What it means
Before electronic trading, buying and selling shares meant going through a physical marketplace. Many cities built their own exchanges, so local firms could raise money from nearby investors.
In the United States, examples included exchanges in Boston, Chicago, Philadelphia and on the Pacific coast. These exchanges served two purposes.
They provided a venue for smaller, local companies that were not big enough for the national exchange, and they often allowed stocks that were listed on the main exchange to be traded there too. This second activity, known as dual trading, gave investors in a region another place to deal and sometimes better prices.
Technology changed their role. Computer networks linked all venues and made location far less important, so trading drifted towards the exchanges with the most volume.
Many regional exchanges merged with larger rivals or were bought by them, and some now operate as part of national exchange groups. For a finance reader, the term is useful for two reasons.
It explains why a stock can trade in several places at once and why the price shown is linked across venues by rules requiring brokers to seek the best available price. It also helps when reading older documents that mention regional exchanges, because they reflect how the market once worked.
Regional exchanges have not vanished everywhere. In some countries, local exchanges still list small and medium-sized companies that find a national listing too costly.
Their rules and costs are usually lighter, which makes them attractive for firms at an early stage. The trade-off is liquidity, which means how easily a share can be bought or sold without moving its price.
A share listed only on a small local exchange may trade rarely, and a seller may have to accept a lower price. Investors should weigh that trade-off against the lower cost of listing.
In practice
Real-world examples.
Example
A family-owned brewery in a mid-sized city wants to raise $5,000,000 for a new plant. The owners list on a regional exchange where the fees and rules are lighter than on the national market, and local investors buy most of the shares. The brewery spends far less on listing fees and compliance than it would on a national market.
Example
A broker receives an order to buy a large company's shares. The shares are traded on several venues, including a regional one, so she routes the order to the venue showing the best price at that moment. Her firm records the choice, because it must be able to show that the client received a fair deal.
Example
An analyst reading a company's annual report from the 1980s finds that its shares were listed on a regional exchange. She concludes that the company was then too small for the national market and sees its later move to the main exchange as a sign of growth.
Case study
Seen in the real world.
Cobalt Valley Brewing is an illustrative, fictional company that listed on a small regional exchange when it had sales of only $8,000,000. The listing cost far less than a national one and gave local customers and suppliers a chance to own part of the business. The company also found that being known locally helped it with recruitment and with its bank.
Over ten years, sales grew to $90,000,000, and trading in the company's shares became thin relative to its size. Large investors would not buy because they could not easily sell, so the board decided to move to the main national exchange.
The move raised costs and disclosure duties, but the share price rose and trading volumes grew. The illustrative lesson is that a regional listing suits an early stage, and the right venue can change as a business matures.
Watch out
Common mistakes.
- Assuming that a regional exchange is unregulated, when listed companies are still subject to securities rules and oversight.
- Ignoring liquidity, since shares on a small exchange can be hard to sell quickly at a fair price, and thin trading makes the quoted price a weak guide to what the business is worth.
- Thinking that regional exchanges all work the same way, when rules, costs and ownership differ between countries.
Questions
People also ask.
Why did many regional exchanges merge or close?
Electronic trading made location unimportant, and volume moved to the largest venues, leaving smaller ones with too little business.
Can the same stock trade on more than one exchange?
Yes, a share can be listed on a national exchange and traded on regional venues too, with rules in place to link the prices. Brokers were attracted to regional venues by lower fees, and some competed hard on speed.
Why would a company choose a regional listing?
Lower cost, lighter requirements and a base of local investors can suit a young or smaller company. The listing can also raise the company's profile in its home area.
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