Technological advancements have contributed a lot to the evolution of the trading landscape. The way stock trading is done today represents a radical shift compared to the bygone era when brokers screamed and made hand gestures on the trading floor.
Majority of trades today take place electronically with the push of a button at both the institutional and the individual level. Billions of dollars exchange hands in cyberspace within milliseconds. In this article, we will look at how stock exchanges have evolved and the manner in which stock trading has progressed from in-person to electronic within a span of a few decades.
Electronic Stock Exchanges – A Historical Introspection
London Stock exchange holds the honor of being the first major stock exchange that was formed in 1773. A scant 17 years later, the Philadelphia Stock Exchange was established, which was the first stock exchange in the US. The New York Stock Exchange (NYSE) was formed in 1792 that quickly became the biggest exchange in the world.
Stock traders and brokers bought and sold stocks, bonds, and other financial securities on the trading floor. The process of trading in the securities remained somewhat the same for more than 200 years after the establishment of the stock exchanges.
In the late 1990s, the advancement of internet technologies caused major shifts in the behaviors of stock traders. The digital convergence of internet and communication technologies resulted in the development of electronic stock exchanges that greatly changed the way traders bought and sold securities.
Electronic stock exchanges, also known as Electronic Communication Networks (ECNs), were first authorized in 1998. In addition, increased regulations by the Securities and Exchange Commission (SEC) in the US forced NYSE to go electronic. The NYSE merger with Archipelago Holdings has changed the stock exchange into a ‘hybrid’ stock market allowing both traditional floor trading and electronic trading.
Individual investors can place orders via electronic trading platforms such as eToro, Interactive Brokers, and OptionsHouse, to name just a few. Large institutions generally place orders using proprietary trading platforms such as Thomson Reuters Eikon, Bloomberg Terminal, Reuters 3000 Xtra, CanDeal, and Thomson TradeWeb. The process of connecting the parties in electronic exchange is supported by the Financial Information exchange (FIX) protocol, which is considered the industry standard that is used by most of the electronic exchanges and traders.
The popularity of electronic trading has a number of important implications. Stock exchanges today no longer require brick-and-mortar structures. The electronic trading has also eliminated the need to interact with live people. Also, there is no real need of hiring brokers to buy and sell securities.
Above all, the main benefit of electronic exchanges is the reduced cost of interactions. By removing the middleman involved and the direct processing of orders, the costs have been brought down to a large extent. This has translated into greater profits for the investors. It has also allowed greater liquidity in that traders can easily buy and sell the stocks, which in turn has increased the efficiency of the stock markets.
Today, the majority of stock trading occurs over the internet. Faster hardware has made it possible for the creation of advanced algorithms that can allow automatic trading. The algorithms can determine the pricing, quantity, and timing of the trades that resulted in a high-frequency trading phenomena, which I had discussed in one of my previous blogs. Looking forward, it’s no exaggeration to say that the growing demand for reduced transaction costs and faster trading will result in more advanced trading options for the investors.