GLOBAL STOCK MARKET GOES DIGITAL
For more than 200 years, buying and selling stocks has required face-to-face communication at physical exchanges during specified trading hours. But with the advent of technology, no time or distance can limit an opportunity to trade. Many stock markets have electronic trading, which is open 24 hours a day, seven days a week, and 365 days a year.
Based on Financial Insights’ 2006 research report, Top 10 Strategic IT Initiatives in Global Capital Markets for 2006: Automation Rules, new efficiencies is not a newcomer in capital markets, but rather the accelerated pace driven by economic, regulatory, and technological variables.
The Internet has shaped most processes in the world, as well as an investor’s behavior and expectations when it comes to trading. Since technology can speed up almost anything, traders seek instantaneous trading and access-to-information capabilities. Markets and regulators quickly responded to meet their online needs. Nasdaq created the first electronic stock market worldwide, which houses over 70 marketplaces in 50 countries.
Electronic communications networks (ECNs) and electronic stock exchanges are making the greatest impact on investors, responding to their technology needs. Authorized in 1998, ECN is an automated system designed to trade stocks away from an exchange. The US Congress and the Securities and Exchange Commission (SEC) aimed to escalate industry competition for automated trading in over-the-counter (OTC) markets. ECNs also provided an avenue for after-hours trading.
In ECNs, buy and sell orders with same prices are being matched for the same number of shares. But these networks have no market makers or specialists to coordinate traders. Archipelago Exchange, Bloomberg Tradebook, BRUT, and Nasdaq’s Instinet are some of the well-known ECNs today.
Certain estimates indicate ECNs attract a rapidly rising trading volume, trading more than 60% of OTC volume. However, it does not imply the demise of stock exchanges, since many exchanges have retained their traditional physical exchanges while developing their own electronic trading. Also, many investors believe automated trading cannot match an exchange’s capacity to find more precise bid and offer prices.
On the other hand, the increasing demand for faster trading and access to details will continue to establish new and more advanced electronic trading venue. NYSE Arca is the product of a merger between the New York Stock Exchange and the Archipelago Holdings. With more than 8,000 securities, enabling investors to place orders through the fully-electronic exchange, its new automated trading platform, or conventional floor brokers. Large or complex orders will still be routed through floor traders. Also, brokers can purchase and sell NYSE-listed stocks online.
And the exchanges have not stopped its expansion. In June 2006, it acquire Euronext, a pan-European stock exchange, for $20 billion. Also, Nasdaq purchased a portion of the London Stock Exchange.
Electronic trading is more than a revolution. It has evolved and stepped up the landscape of global stock market. Thanks to technologies, it have unveiled new, fast ways to trade stocks, as well as access to pools of capital around the world.
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