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Electronic trading, sometimes called etrading, is a method of trading
securities (such as stocks, and bonds), foreign exchange or financial
derivatives electronically.1 Information technology is used to bring together
buyers and sellers through an electronic trading platform and network to create
virtual market places such as NASDAQ, NYSE Arca and Globex which are also known
as electronic communication networks (ECNs).
Electronic trading is in contrast to older floor trading and phone trading and has a number of advantages, but glitches and cancelled trades do still occur.
For many years stock markets were physical locations where buyers and sellers met and negotiated. Exchange trading would typically happen on the floor of an exchange, where traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another ¨C a process known as open outcry or pit trading (the exchange floors were often pit-shaped ¨C circular, sloping downwards to the centre, so that the traders could see one another). With the improvement in communications technology in the late 20th century, the need for a physical location became less important and traders started to transact from remote locations in what became known as electronic trading.3 Electronic trading made transactions easier to complete, monitor, clear, and settle and this helped spur on its development.
One of the earliest examples of widespread electronic trading was on Globex, the CME Group¡¯s electronic trading platform conceived in 1987 and launched fully in 1992.4 This allowed access to a variety of financial markets such as treasuries, foreign exchange and commodities. The Chicago Board of Trade (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.
Set up in 1971, NASDAQ was the world's first electronic stock market, though it originally operated as an electronic bulletin boardcitation needed, rather than offering straight-through processing (STP).
By 2011 investment firms on both the buy side and sell side were increasing their spending on technology for electronic trading.5 With the result that many floor traders and brokers were removed from the trading process. Traders also increasingly started to rely on algorithms to analyze market conditions and then execute their orders automatically.6
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.7
While the majority of retail trading in the United States happens 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.citation needed
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 (i.e. companies like GFI Group and BGC Partners. 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. Download