Electronic trading platform

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An electronic trading platform being used at the Deutsche Borse. Deutsche-boerse-parkett-ffm008.jpg
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.

Contents

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

Financial transactions had traditionally been handled manually, between brokers or counterparties. [3] However, starting in the 1970s, financial transactions started to migrate to electronic trading platforms. Platforms and trading venues included 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 could be used to place various orders and were 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

Related Research Articles

<span class="mw-page-title-main">Nasdaq</span> American stock exchange

The Nasdaq Stock Market 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 of stock exchanges by market capitalization of shares traded, behind the New York Stock Exchange. The exchange platform is owned by Nasdaq, Inc., which also owns the Nasdaq Nordic stock market network and several U.S.-based stock and options exchanges. Although it trades stock of healthcare, financial, media, entertainment, retail, hospitality, and food businesses, it focuses more on technology stocks. The exchange is made up of both American and foreign firms, with China and Israel being the largest foreign sources.

<span class="mw-page-title-main">Day trading</span> Buying and selling financial instruments within the same trading day

Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. Day trading may require fast trade execution, sometimes as fast as milli-seconds in scalping, therefore direct-access day trading software is often needed.

TradeStation Group, Inc. is the parent company of online securities and futures brokerage firms and trading technology companies. It is headquartered in Plantation, Florida, and has offices in New York; Chicago; Richardson, Texas; London; Sydney; and Costa Rica. TradeStation is best known for the technical analysis software and electronic trading platform it provides to active traders and certain institutional trader markets. TradeStation Group was a Nasdaq GS-listed company from 1997 to 2011, until it was acquired by Monex Group, a Tokyo Stock Exchange-listed parent company of one of Japan's leading online securities brokerage firms.

An electronic communication network (ECN) is a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges. An ECN is generally an electronic system accessed by an electronic trading platform that widely disseminates orders entered by market makers to third parties and permits the orders to be executed against them in whole or in part. The primary products that are traded on ECNs are stocks and currencies. ECNs are generally passive computer-driven networks that internally match limit orders and charge a very small per share transaction fee.

The OTC (Over-The-Counter) Bulletin Board or OTCBB was a United States quotation medium operated by the Financial Industry Regulatory Authority (FINRA) for its subscribing members. FINRA closed the OTCBB on November 8, 2021.

The Small-Order Execution System (SOES) was a system to facilitate clearing trades of low volume on Nasdaq. It has been phased out and is no longer necessary.

Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders. In the twenty-first century, algorithmic trading has been gaining traction with both retail and institutional traders. A study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.

A financial quotation refers to specific market data relating to a security or commodity. While the term quote specifically refers to the bid price or ask price of an instrument, it may be more generically used to relate to the last price which this security traded at. This may refer to both exchange-traded and over-the-counter financial instruments.

<span class="mw-page-title-main">Electronic trading</span> Trading financial products online

Electronic trading, sometimes called e-trading, is the buying and selling of stocks, bonds, foreign currencies, financial derivatives, cryptocurrencies, and other financial instruments online. This is typically done using electronic trading platforms where traders can place orders and have them executed at a trading venue such as a stock market either directly or via a broker.

Direct market access (DMA) in financial markets is the electronic trading infrastructure that gives investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies and other private traders use the information technology infrastructure of sell side firms such as investment banks and the market access that those firms possess, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies. Certain forms of DMA, most notably "sponsored access", have raised substantial regulatory concerns because of the possibility of a malfunction by an investor to cause widespread market disruption.

An automated trading system (ATS), a subset of algorithmic trading, uses a computer program to create buy and sell orders and automatically submits the orders to a market center or exchange. The computer program will automatically generate orders based on predefined set of rules using a trading strategy which is based on technical analysis, advanced statistical and mathematical computations or input from other electronic sources.

In finance, a dark pool is a private forum for trading securities, derivatives, and other financial instruments. Liquidity on these markets is called dark pool liquidity. The bulk of dark pool trades represent large trades by financial institutions that are offered away from public exchanges like the New York Stock Exchange and the NASDAQ, so that such trades remain confidential and outside the purview of the general investing public. The fragmentation of electronic trading platforms has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements. Generally, dark pools are not available to the public, but in some cases, they may be accessed indirectly by retail investors and traders via retail brokers.

Payment for order flow (PFOF) is the compensation that a stockbroker receives from a market maker in exchange for the broker routing its clients' trades to that market maker. The market maker profits from the bid-ask spread and rebates a portion of this profit to the routing broker as PFOF. Another fraction of a penny per share may be routed back to the consumer as price improvement.

High-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons in trading securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.

Flash trading, otherwise known as a flash order, is a marketable order sent to a market center that is not quoting the industry's best price or that cannot fill that order in its entirety. The order is then flashed to recipients of the venue's proprietary data feed to see if any of those firms wants to take the other side of the order.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

<span class="mw-page-title-main">MetaTrader 4</span> Electronic trading software

MetaTrader 4, also known as MT4, is an electronic trading platform widely used by online retail foreign exchange speculative traders. It was developed by MetaQuotes Software and released in 2005. The software is licensed to foreign exchange brokers who provide the software to their clients. The software consists of both a client and server component. The server component is run by the broker and the client software is provided to the broker's customers, who use it to see live streaming prices and charts, to place orders, and to manage their accounts.

MT4 ECN Bridge is a technology that allows a user to access the interbank foreign exchange market through the MetaTrader 4 (MT4) electronic trading platform. MT4 was designed to allow trading between a broker and its clients, so it did not provide for passing orders through to wholesale forex market via electronic communication networks (ECNs). In response, a number of third-party software companies developed Straight-through processing bridging software to allow the MT4 server to pass orders placed by clients directly to an ECN and feed trade confirmations back automatically.

<span class="mw-page-title-main">Virtu Financial</span> Financial services company

Virtu Financial is an American company that provides financial services, trading products and market making services. Virtu provides product suite including offerings in execution, liquidity sourcing, analytics, broker-neutral, multi-dealer platforms in workflow technology and two-sided quotations and trades in equities, commodities, currencies, options, fixed income, and other securities on over 230 exchanges, markets, and dark pools. Virtu uses proprietary technology to trade large volumes of securities. The company went public on the Nasdaq in 2015.

<span class="mw-page-title-main">Interactive Brokers</span> American financial services firm

Interactive Brokers, Inc. (IB), headquartered in Greenwich, Connecticut, is an American multinational brokerage firm which operates the largest electronic trading platform in the United States by number of daily average revenue trades. In 2023, the platform processed an average of 3 million trades per trading day. Interactive Brokers is the largest foreign exchange market broker and is one of the largest prime brokers servicing commodity brokers. The company brokers stocks, options, futures contracts, exchange of futures for physicals, options on futures, bonds, mutual funds, currency, cryptocurrency, contracts for difference, derivatives, and event-based trading contracts on election and other outcomes. Interactive Brokers offers direct market access, omnibus and non-disclosed broker accounts, and provides clearing services. The firm has operations in 34 countries and 27 currencies and has 2.6 million institutional and individual brokerage customers, with total customer equity of US$426 billion as of December 31, 2023. In addition to its headquarters in Greenwich, on the Gold Coast of Connecticut, the company has offices in major financial centers worldwide. More than half of the company's customers reside outside the United States, in approximately 200 countries.

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. 1 2 McGowan, Michael J. (2010–2011). "The Rise of Computerized High Frequency Trading: Use and Controversy". Duke Law & Technology Review. 9: [1].
  7. 1 2 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. 1 2 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. 1 2 3 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.
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