A laboratory investigation of exchange flows near the two-layer hydraulic limit is used to examine the generation of shear instability at the interface dividing the two layers. The present experiments differ from many previous investigations into shear instability, in that the instabilities are an active part of a quasi-steady flow regime rather than the product of a controlled initial state. Regimes characterized by either Kelvin–Helmholtz or Holmboe's instability are found to be separated by a well-defined transition. Observations of the transition from Kelvin–Helmholtz to Holmboe's instability are compared to predictions from scaling arguments that draw on elements of both two-layer hydraulic theory and linear stability theory. The characteristics of unstable modes near the transition, and the structure of both classes of instability are examined in detail.