77. Internet/ Electronic trading (etrading) as a part of financial services market infrastructure

Electronic trading, sometimes called etrading, is a method of trading securities (such as stocks, and bonds), foreign exchange or financial derivatives electronically. 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 rapidly replacing human trading in global securities markets.

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.

The idea of electronic trading is not new. In 1971, Fischer Black suggested steps toward a fully automated exchange that would eliminate the need for specialists and market-makers. He noted that “a stock exchange can be embodied in a network of computers, and the costs of trading can be sharply reduced, without introducing any additional instability in stock prices.

ECNs have a number of advantages.

1) They are automatic. Once an order is submitted, trade execution proceeds without human intervention according to price/time priority, unlike traditional markets, where orders might be held by dealers.

2) They are anonymous. The identity of traders is not revealed, which can be of importance to certain traders.

3) They are low cost. ECNs earn income by charging a fee to market orders of about 3 cents per share, while they pay for orders that supply liquidity.

4) They are fast. Execution and confirmation are electronic and occur in less than a second.

5) They can be programmed to offer complex orders.

Internet Trading Service is a service provided by the brokerage firm to its customers, enabling them to trade in securities by entering buy and sell orders to the electronic trading system for themselves through the use of the Internet.

Therefore, the investor who wishes to trade securities through the Internet must realize that such mechanism is considerably and substantially different from the traditional method. The investor monitors the prices of securities in real time, in addition to other trading information and any information made available to him by the broker, so that he will then enter his own buy and sell orders without the need to contact the broker and authorize him to do so. Therefore, the investor should fully realize that he is the purchase or sale decision maker and he is responsible for the execution of such decision through entering the appropriate order into the electronic trading (or "e-trading") system through the program made available by the broker to his clients.

Advantages of Internet Trading:

• Enables the investors to follow the course of trading in real time regardless of their geographical location.

• Enables the investors to enter buy and sell orders immediately in light of perceived investment opportunities.

• Enables the investors to follow-up and management their entered orders and investment portfolios in real time.

• Attracts attention of new investors whether locals or foreigners.

• Increases the base of securities dealers.

• Increases the depth and liquidity of the market and high trading volumes.

Algorithmic trading uses mathematical models to determine the optimal time and venue(s) to execute a buy or sell order. The algorithms are designed to analyze market data and trends continuously in order to execute an investor’s orders as efficiently as possible.

Electronic markets have brought numerous benefits to investors of all types. These benefits include the following:

Lower Volatility

Increased Liquidity

Reduced Transaction Costs

Smaller Bid / Ask Spreads

Improved Price Discovery

Enhanced Risk Management