Background

There are three major types of financial exchanges

1. Stocks and bonds
2. Commodity exchange
3. Foreign exchange (Forex)

Stock exchanges, where stocks and bonds are traded, are highly regulated and don’t transcend national boundaries. The listed companies have to follow disclosure protocols decided by the government and the exchange. The stocks that are traded on these exchanges are mostly unique to the exchanges. For example, Google is only listed on the American exchange of NASDAQ. So, to buy Google stock, you need to conform to American laws. Also, you can only sell these shares back on NASDAQ and that too only within certain hours of the day. Therefore, these exchanges have some monopoly power.

However, commodities can be easily resold and delivered on other domestic exchanges and with some effort across national boundaries as well. Therefore, unlike stock exchanges, commodity exchanges do not have a monopoly over what’s being traded on them. The only advantage they can offer to the traders is a marketplace where they can find counterparties to take a position against their trade. Traders don’t have to arbitrate, that is, buy from one market at a lower price and then sell to another at a higher. Just the fact they can do it ensures that prices differences are minimized. Crude oil is the most actively traded commodity in the world and unlike Google stock, a trader can trade in crude oil, practically, in any commodity exchange in the world. Some other commodities could be traded in exchanges specific to a country.

Foreign Exchange (forex) markets are different. In theory, one can be run a US Dollar - Euro foreign exchange in Nigeria. Therefore, these transcend national boundaries. Most forex markets, however, are regulated. Forex markets are practically 24-hours a day, 7-days a week. Since major currency pairs like USD-EURO can be traded in any major forex exchange on the world, these markets practically never close. This distinction is subtle but important. For example, consider Apple Inc. which is listed on NASDAQ in the USA. If some bad news related to say Apple is published in media on Friday evening after NASDAQ is closed for trading then the traders cannot trade their Apple stocks till the Monday morning. But if Britain’s exit from EU (Brexit) is canceled on a Friday evening then the forex market will react immediately to the news.

Another subtle distinction is that big stock exchanges can enforce their rules and if a trader behaves badly then they can ban him/her for life. Getting banned from a major exchange is career suicide. A trader who, say specializes in tech stocks or healthcare stocks of a country cannot simply move to another country and learn the rules there. Commodity and forex markets are different. One can simply register in a different jurisdiction and start trading. Thanks to the Internet, being registered in Malta does not require one to live in Malta.

Crypto Exchanges

What’s traded on crypto exchanges is not unique to those exchanges. Just like USD can be purchased on pretty much every exchange, one can buy Bitcoin from any exchange, 24-hours a day. But while Forex markets are trading on the optimism or pessimism around a nation’s economy, commodity markets are pure speculation around demand and supply of a commodity. Therefore, cryptocurrency exchanges are akin to commodity exchanges. And since the goods are virtual, they easily transcend national boundaries. Therefore, inter-exchange trading implies price arbitrage will be rare in the longer run. So, what decides one exchange will win over another? Given that an exchange does not have the monopoly over what’s being traded, the only major barriers I can think of are either regulatory or higher liquidity.