through the exchange of trading and there's one of the big issues exchanges are under increasing pressure to consolidate to merge and become one-stop shops of the buzzwords you'll hear at the moment in other words the London Stock Exchange can't just sit there okay complacently offering a sort of list of liquid UK stocks people want to go there and buy international stocks maybe they want derivatives maybe they want commodities ok so increase in the exchanges emerging are getting together to provide that kind of one-stop shop and also drive down costs big it's generally thought to be beautiful so in the UK market for example we no longer have regional exchanges in Birmingham and Manchester and so on years ago they all got squished into ones the London Stock Exchange and now internationally there's pressure even on those domestic exchanges the dominant ones to get their act together get even cheaper move further towards electronic trading and offer a bigger and wider range of securities to their members and that's something you will see plenty of commentary on in the press at the moment