Electronic trading platform

An electronic trading platform being used at the Deutsche Börse.

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 can be traded by the trading platform, over a communication network with a financial intermediary or directly between the participants or members of the trading platform. This includes products such as stocks, bonds, currencies, commodities, derivatives and others, with a financial intermediary such as brokers, market makers, Investment banks or stock exchanges. Such platforms allow electronic trading to be carried out by users from any location and are in contrast to traditional floor trading using open outcry and telephone-based trading. Sometimes the term trading platform is also used in reference to the trading software alone.

Electronic trading platforms typically stream live market prices on which users can trade and may provide additional trading tools, such as charting packages, news feeds and account management functions. Some platforms have been specifically designed to allow individuals to gain access to financial markets that could formerly only be accessed by specialist trading firms using direct market access. They may also be designed to automatically trade specific strategies based on technical analysis or to do high-frequency trading.

Electronic trading platforms are usually mobile-friendly and available for Windows, Mac, Linux, iOS and Android, making market entry easier and helping with the surge in Retail Investing.[1]

Etymology

The term 'trading platform' is generally used to avoid confusion with 'trading system' which is more often associated with the trading method or strategy than the computer system used to execute orders within financial circles.[2] In this case, platform is used to mean a type of computing system or operating environment such as a database or other specific software.

Historic development

Transactions have traditionally been handled manually, between brokers or counterparties.[3] However, starting in the 1970s, a greater portion of transactions have migrated to electronic trading platforms. These may include electronic communication networks, alternative trading systems, "dark pools" and others.[4]

The first electronic trading platforms were typically associated with stock exchanges and allowed brokers to place orders remotely using private dedicated networks and dumb terminals. Early systems would not always provide live streaming prices and instead allowed brokers or clients to place an order which would be confirmed some time later; these were known as 'request for quote' based systems.

In 1971, Nasdaq was created by the National Association of Securities Dealers and operated entirely electronically on a computer network. Nasdaq was opened on 8 February 1971.[5] It rapidly gained popularity and by 1992, it accounted for 42% of trade volume in the US.[6]

With the advent of electronic financial markets, electronic trading platforms were also soon launched. In 1992, Globex became the first electronic trading platform to reach the market. E-Trade, a company that started as an online brokerage service, soon also launched its own platform aimed at the consumer.[7] These platforms rapidly gained popularity with E-Trade's growth rate at 9% per month in 1999.[7] In the late 2000s, with the emergence of digital tools, a new generation of investment companies started to appear, which began to offer services to assist non-professional investors in trading. In 2007, a multi-asset investment company eToro was founded, focusing on copy trading, social trading, and other types of trading services.[8] In 2017, the bitcoin exchange Binance was founded.[9]

Trading systems evolved to allow for live streaming prices and near instant execution of orders as well as using the internet as the underlying network meaning that location became much less relevant. Some electronic trading platforms have built-in scripting tools and even APIs allowing traders to develop automatic or algorithmic trading systems and robots.[6]

The client graphical user interface of the electronic trading platforms can be used to place various orders and are also sometimes called trading turrets (though this may be a misuse of the term, as some refer to the specialized PBX phones used by traders).

During the period from 2001 to 2005, the development and proliferation of trading platforms saw the setting up of dedicated online trading portals, which were electronic online venues with a choice of many electronic trading platforms rather than being restricted to one institution's offering.[10]

Regulations

Information Reporting

In 1995, the U.S. Securities and Exchange Commission (SEC) promulgated Rule 17a-23, which required any registered automated trading platform to report information, including participants, orders, and trades every quarter.[11] Requiring platforms to comply with enhanced pre- and post-trade transparency requirements has provided a stronger incentive for users to trust electronic trading platforms.[12]

Order Handling Rules

Market fragmentation led some Nasdaq market makers on Instinet to quote prices that were better than their own quotes on Nasdaq. To address this discrepancy, the SEC introduced the Order Handling Rules in 1996. These rules required stock exchange specialists and Nasdaq market makers to publicly display any price quoted on a proprietary trading system that represented an improvement of their displayed prices. Another order handling rule required a market maker to display the size and price of any customer limit order that either increased size at the quoted price or improved the market maker's quotation.[11]

Decimalization

Decimalization was instituted in 2001 by the SEC, requiring market makers to value financial instruments by increments of $0.01 as opposed to the previous standard of $.0625. This change significantly lowered margins, providing an incentive for big dealers to utilize electronic management systems and eventually leading to lowered trading costs.[13]

Features

Historical data

Electronic trading platforms frequently provide historical data, including graphs, to help their customers make trading decisions. These diagrams may be expanded to contain a large number of dates and are frequently employed in technical analyses of particular instruments.[14]

Current news

To help consumers make decisions about their contracts, trading platforms frequently include recent news. Articles on certain businesses may be included, as well as updated ratings provided by independent companies that focus on particular commodities.[14] The same information that professional traders have access to is available to retail traders on different applications due to specialized news.[15]

Portfolio tracking

The user's portfolio can be tracked, which is another function that is frequently seen on trading platforms and can have an impact on trades based on a trader's past performance.[14]

See also

References

  1. ^ Mecane, Joseph (9 July 2020), Citadel Securities' Mecane Says Volatility Behind Rise in Retail Investing, Bloomberg.com, retrieved 2023-04-18
  2. ^ "Trading Platforms". IBS Intelligence. Retrieved 10 June 2010.
  3. ^ Weber, Bruce W. (2006-05-01). "Adoption of electronic trading at the International Securities Exchange". Decision Support Systems. Economics and Information Systems. 41 (4): 728–746. doi:10.1016/j.dss.2004.10.006. ISSN 0167-9236.
  4. ^ Lemke and Lins, Soft Dollars and Other Trading Activities, §§2:25–2:29 (Thomson West, 2013–2014 ed.).
  5. ^ "What Is NASDAQ?". Business News Daily. Retrieved 2023-04-18.
  6. ^ a b McGowan, Michael J. (2010–2011). "The Rise of Computerized High Frequency Trading: Use and Controversy". Duke Law & Technology Review. 9: [1].
  7. ^ a b Wu, Jennifer (June 1999). "Online Trading: An Internet Revolution" (PDF). MIT.
  8. ^ "Israeli social trading firm eToro raises $100 million in private funding". Reuters. 2018-03-23. Retrieved 2023-05-21.
  9. ^ Knauth, Dietrich (2023-03-10). "US government appeals approval of Voyager sale to Binance.US". Reuters. Retrieved 2023-05-21.
  10. ^ Wu, Jennifer; Siegel, Michael; Manion, Joshua. "Online Trading: An Internet Revolution" (PDF).
  11. ^ a b Mahoney, Paul G.; Rauterberg, Gabriel V. (19 April 2017). "The Regulation of Trading Markets: A Survey and Evaluation". Virginia Law and Economics Research Paper No. 2017-07.
  12. ^ Garvey, Ryan; Wu, Fei (2010-11-01). "Speed, distance, and electronic trading: New evidence on why location matters". Journal of Financial Markets. 13 (4): 367–396. doi:10.1016/j.finmar.2010.07.001. ISSN 1386-4181.
  13. ^ Kim, Kendall (2010-07-27). Electronic and Algorithmic Trading Technology: The Complete Guide. Academic Press. ISBN 978-0-08-054886-9.
  14. ^ a b c de Campos Costa, Allan; Joia, Luiz (December 2003). "Critical Success Factors for Stock Brokerage over the Internet: An Exploratory Study in the Brazilian Market under the Perspective of the Investor". Association for Information Systems AIS Electronic Library.
  15. ^ Chaudhry, Sayan; Kulkarni, Chinmay (2021-06-28). "Design Patterns of Investing Apps and Their Effects on Investing Behaviors". Designing Interactive Systems Conference 2021. ACM. pp. 777–788. doi:10.1145/3461778.3462008. ISBN 978-1-4503-8476-6.