Where securities trade: The stock exchange is only one of the places

We imagine a share is always bought on the stock exchange. In reality, there are several trading venues, more or less visible.

The first is the exchange itself. A public order book, where everyone sees prices and quantities.

It is transparent. But for a very large seller, that is also a problem: everyone sees that he is selling.

Say a fund wants to sell one million shares. If it shows that, buyers back off and the price falls before the sale even happens.

Hence the second venue: the dark pool. A hidden book. Orders are not displayed before the trade.

Buyers and sellers meet there without showing themselves. The price is usually taken from the public exchange.

A large share of stocks trades this way, outside public books. You only see the result afterwards.

The risk: if too much trading goes into the shadows, the public price is formed on fewer orders, and becomes less reliable.

Third venue: over the counter. No book at all. Two parties negotiate a tailor-made contract, directly.

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That is where many derivatives live: swaps, exotic options. Hundreds of trillions of dollars, in notional amount.

The advantage: the contract fits the need exactly. The danger: each depends on the other's solvency.

If the other side goes bust, your contract is only worth what you recover in the bankruptcy. Often, far less.

In two thousand eight, nobody knew who owed what to whom. This opacity turned one bankruptcy into general panic.

Hence the fourth player, the most discreet and the most important: the clearing house.

It stands in the middle of every trade. It becomes the buyer to every seller, and the seller to every buyer.

If one defaults, it pays the other. Risk no longer spreads from one player to all the others.

To hold up, it asks for collateral: the margin. For the example: ten per cent on a one hundred thousand euro contract, so ten thousand euros.

Every day, it recalculates. The contract loses three per cent? You must pay three thousand euros, right away. That is the margin call.

In two thousand eight, when Lehman Brothers went bust, the London clearing house LCH wound down its swaps without touching other members' money.

After the crisis, the G twenty required standardised derivatives to go through these houses. Over the counter trading shrank.

But careful: by concentrating all the risk in one place, a new weak point was created. If a clearing house fell, everything would fall.

So, four venues. The public book, the hidden book, the tailor-made contract, and the one that absorbs defaults.

When you buy a security, it travels through all this plumbing. You do not see it. But it guarantees you will get delivery.