Interbank market news scan: What is an exchange?

Today’s rates ….

30-Day Federal Funds Futures: 94.695.

Effective Federal Funds Rate: 5.33%.

Interest on Reserve Balances: 5.40%.

Discount Window: 5.50%.

EUR/USD=1.0946.

USD/JPY=149.4506.

Today’s definition …

Exchange- “An exchange is a marketplace where securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to the investing public.” — Investopedia.

17 CFR 1.3 defines the term, “board of trade”, as an organized exchange or other trading facility. Also under 17 CFR 1.3, an exchange is also referred to as a contract market or designated contract market.

7 U.S.C. Section 1a (37) defines an “organized exchange” as a trading facility that permits trading by or on behalf of a person that is not an eligible contract participant; or by persons other than on a principal-to-principal basis; or has adopted (directly or through another nongovernmental entity) rules that govern the conduct of participants, other than rules that govern the submission of orders or execution of transactions on the trading facility; and include disciplinary sanctions other than the exclusion of participants from trading.

The term “trading facility” means a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or through the interaction of multiple bids or multiple offers within a system with a pre-determined non-discretionary automated trade matching and execution algorithm.

(Ready for your next trader challenge? Visit https://traderswithedge.com/?r=348 )

Today’s thought experiment ...

It was during the second or third grade that I was introduced to how rain is made. Unbeknownst to me it was my first meteorology class. (I think I did better in the elementary school edition versus later in college, but I digress.) The heat of the day, according to my schoolteacher, would cause the moisture on and in the ground to evaporate and the evaporated moisture would enter the sky and form clouds. As the clouds grew heavier and darker, they would eventually release the rain and the process of evaporation would begin all over again.

This circular process provides the water necessary for growing plants and hydrating humans. This continuous feedback loop is an exchange of energy process between earth and sky. This transaction yields benefits of food and water to humans and other life forms.

I can think of Earth as an exchange platform where the heat it generates evaporates the water, and later receives the water in the form of rain. Humans and animals consume the water and other sources of nutrients provided by the mixture of earth and water. Animals exchange energy with each other by either consuming each other or procreating with each other. As life forms expire, their remains return to the earth thus further contributing to the life process.

In a transactional economy such as ours, the role of the exchange is to ensure the smooth transfer of energy and value between traders, capture some of that energy and value in the form of fees and pass on the rest to government and investors. An exchange is the energy transferring node, the “earth” in a transactional economy.

Unlike earth, the exchange cannot harbor secrets. Earth can be predictable. We expect the planet to rotate and the seasons to come and go. However, we cannot predict every storm or forest fire. We cannot foresee every event where a whale may beach itself. Nor can we predict the next pandemic. Earth can afford to be unpredictable because she knows her inhabitants are trapped here and subject to her whims.

An exchange does not have the luxury of secrets. An exchange must be transparent with pricing and guard against price manipulation. An exchange has to vet its member brokers and enforce its compliance rules fairly. The exchange does not have earth’s advantage of being indiscriminate.

Alton Drew

26 November 2023

Disclaimer: The data and output from this blog post does not constitute investment or legal advice and is not a personal recommendation from Alton Drew.  Nothing contained herein constitutes the solicitation of the purchase or sale of any futures or options.  Any investment activities undertaken will be at the sole risk of the reader.  Alton Drew expressly disclaims all liability for the use or interpretation (whether by visitor or by others) of information contained herein. Decisions based on this information are the sole responsibility of the reader.  Any visitor to this page agrees to hold Alton Drew harmless against any claims for damages arising from any decisions that the visitor makes based on such information.

This page may contain affiliate links.  If you choose to make a purchase after clicking a link, I may receive a commission at no additional cost to you.  Thank you for your support.