When I was at Forbes I learned that the American Stock Exchange, once known as "the curb," also had the nickname, "The Scam-ex." This was where people bought and sold shares of subprime public companies and where insiders and bucket shops conducted pump and dump scams on retail investors.
To those who ran the exchange, such talk was just snobbery. There were bad apples, sure, but not every public company is IBM. The Amex gave small companies a chance. Not all stayed small. Some grew big and stuck with the exchange. Besides, to protect its credibility, they hade every incentive to police their own lands or nobody would trade in Amex listed securities.
A few years later, as exchanges consolidated, NYSE bought the Amex (and after that, Euronext bought NYSE and after that...) Then we had the Financial Crisis. We all learned about derivatives and how certain of them, like credit default swaps, were not traded on exchanges at all. These were contracts between private entities. When they traded, they traded over the counter. OTC markets can work fine. But sometimes you have to wonder who you're trading with, what their means and intentions are and how they're paying.
The job of an exchange is to regulate security risk (am I really getting what I'm buying?) and counter-party risk (am I trading with a partner who has honest intentions and the means to meet their obligations?). The business objective of an exchange is to collect listing fees (how much can my exchange offer?) and to promote trading volume (how many people can we get trading?) These goals are in conflict.
On Tuesday, the Department of Justice arrested a trader who they say was a futures market manipulator who contributed to the 2010 Flash Crash, when the Dow Jones stocks fell 1,000 points in minutes. What struck me about the criminal complaint, though, was that our pirate trader worked his scam from 2009-2014. That means he traded for four years after the Flesh Crash. It's not that his manipulations went unnoticed. He received several stern letters from the CME Group, owners of the Chicago Mercantile Exchange. But he was never kicked off the exchange. I write more about it at The Daily Beast.