Electronic trading, sometimes called e-trading, is the buying and selling of

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s, bonds, foreign currencies,

financial derivatives In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: # an item (the "underlier") that can or must be bou ...

cryptocurrencies A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records ...

, and other financial instruments online. This is typically done using

electronic trading platform In finance, an electronic trading platform, also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products ...

s where traders can place orders and have them executed at a trading venue such as a

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...

, either directly or via a broker. Electronic trading first started in the 1970s, and developed significantly during the 1990s and 2000s with the spread of the Internet. Electronic trading slowly replaced traditional floor trading and telephone trading over the following 20 years. Electronic trading can include various exchange-based systems that run the matching engine for orders, such as

NASDAQ The Nasdaq Stock Market (; National Association of Securities Dealers Automated Quotations) is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list ...

, NYSE Arca and Globex, as well as other types of trading platforms, such as electronic communication networks (ECNs), alternative trading systems, crossing networks and

dark pool In finance, a dark pool (also black pool) is a private forum ( alternative trading system or ATS) for trading securities, derivatives, and other financial instruments.algorithmic trading, where computers are used to place orders into the market at high speeds, such as in high-frequency trading.

History

Before electronic trading, 1600–1970s

From the start of modern

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for ...

s in the 1600s in Amsterdam and London, there were physical locations where buyers and sellers met and negotiated prices to buy and sell securities. By the 1800s exchange trading would typically happen on dedicated floors of an exchange. Often where traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another, a process known as open outcry or pit trading (the exchange floors were often pit-shaped – circular, sloping downwards to the center, so that the traders could see one another).

Development of electronic communications, 1970s

With the improvement in

communications Communication is commonly defined as the transmission of information. Its precise definition is disputed and there are disagreements about whether Intention, unintentional or failed transmissions are included and whether communication not onl ...

technology in the late 20th century, the need for a physical location became less important and together with the development in computer technology traders started to transact from remote locations in what became known as electronic trading. Electronic trading made transactions easier to complete, monitor, clear, and settle and this helped spur on its development. Set up in 1971,

was the world's first electronic stock market, though it originally operated as an electronic bulletin board, rather than offering straight-through processing (STP). One of the earliest examples of widespread electronic trading was on Globex, the CME Group’s

conceived in 1987 and launched fully in 1992. This allowed access to a variety of financial markets such as treasuries, foreign exchange and commodities. The

Chicago Board of Trade The Chicago Board of Trade (CBOT), is an American futures exchange, futures and options exchange that was founded in 1848. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other excha ...

(CBOT) produced a rival system that was based on Oak Trading Systems’ Oak platform branded ‘E Open Outcry,’ an electronic trading platform that allowed for trading to take place alongside that took place in the CBOT pits. In 1994, digiTRADE was the first company to bring securities trading to the internet, with K. Aufhauser & Company, Inc as the first client, going live with "WealthWeb" in September of 1994. By June 11, 1997, digiTRADE launched interest and touch tone telephone workstations for full service brokerage firms. By January 26th, 1998, LPL Financial Services had launched a broker workstation across 2,700 registered representatives. This was a complete front-back office system for stocks, options, mutual funds and annuities, digiTRADE PRO integrates a customized LPL front-end with digiTRADE's trading applications, and will allow LPL's reps to place orders 24 hours a day via the internet. On August 31st, 1998, Thomson Financial Services acquired digiTRADE, the widely recognized leader of automated internet and telephone-based trading and account management services. By 1998, digiTRADE had deployed internet and telephone-based trading systems for 51 financial solutions including Bank of America, Bear Stearns, Chase Manhattan, Chubb, CitiBank, Dreyfus, First Union, LPL Financial, New York Life, T.Rowe Price and Wexford Clearing Services.

Internet from 2000s

With the spread of the internet in the early 2000s, a number of brokers started building electronic trading platforms to allow individual retail traders access to trade online. By 2010s investment firms on both the

buy side Buy-side is a term used in investment banking to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and pension funds are the most c ...

and

sell side Sell side is a term used in the financial services industry to mean providing services to sell securities. Firms or institutions on this side include investment banks, brokerages and market makers, who facilitate offering securities to investors, ...

were increasing their spending on technology for electronic trading. With the result that many floor traders and brokers were removed from the trading process. Traders also increasingly started to rely on

algorithms In mathematics and computer science, an algorithm () is a finite sequence of mathematically rigorous instructions, typically used to solve a class of specific problems or to perform a computation. Algorithms are used as specifications for per ...

to analyze market conditions and then execute their orders automatically. The move to electronic trading compared to floor trading continued to increase with many of the major exchanges around the world moving from floor trading to completely electronic trading. Trading in the financial markets could broadly be split into two groups: *

Business-to-business Business-to-business (B2B or, in some countries, BtoB) refers to trade and commercial activity where a business sees other businesses as its customer base. This typically occurs when: * A business sources materials for its production process for ...

(B2B) trading, often conducted on exchanges, where large investment banks and

broker A broker is a person or entity that arranges transactions between a buyer and a seller. This may be done for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither ...

s trade directly with one another, transacting large amounts of securities, and *

Business-to-consumer Direct-to-consumer (DTC or D2C) or business-to-consumer (B2C) is the business model of selling products directly to customers and thereby bypassing any third-party retailers, wholesalers, or middlemen. Direct-to-consumer sales are usually transa ...

(B2C) trading, where

retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is the sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholes ...

(e.g. individuals buying and selling relatively small amounts of stocks and shares) and

institutional An institution is a humanly devised structure of rules and norms that shape and constrain social behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions and ...

clients (e.g.

hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...

s, fund managers or

insurance companies Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

, trading far larger amounts of securities) buy and sell from brokers or

broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and ...

s, who act as middle-men between the clients and the B2B markets.

Consolidation, 2010s

By 2010 the majority of retail trading in the United States happened over the Internet, retail trading volumes are dwarfed by institutional, inter-dealer and exchange trading. However, in developing economies, especially in Asia, retail trading constitutes a significant portion of overall trading volume. This also had some negative impacts such as the 2010 flash crash where errors in electronic trading caused a significant market crash. For instruments which are not exchange-traded (e.g. US treasury bonds), the inter-dealer market substitutes for the exchange. This is where dealers trade directly with one another or through inter-dealer brokers. They acted as middle-men between dealers such as investment banks. This type of trading traditionally took place over the phone but brokers moved to offering electronic trading services instead. Similarly, B2C trading traditionally happened over the phone but brokers moved to allow their clients to place orders using electronic systems. Many retail or discount brokers went online during the late 1990s and most retail stock-broking takes place online. Larger institutional clients, however, will generally place electronic orders via proprietary

s such as Bloomberg Terminal or Eikon or using their brokers' proprietary software.

Impact

The increase of electronic trading had some important implications: * Reduced cost of transactions – By automating as much of the process as possible (often referred to as " straight-through processing" or STP), costs were brought down. * Greater liquidity – electronic systems make it easier to allow different companies to trade with one another, no matter where they are located. This leads to more buyers and sellers and so greater

market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...

which increases the efficiency of the markets. * Greater competition – While electronic trading has not necessarily lowered the cost of entry to the financial services industry, it has removed barriers within the industry and had a globalisation-style competition effect. * Increased transparency – Electronic trading has meant that the markets are less opaque. * Tighter spreads – The bid–offer spread represents the profit being made by the

market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the difference, which is called the ''bid–ask spread'' or ''turn.'' Thi ...

s. The increased liquidity, competition and transparency means that spreads have tightened. *'Arms race' in pursuit of 'speed' – Several academics have argued that the continuous nature of electronic markets has incentivized a 'wasteful' technology race leading to high-frequency trading. For retail investors, financial services on the web offer great benefits. The primary benefit is the reduced cost of transactions as well as the ease and the convenience. Online financial transactions bypass traditional hurdles such as

logistics Logistics is the part of supply chain management that deals with the efficient forward and reverse flow of goods, services, and related information from the point of origin to the Consumption (economics), point of consumption according to the ...

. Conversely there is concern about the impact of speculation through trading, considered negatively and of potential significant damage to the real economy.

References

{{Reflist Financial markets Stock market E-commerce