Electronic trading is the trading of financial securities, derivatives, and foreign exchange electronically through digital platforms. Electronic trading uses Electronic Communication Networks (ECN) to connect buyers and sellers in a virtual marketplace rather than a physical trading floor. Electronic Communication Network is a computerized platform that automatically matches buyers and sellers who seek to trade securities in the market. Electronic Communication Network makes it possible for investors and traders to trade without any third-party involvement. Electronic trading systems facilitate the matching of purchase and sell orders through order matching systems. An order matching system is a digitalized trading engine that performs transactions for investors and traders wishing to buy or sell securities in stock markets, commodity markets, or any kind of financial exchange. An order matching system uses computer algorithms to find and execute compatible buy and sale orders.
Order matching systems perform stock matching, wherein the system will search and find an investor who wants to buy the same amount of securities another investor seeks to sell at the price the investor is willing to buy at. Stock matching is the process by which compatible trades of buy and sale orders at the same price are identified and executed. An order matching system performs the role of a stock matcher much more efficiently than a manual matching system owing to the advanced technology that helps to effect trades faster and more efficiently. The commonly used algorithms used by order matching systems are broadly classified into FIFO algorithms and Pro-rata algorithms. FIFO, which stands for first in-first out, gives priority to the first buy order with the highest price. Pro-rata algorithms, on the other hand, give priority to orders at a particular price value in proportion to the size of the order.
In today’s day and age, trading using electronic trading systems is a necessity. In the absence of electronic trading systems, it is very difficult for buyers and sellers to have their buy and sell orders matched, making the transaction complex and time-consuming. By utilizing a computerized matching engine, several trades are performed simultaneously every minute. Electronic trading also allows demographically separated investors and brokerages to make trades directly. Once an investor has set up an account with a brokerage, he invests by placing orders for buying or selling on the digital trading platform that the electronic trading system offers. The programmed algorithms then run, seeking out matching orders across different exchanges. The trade is executed when a compatible order has been identified in an exchange. Every exchange transacts with multiple brokerages at the same time.
Electronic trading systems are utilized by most of the stock markets today, including the New York Stock Exchange, the Nasdaq, the Bombay Stock Exchange, the National Stock Exchange in India, etc. Globex was the first stock market in the history of stock markets to be launched as an electronic trading exchange in the year 1992. Electronic trading was picked up and followed by other competitors, and the Chicago Board of Trade’s Oak Trading System was launched in 1998. Gradually the majority of the trading systems started adopting electronic trading systems.
The move to electronic trading largely came about because of the high-frequency trading that only electronic trading systems offer. High-frequency trading refers to the trading method that uses computer algorithms to execute a large number of trades simultaneously in a matter of just a fraction of a second. High-frequency trading involves speed, efficiency, and accuracy that not be achieved with electronic trading systems and their computerized algorithms.
The main disadvantage of using electronic trading systems is that they completely cut out the human judgment element. Market volatility, as well as trades of a more complex nature, often require a human touch. Since most of the trading on electronic trading systems is automated, a minor technological error results in huge losses. Such glitches are commonly rectified by regulatory bodies by ceiling trades.
The Commodity Futures Trading Commission (CFTC) is an example of an independent regulatory body in the United States. The CFTC is a federal agency that regulates the derivatives market. It oversees all electronic trading in the derivatives market to protect the market participants from manipulation and fraud through illegal or unethical trading practices. The CFTC also monitors and checks for hardware and software malfunctions as well as any threats regarding cyber-security. Since all transactions are performed using electronic systems, all information is stored and accessed by the CFTC.
What is an Order Matching System?
An order matching system is a computerized trading engine that matches and carries out trades for compatible buy and sell orders in financial exchanges, including stock markets and commodity markets. Order matching systems seek out a pair of opposite requests (one buy request and one sell request) for the same price value and automatically execute the trade on behalf of the traders. For instance, if a buyer wishes to buy a certain quantity of stock of XY for a price Z, the order matching system will seek out a seller who wishes the same quantity of XY for the price Z and carries out the transaction. Usually, a buy and sell order is matched only if the maximum price of the buy order is equal to or more than the minimum price of the sell order.
Electronic order matching was first introduced in the United States in the 1980s to supplement manual order matching on the trading floor. Before the age of computers and technology, brokers and specialists carried out the process of order matching was carried out manually. Brokers had to rely on face-to-face interactions on the trading floor to have orders matched. This process was laborious, restrictive as well as subject to inaccuracies. The Chicago Stock Exchange was the first in the world to use electronic order matching. Gradually, electronic order matching replaced manual order matching, particularly with most exchanges adopting electronic trading. The process of order matching has become completely automated since the year 2010.
Order matching systems use computerized algorithms to perform the task of order matching. By using different algorithms, different exchanges prioritize their orders differently, depending on their criteria. There are many algorithms available for order matching, but the two main kinds of algorithms that are most widely used are FIFO and Pro-Rata.
Order matching systems are of key value to electronic trading systems as it offers speed and accuracy to it. Manual order matching is subject to time lags and inaccuracies. Removing any kind of inefficiency from the matching system is of primary importance to investors and traders. A time-consuming matching system that involves the risk of inaccuracies forces buyers and sellers into deals that may not be ideal for them, thereby reducing their profits considerably. Order matching systems are therefore crucial to electronic trading, particularly with the rise of high-frequency trading.
How does Order Matching System work in Electronic Trading?
Order Matching systems work in electronic trading by seeking out compatible buying and selling orders. An order matching system uses computer algorithms to find matching orders. Orders which were matched through face-to-face interactions by brokers on the trading floor are now matched by order matching systems. Every stock exchange has its own order matching system that processes buy and sell orders for it. In an electronic trading system, it is the order matching system that undertakes the task of matching orders.
Knowing how an order matching system functions are useful to users of electronic trading. In order to undertake electronic trading, an investor or trader first sets up an online trading account that is offered by the brokerage of his choice. While setting up an account, the user also has to give his bank account details, to facilitate the electronic transfer of funds between the bank and the brokerage. Once an investor or trader has logged into his trading account, he has to select the security he wishes to buy or sell and the desired quantity as well as price. Using their technology, the brokerage then connects with exchanges that wish to sell similar securities. The order matching system of the exchange then runs its algorithm to find a compatible match by connecting with the systems from many different brokerages. Upon finding a match, the system automatically executes the order.
Instead of order matching, some exchanges offer what is known as a Request for a Quote (RFQ). RFQ are either manual or automated. RFQs give the users the choice of soliciting quotes from other market participants before the transaction is executed instead of automatically executing the trade.
How do buying and selling work in the Stock market? In the stock market, buying involves bidding to buy securities at the best price the seller will sell them at, while selling involves asking for the best price a buyer is willing to buy the securities for. Bid price refers to the maximum price a buyer is willing to buy a security for. The bid price is the opposite of the asking price. Ask price is the minimum price a seller is willing to sell the security for. For buying and selling to be executed in the stock market, the bid-ask prices have to be matched. If the maximum price of the buy order matches or exceeds the minimum price of the sale order, the buy and sell order is matched, and the trade is executed.
What are Requests for a Quote (RFQ) in Electronic Trading Systems?
Request for a Quote (RFQ) is a process by which investors and traders solicit quotes regarding the sale of securities from other market participants. The RFQ is an invitation for bids from investors and traders to wish to purchase securities. In response to an RFQ, quotes are provided by one or more interested market participants. The quote is offered to the requesting investor exclusively, and he goes ahead with the transaction if the quote is acceptable to him. Some stock exchanges offer optional RFQs to their users in place of order matching. The RFQs are manual or automated. By giving the market participant the choice of deciding on the best possible trade, RFQs ensure the transparency of the trading deals, particularly in the pre-trading phase.
RFQs function in a manner that is opposite to order matching. While order matching automatically executes the trade once a compatible match has been found, RFQs require the consent of the requesting investor before the trade is finalized. Investors decide on one quote after receiving quotes from one or more interested investors.
What is an Electronic Trading System?
An electronic trading system is a system that is designed using technology to effectuate trades electronically. Electronic trading systems are a crucial part of electron trading through which securities and financial derivatives are traded electronically. Electronic trading systems bring together buyers and sellers on a virtual marketplace as opposed to a trading floor. It allows market participants to trade directly via an Electronic Communications Network.
Using complex technology, an electronic trading system simplifies the process of trading for the market participants. Once the market participants have created online trading accounts with the brokerage of their choice, trades are carried out easily with just a few clicks of the mouse. Electronic trading systems execute several trades simultaneously per minute, making electronic trading much more efficient and speedy than face-to-face trading. In today’s world, electronic trading is of key importance as most exchanges have now adopted electronic trading. By using advanced technology, electronic trading makes trading simpler, swifter, and less subject to errors and inaccuracies.
Electronic trading systems first began to be introduced in the 1980s. Before the 1980s, trading used to take place through the face-to-face interactions of brokers on the trading floor. The exchanges were open outcry markets, where traders gathered together and executed transactions verbally and through gestures. However, with the advent of computers and advancing technology, brokerage firms, as well as their clients, realized how they could use technology to make their trading process faster and more accurate.
In 1971 NASDAQ launched its electronic automated quotation system on which the market participants could see the prices offered by other firms. In the year 1988, it added several other features and became the first stock market in the world to trade online. Globex by CME, which was launched in 1992, was the first electronic trading platform for derivatives contracts, including futures, options, and commodity contracts. Globex was launched as a one-of-a-kind electronic market that functions 24 hours a day from Sunday to Friday, irrespective of time zones and geographical boundaries. Gradually more and more exchanges started adopting the electronic mode of trading, at least partially considering the benefits that technology has to offer.
In most of the leading exchanges in the world, such as the Bombay Stock Exchange or the London Stock Exchange, electronic trading has completely replaced open outcry systems. Some of the exchanges in the United States, however, like the New York Stock Exchange (NYSE), as well as commodities exchanges such as the Chicago Board of Trade, and the Chicago Board Options Exchange, have still maintained the open outcry options in their trading floors. These also offer electronic options to users who prefer to trade electronically. The majority of the users prefer electronic trading to open outcry markets.
What is the Backup System of the Electronic Trading System?
The backup system of an electronic trading system is a centralized entity that keeps track of who owns what. The backup system ensures that all information regarding all the executed transactions is stored and is accessible to the market participants as well as the government regulators. A backup system is of key importance as it ensures that investors access their accounts to make trades whenever they desire or generate client statements. The backup system also helps to store the information required for corporate actions such as paying dividends and tax reporting. The information is also necessary for regulatory bodies such as the SEC to check for fraudulent or illegal trading practices.
What are the fundamental features of the Electronic Trading System?
The three fundamental features that are present in every electronic trading system, including all exchanges, are listed below.
- Regulating by the Securities Exchange Commission (SEC) like regulators.
All electronic trading systems are subject to reviews and checks from governmental or non-governmental regulatory bodies like the SEC. The regulatory bodies are responsible for ensuring the trades are made in a legal and ethical manner.
- Performing a high volume of transactions.
All electronic trading systems are designed to perform a high volume of transactions. An electronic trading system processes and executes several trades per minute, making electronic trading swift.
- Being open to being audited.
All electronic trading systems have to be open to being audited by the concerned regulatory bodies. Audits are conducted to ensure the transparency and accuracy of the trades made electronically.
How is Electronic Trading System Data Protected?
Electronic trading system data is protected with the help of regulators and technology. Electronic trading system data come under the protection of that country’s regulatory body that controls the securities and financial derivatives markets, such as the SEC in the United States or the SEBI in India. The regulatory bodies conduct audits and reviews to ensure that the trading data is protected and that the transactions are executed transparently. Depositories are also created in electronic trading to store and protect trading data. A depository is an entity that holds financial securities or contracts in a dematerialized form. Depositories function as recordkeepers so that even if the brokerage loses the data, the data still be accessed.
Electronic trading system data is also protected using encryption technology. Encryption technology codes the trading system data using special algorithms so that only authorized personnel access it. Technology also protects trading data using session time-outs, which cut off access to trading accounts following a duration of inactivity. Electronic trading system data protection is of key importance today with growing risks, including identity theft, fraud, illegal trading practices, and other forms of cybercrime. As more and more people turn to electronic trading, the risks involving data protection also increase. The unauthorized access and use of an investor’s details from a trading account result in financial loss for the investor.
How does Depository Trust Company Work as Recordkeeper of Electronic Stock Market?
The Depository Trust Company (DTCC) is the authority in the United States that is designated to keep a record of the electronic stock market. The DTCC maintains a repository of electronic trading system data. The DTCC repository comes in handy to investors and traders, helping them to recover their details in case the brokerage holding their trading account goes out of business. All information from an electronic trading system is stored by a designated authority according to each country’s rules.
What Trading Records are Kept by Electronic Trading System?
The trading records kept by an electronic trading system include details of the client’s brokerage account, actions undertaken by the client, dividends and capital gains due to the client, buy and sell orders made by the client as well as any other financial transaction. The trading records, which are kept by the electronic trading system, are used by the brokerage company to issue a dividend and capital gains and client statements and to make the process of tax filing easier. The stored trading records are also accessed by the clients whenever they desire.
What are the risks of an Electronic Trading System?
The main risks to electronic trading systems include technological glitches, trading glitches, and fraudulent activities. The risks to electronic trading systems have the potential of incurring losses on brokerages and affecting the functioning of the market. Even minor glitches have huge impacts on the market owing to the widespread reach of electronic trading. A Flash crash is an example of a minor glitch that has drastic impacts. A Flash crash is a trading glitch that results in the rapid fall of a stock’s price as a result of a withdrawal of orders. Flash cash is usually followed by a quick recovery in stock prices. Although the flash cash may be of a very duration, lasting just a few minutes, the damages that it causes in the short duration are long-lasting.
Technological glitches affecting electronic trading include software and hardware malfunctions that obstructs the process of trading for a period of time. Technological glitches result in market shutdowns, thereby affecting the trades drastically. Fraudulent trading activities include misuse of investor details, identity theft as well as other illegal and unethical practices that result in huge losses for investors and traders. Technological glitches and fraudulent trading activities also damage the reputation of the concerned brokerage firm. In order to rectify the losses incurred by glitches and frauds, several trades may have to be canceled by regulatory bodies.
What is Flash Crash in Electronic Trading Systems?
Flash crash in electronic trading systems refers to the scenario where there is a rapid decrease in prices as a result of a sudden increase in trading volume. Flash crash last for a short duration and shows a swift recovery within the same day. Flash crashes occur because of high-frequency trading that results in a sell-off. A sell-off is a rapid increase in the trading volume resulting in a decline in the security’s prices. The demand for the securities decreases when more securities are available to be sold than what the buyers are willing to buy. Flash crashes, thus, bring down the prices of the securities.
According to Brad Katsuyama, the CEO and Co-founders of the Investors Exchange, in the “flash-crash of 2010, where the price of some stocks briefly fell to zero, high-frequency trading played a big role in the event”. Flash crashes are particularly relevant to electronic trading as it is caused by the high-frequency trading that electronic trading systems offer. The computer algorithms that run to execute electronic trading react to the heavy selling of a security by beginning to sell huge volumes of that security very rapidly, resulting in an imbalance in the buy and sell orders. During a flash crash, the buying orders are unable to match up to the pace of the selling orders. Flash crashes are therefore prevented by including circuit breakers which will pause trading until the buy and sell orders are matched.
What are the possible technological glitches in Electronic Trading Systems?
A technological glitch in an electronic trading system is a small error that arises in the trading system. Technological glitches create a halt in all trading activities resulting in losses for the market participants. The wide reach of electronic trading adds to the gravity of the effects of technical glitches in electronic trading systems.
The two possible technological glitches in electronic trading systems are listed below.
1. Hardware malfunctions
Hardware malfunctions are those technological errors that are created by the issues arising in the physical components of the trading system. Hardware malfunctions have to be rectified by physical interventions.
2. Software malfunctions
Software malfunctions refer to technical errors that stem from issues with the computer algorithm running the system or any viruses that affect the running of the operating systems.
How to invest in a stock via Electronic Trading Systems?
The steps to invest in a stock via electronic trading systems are listed below.
- Opening a demat account and trading account
The first step to invest in stock digitally is to open a demat account and trading account in a brokerage of your choice. A demat account is a dematerialized virtual account that holds the shares you purchase. A trading account is an account that is used to purchase and sell stocks. The two accounts are created by giving the required personal details such as bank details, address proof, identity proof, etc. The two accounts are then linked with the bank account to facilitate the electronic transfer of funds between the bank and the brokerage and vice versa.
- Identifying the desired stock
The second step to investing in stock is to identify the desired stock to be purchased. The stock to be purchased is identified after researching. Researching helps to gain an understanding of the possible profits that are made by investing in that stock.
- Purchasing the desired stock
The third step to investing in stock electronically is the purchasing stage. After ensuring that there are sufficient funds available in the bank account, the chosen stock, as well as the desired units of stock, are purchased by signing into the trading account. Once a seller is willing to sell the same quantity of stock at a mutually agreed price, the purchase takes place. The money is transferred from the investor’s account, and the stocks are held in the demat account.
- Maintaining the demat and trading accounts
The fourth and final step to investing in stock digitally is maintaining the demat and trading accounts. Investors sign in and access their accounts anytime through web logins or apps. Once they have logged in, they view or update their details as well as keep a record of their investments. Should an investor wish to sell stocks, it is done through the trading account, and the transaction will be reflected in the demat account as well.
Which Matching Order Algorithms are used in Electronic Trading Systems?
Matching order algorithms are used in electronic trading systems to find compatible buy and sell orders. Matching order algorithms automatically execute trades in electronic trading by finding and executing buy and sell orders of the same price. Matching order algorithms help in making electronic trading faster, more orderly, and more efficient. Every exchange utilizes its own algorithm to match orders. However, the matching principle behind all matching algorithms falls into one of the two categories, which are FIFO and Pro-rata. FIFO algorithms work on the principle that the first buy order having the highest price will be prioritized during matching before any other order at the same price. Pro-rata algorithms, on the other hand, prioritize orders at the same price according to the size of the order.
1. FIFO Algorithm for Automated Electronic Trading System
The FIFO Algorithm for automated electronic trading systems is also known as the Price-Time-Priority Algorithm. FIFO algorithms identify the first buying order at the highest price and execute the trade with that order. FIFO algorithms give priority to the first order at a particular price before considering all other orders at the same price, unlike Pro-rata algorithms which prioritize orders depending on the order size. For example, if there is a buy order for 100 shares at Rs 90 per share and a subsequent order for 200 shares at the same price, the algorithm will first match the 100 share order from one or more sellers before going on to match the 200 shares order. The main benefit of FIFO algorithms is that they are simple and easy to implement.
2. Pro-Rata Algorithm for Automated Electronic Trading System
The Pro-Rata Algorithm in automated electronic trading systems functions as the name suggests, in a manner that is proportional to the order. The pro-rata algorithm matches orders having the same price according to the size of the order, as opposed to the FIFO algorithms, which match according to the timing of the order. For example, if there are two buy orders at the same price for 200 shares and 100 shares, when a sell order for 200 shares comes in, a pro-rata algorithm will match 150 shares in the 200 buying order and 50 from the 100 buying order. The pro-rata algorithm thus matches orders according to the percentage of the total. The main benefit of pro-rata algorithms is that all orders of a price that are active at a time will be fulfilled partially.
What is the Matching Principle in the Matching Order System?
The matching principle in a matching order system refers to the basic concept that is used to match buy and sell orders. The matching principle determines the matching algorithm that the matching order system uses. Every securities and commodities exchange has its own matching algorithm that follows its preferred matching principle. All matching algorithms are broadly classified into two based on their basic matching principle- FIFO and Pro-rata. The underlying matching principle under FIFO is that the first buy order of the highest price has to be matched first before matching any subsequent buy orders of the same price. The matching principle for FIFO algorithms, thus, prioritizes price and time. The matching principle for Pro-rata algorithms, on the other hand, functions differently. The basis of matching in Pro-rata algorithms is that all active buy orders at the same price will be matched according to the size of the orders. The matching principle for Pro-rata algorithms is thus order matching that is proportional to the order size.
Which Stock Markets use Electronic Trading?
Most stock markets today have turned to electronic trading, considering the various possibilities that technology offer.
Five of the leading stock exchanges in the world that utilize electronic trading are listed below.
- The London Stock Exchange (LSE)
The London Stock Exchange (LSE) is one of the world’s oldest stock exchanges. The LSE traces its origin back to 300 years when in 1698, it began functioning as an exchange in a coffee house. The LSE became a regulated exchange In the year 1801. In 1986, the LSE introduced electronic trading as a replacement for the open outcry floor trading system it followed until then. The transition to electronic trading was the result of the UK government’s new deregulations, which is known as the big bang in the history of the LSE. Today the LSE rivals the NYSE with respect to trade volumes and market capitalization.
- The National Association for Securities Dealers Automated Quotations (NASDAQ)
The NASDAQ is the second latest stock exchange in the United States after the NYSE. The NASDAQ traces its origins back to the year 1971, when it was launched as the world’s first fully electronic stock market. Although it functioned as a quotation system initially following its launch, from the year 1988, it started performing fully automated electronic trades.
- The New York Stock Exchange (NYSE)
The New York Stock Exchange (NYSE) is the largest stock exchange in the world. The NYSE traces its origins back to the year 1792 when it was started on the basis of a signed agreement between 24 stockbrokers. In the NYSE, trading was done in the traditional open outcry method. Traders and brokers would be present during the trading to make the dealings. Technology was first introduced on the trading floors in the 1960s. In 2007, the NYSE Hybrid Market was launched, and the NYSE listed all its stock for electronic trading. The NYSE Hybrid Market combines the use of floor trading and electronic trading. Today, it is the only stock market in the world to function in such a hybrid mode.
- The Tokyo Stock Exchange (TSE)
The Tokyo Stock exchange is the largest stock market in Japan. The TSE traces its beginnings to the year 1878, when it was created under the instructions of the finance ministry. The TSE was shut down in 1945 during the second world war and started functioning again in 1949. In 1999, the TSE officially shut down its trading floors and turned to fully electronic trading to increase the speed and accuracy of trading.
- The Bombay Stock Exchange (BSE)
The Bombay Stock exchange is the oldest stock market in Asia. The BSE traces its roots back to 1875 when it was first started by a cotton merchant, Premchand Roychand. In 1957, the BSE became the first stock exchange to obtain recognition from the Indian government. Until 1995, the BSE functioned as a traditional open outcry stock market. In 1995, the BSE switched to electronic trading. The transition of the BSE from floor trading to fully electronic trading only took 50 days. Today, It is one of the leading stock markets in the world.
Which Stock Markets Use Electronic Trading and Floor Trading together?
The New York Stock Exchange (NYSE) is the only stock market today that uses both electronic trading and floor trading. The NYSE launched its hybrid mode through the NYSE Hybrid Market, which combines electronic and floor trading, in 2007. It combines the advanced technology from electronic trading with the human judgment element from floor trading to form what they call the “high tech, high touch” trading system. The addition of the human element factor with the advanced technological possibilities of electronic trading helps the NYSE in providing lower volatility and better liquidity.
What is the History of Electronic Trading?
The history of electronic trading traces its roots to its predecessor, floor trading. Electronic trading was first invented to overcome the difficulties posed by floor trading. Floor trading involved the open outcry trading that took place on the trading floor of exchanges. Traders and brokers had to gather to execute trades through gestures and face-to-face interactions. In-person trading had limitations in terms of speed, efficiency, and accuracy. The potential improvements that technology could bring to trading became a consideration for all market participants. This led to the introduction of technology to trading floors in the 1960s. Although the transactions were still conducted in the open outcry method, screens and quotation systems began to be installed in all major stock exchanges.
Instinet, which was launched in 1967, was the first trading system that allowed market participants to make confidential deals electronically. In 1971, the NASDAQ was launched as the world’s first electronic trading system. However, until the year 1988, the NASDAQ functioned only as an automated quotation system that provided its clients with the prices other firms were offering. From the year 1988, the NASDAQ added other technological features to its trading system and started functioning as a fully automated electronic trading system.
All major stock exchanges in the world, which used to conduct trades in the traditional open outcry manner, gradually switched to electronic trading. Today, electronic trading has completely replaced traditional floor trading in almost all exchanges. Electronic trading supports high-frequency trading of large volumes and is subject to fewer errors. The New York Stock Exchange is the only stock market today to have retained floor trading along with electronic trading. The leading stock exchanges in India, such as the National Stock Exchange and the Bombay Stock Exchange, as well as other leading stock exchanges in the world, including the London Stock Exchange, Eurex, and CME Globex, have all adopted their own fully automated electronic trading systems.
What is the first electronic stock exchange?
The National Association for Securities Dealers Automated Quotations (NASDAQ) was the first electronic stock exchange to be launched in the world. The NASDAQ was instituted in 1971 as an automated quotation system. At first, it didn’t facilitate electronic trading as such but allowed its clients to view the prices that were being offered by other firms. The trades, however, were handled either over the phone or over the counter. The NASDAQ continued to add more technological features, and by 1988 it began functioning as a fully automated electronic trading system.
Does the Indian Stock Market use Electronic Trading Systems?
All leading Indian stock markets, including the Bombay Stock Exchange (BSE) and the National Stock Exchange, use electronic trading systems. The BSE, which functioned using floor trading, switched to electronic trading in 1995. The BSE’s transition to electronic trading was completed in a matter of just 50 days. The National Stock Exchange, on the other hand, was launched as an electronic trading system since its inception in 1992. It is credited for being the first dematerialized stock exchange in India.
Why does High-frequency Trading prefer Electronic Systems?
High-frequency Trading (HFT) is a form of trading that uses complex computer algorithms to perform a large number of trades within a fraction of a second. High-Frequency Trading utilizes specially designed algorithms to study the market and execute trades according to trends in the market. The computer algorithms designed for high-frequency trading are designed to pick up any emerging trends in the market in a fraction of a second. High-frequency trading increases the volume of trades taking place and contributes to improved liquidity in the market.
High-frequency Trading prefers electronic trading systems as only an electronic system is able to support the HFT’s automated trading platform that is centered around sophisticated algorithms. It requires digital tools to both create and run computer algorithms. It is the advances in computing, technology, and trading algorithms that make high-frequency trading possible. The speed and efficiency that HFT aims for not be achieved with the limitations of in-person floor trading.
What is the task of the U.S Commodity Futures Trading Commission for Electronic Trading Systems?
The U. S Commodity Futures Trading Commission (CFTC) is an independent regulatory body that is appointed by the US government to regulate the derivatives market, including futures, options, and swaps. The CFTC aims to protect investors from illegal and unethical trading practices, manipulation, and other fraudulent activities. In today’s age of electronic trading systems and cryptocurrencies, the role of the CFTC has altered from being a regulator of traditional commodity trading to regulating the products of financial technology and digital currencies. The advancements in financial technology, including algorithmic trading, the use of artificial intelligence, and machine learning, have made a significant impact on all the CFTC regulated markets. The CFTC organization regulates the electronic trading of all commodities today, ensuring that all transactions are executed in a transparent fashion. The CFTC also aims to regulate digital currencies by issuing warnings regarding suspicious and possibly fraudulent activities.
The CFTC was first established in 1974, mainly in order to regulate the futures market in the agricultural sector that existed then. The CFTC organization comprises a total of 13 operating divisions, of which the five main divisions are the Division of Market Oversight, Division of Clearing and Risk, Division of Data, Division of Enforcement, and Market Participants, Division. The role of the CFTC, however, underwent changes over the years owing to the rise and integration of new technology into financial services and digital currencies.
How does the Electronic Trading System affect Human Judgment?
Electronic trading systems affect human judgment by promoting a system of automated trading that completely eliminates the human factor. Electronic trading systems use computer algorithms instead of floor trading that draws from human judgment to identify and execute trades. Floor trading refers to the older and more traditional manner of trading where the traders and brokers gather in person on the trading floor. Floor trading involves trading through face-to-face interactions and gestures. Without the aid of technology, floor trading was more time-consuming and more subject to inaccuracies as compared to the more efficient automated electronic trading.
High-income net-worth individuals and investors, however, still prefer floor trading, particularly while making large and complex trading decisions. In such situations, the human judgment element plays a crucial role with respect to the timing and manner of the execution of trades. Floor brokers prevent the front-running of large-scale investments by using their contacts to seek out possible competitors. The experience and specialized knowledge that floor traders possess are also useful to high-net-worth individuals, particularly with regard to timing the execution of trades. The human judgment factor of floor brokers helps execute trades in a manner that does not affect the prices of the securities. In the case of electronic trading, however, trades are automatically made whenever the predetermined conditions are fulfilled, which proves disadvantageous in the case of complex, large-scale investments that are sensitive in nature.