Modern financial assets trading has evolved so quickly in a few short years. Just some years ago, the ‘open outcry’ system was still a predominant way of buying and selling financial assets on various exchanges across the world. The method now has a nostalgic feel among veteran traders who crave the unique feeling of congregating on designated trading floors or pits to shout their buy and sell orders to exchange representatives. Traders always felt that interacting with other traders on the floor provided a unique atmosphere and vibe about the buying and selling experience. It was also relatively easy gauging the overall market sentiment by simply looking at investor’ faces across the floor. This method was the default way to trade in the 1970s but only left the scene as recently as 2017 in some exchanges around the world. A major pitfall for this method was distorted price discovery as well as the inability to day trade efficiently.
A Move to Phone Trading
It was in the 1980s that phone trading started coming to the fore. Exchanges would set up dedicated call centres, where investors would call representatives to place their buy and sell orders. For exchange representatives, this brought some calm and order; but for investors, there were issues about price transparency. Investors would have to confirm the prevailing price rates of the underlying stocks they wished to buy or sell with the exchange representatives. Phone trading provided some convenience to both exchanges and investors, but its glaring inefficiencies paved the way for electronic trading platforms that have revolutionised trading activity as we know today.
A Shift to Technology
Electronic trading platforms are pretty much the standard today, but they have roots as far back as 1971 when NASDAQ (National Association of Securities Dealers Automated Quotations) was formed. NASDAQ used advanced ICT systems to deliver a fully automated OTC (over the counter) trading ground. The NASDAQ protocol would shake up the financial industry, with other exchanges quickly following suit. The NYSE (New York Stock Exchange) was the first to implement a similar protocol with its DOT (Designated Order Turnaround) system that connected member companies electronically. Technological advancements enhanced the penetration and adoption of electronic platforms. These platforms were capable of processing a large number of orders quickly and efficiently. At last, all the inefficiencies and lag time of the open outcry system had been resolved; at least as far as brokerage firms and big institutions were concerned.
In the late 1990s and during the turn of the millennium, personal computers had already become available to the mainstream public and mobile phones were also emerging and becoming more and more powerful, with bigger screen sizes. There was now a need for electronic platforms that would match the needs of the modern global investor, both institutional and retail. The CME (Chicago Mercantile Exchange) was one of the first to go global, to attract all types of investors to conveniently trade options and futures using their online trading platforms. CME would later reveal in 2015 that more than 99% of trading activity on their exchange was done electronically. More brokerage firms would follow suit, offering stable, powerful and light ‘democratic’ trading platforms. The platforms would come in different forms, such as downloadable software for both desktop and mobile devices. For further convenience, there have also been web-based platforms, such as WebTrader, that are easily accessible on both mobile and desktop devices.
The growth of electronic platforms opened the doors for automated trading systems that would leverage technology to practically manage all trading decisions for investors. In its simplest form, traders would automate their trading systems by allowing computer software to trade the markets based on coded algorithms. This would eventually lead to the development of HFT (high-frequency trading) algorithms as well as AI-based black-box trading that would allow for intelligent reading, deciphering and utilisation of big data. These systems now receive multiple, relevant data and send requests to and from the exchanges. All this is done in real-time, and this is important because, in the dynamic world of finance, a piece of data can easily be considered old even if it was released a couple of seconds ago.
There is no doubt that technology has guided the evolution of trading methods. Financial markets are now easily accessible and there is greater liquidity. Investors (big or small) can now trade any financial asset in the world with minimal trading costs and greater price transparency.
Author | Emily Forbes
An Entrepreneur, Mother & A passionate tech writer in the technology industry!