Electronic trading uses computer technology to bring buyers and sellers together in a virtual market place, rather than on a trading floor. Nearly all the exchanges in the U.S. and Europe have some kind of electronic platform, instead of or in addition to trading on the floor. NASDAQ was the first all-electronic stock exchange. NYSE Arca and Globex are examples of exchange-owned electronic trading platforms.
Electronic trading, either directly with counterparties or through an on-line intermediary, has transformed traditional methods of trading through exchanges. Rather than join the exchange and trade from the floor, Institutional investors, broker-dealers and market-makers can trade directly via an Electronic Communications Network, or ECN, which automatically matches buy and sell orders at specified prices. ECNs register with the SEC as broker-dealers.
Individual investors and retail traders usually access ECNs through an account with a broker-dealer subscriber that allows the trader access to its trading platform, which lets customers do research and execute orders from their computers. Platforms usually differ by the markets they trade - commodity futures, options, stocks or currencies (forex) - although brokers that trade all markets will generally offer separate trading platforms for each. Long-time online-trading powerhouse TradeStation recently took the industry's top award for electronic brokerage on the strength of it trading-platform technology.
Initially, electronic trading was done only "after-hours" and just augmented trading during regular exchange hours. Exchanges promised this electronic "after-hours trading" would not supplant the trading floor, but competitive challenges from newer electronic trading platforms eventually forced the exchanges to offer daytime electronic markets as well.
NASDAQ, founded in 1971, was the world's first electronic stock exchange.
In the futures world, Europe was ahead of the U.S. in closing down the trading floors and moving to electronic trading. Open outcry exchanges such as the Chicago Board of Trade were slower to adopt electronic trading because of their member-owned governance structure, in which every major decision had to be voted on by 2,171 exchange members whose livings depended on the pits.
Barron's magazine's top-10 electronic brokerages, ranked in March 2008
- TradeStation Securities
- Interactive Brokers
- Fidelity Investments
- MB Trading
- Muriel Siebert
- E*Trade Securities
- Trading Platforms. YourTradingSystem.com.
- Making It Click: Annual Ranking Of the Best Online Brokers. Barron's.
- Electronic Trading's Past & Future. SFO Magazine.
- Electronic Trading History Timeline. Google.
- CBOT Gazes into the Pit. Fortune.