User:Pawnsacrifice/Electronic trading platform
An electronic trading platform is a piece of computer software that allows users to place orders for financial products over a network with a financial intermediary. 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 software typically allows users to monitor live prices and search through catalogs of financial products.
These platforms are available on mobile, but usually have a website counterpart. Some more specialized software may require local installation.
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History[edit]
Before the advent of electronic trading, person-to-person trades were made on physical exchanges for centuries in the U.S. [1] The NYSE was by far the most influential of these exchanges and operated on open outcry, which was a system of hand signals and verbal communication used by participants to place trades. In 1971, Nasdaq was created by the National Association of Securities dealers and operated entirely electronically on a computer network.[2] It rapidly gained popularity and by 1992, it accounted for 42% of trade volume in the US.[3] With the advent of electronic financial markets, electronic trading platforms soon also came into existence. In 1992, Globex became the first electronic trading platform to reach the market.[4] E*Trade, a company that started as an online brokerage service, soon also launched its own platform aimed at the consumer.[5] These platforms rapidly gained popularity with E*Trade's growth rate at 9% per month in 1999.[5]
Regulations[edit]
Over the years, many regulations have been introduced, both to increase retail activity on electronic platforms and reduce potential fraud on these platforms[6]. For example, requiring platforms to comply with enhanced pre- and post-trade transparency requirements have provided strong incentive for users to trust electronic trading platforms[6].
Information reporting[edit]
In 1995[7], 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.[8]
Order Handling Rules[edit]
To address growing concerns about market fragmentation,[8] which led to some Nasdaq market makers on Instinet to quote prices that were better than their own quotes on Nasdaq, 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.[8] Another Order Handling Rule required a market maker to display the price and size of any customer limit order that either increased size at the quoted price or improved the market maker’s quotation.[8]
Decimalization[edit]
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 significantly lowered margins, forcing big dealers to utilize electronic management systems and eventually leading to lowered trading costs. This allowed algorithmic trading to take off.[9]
Features[edit]
Many investors rely on information provided by trading platforms to influence trading decisions.[10] This information can include, but is not limited to, access to historical data, current news, APIs, portfolio tracking, and reviews of certain commodities by independent firms.[10]
Historical data[edit]
Electronic trading platforms often provide historical data, including graphs, to their customers to inform trading decisions.[10] These graphs can often be expanded to include a wide-range of dates, and can be used in a technical analysis of a certain instrument.[10] For example, online brokerage E-Trade provides metrics including analyst recommendations, price targets, income statements, and data on past performance.[11]
Current news[edit]
Traders often like to use current news to inform decisions of their trades.[10] (an extremely vague and anecdotal statement) This can include articles on specific companies, or updated ratings given by independent firms specializing in certain commodities.[10] On some applications, this allows retail traders to have access to the same information their professional counterparts.[11] Notably, Robinhood features market news for their assets, and sends push notifications close to earning events.[11]
Portfolio tracking[edit]
Another feature commonly found on trading platforms is the ability to track the user’s portfolio, and this can influence trades based on how a trader has been performing.[10] For example, E-Trade displays the assets included in a user's portfolio, and compares them to sample portfolios. [11]
APIs[edit]
Electronic trading platforms also commonly provide application programming interfaces (APIs) that allow users to execute trades, view current and historical data, and evaluate trading performance[12]. These APIs are often used with algorithmic trading strategies[12].
Controversies[edit]
Robinhood/WallStreetBets[edit]
One of the most famous controversies involved the GameStop short squeeze, where thousands of retail investors attempted to short squeeze the GameStop stock, causing many electronic trading platforms, most notably Robinhood, to halt the buying of the GameStop stock[13]. This proved to be a major controversy, as many people felt trading platforms shouldn’t have the ability to halt only the buying or only the selling of a specific stock, as this can cause a stock’s price to swing in a platform's favor[13].
Dark Pool Trading[edit]
Barclays and Credit Suisse were fined $154M in 2014 for allowing high-frequency traders to exploit the banks’ dark pool exchanges on their trading platform[14]. Dark pools are private exchanges for trading commodities such as stocks and bonds, where there aren't any public prices and trades do not have to be documented[14]. The controversy arose when Barclays and Credit Suisse told clients that it monitored their platforms for high-speed traders, leading clients to believe traders weren't up against algorithms, when they were actually trading with aggressive high-speed traders[14]. Credit Suisse ended up paying $24.3 million in disgorgement to repay losses[14].
Alt Exchange Controversies[edit]
The electronic cryptocurrency exchange Binance has been under investigation by the U.S. for “Money-Laundering and Tax Sleuths".[11] The DOJ and IRS believe that Binance has been used as a vehicle to finance illegal international activities. [11]
Additionally, the SEC indicted the cofounder and current CEO of Ripple Labs, Inc. for raising over 1.3 billion dollars through the sale of the digital asset XRP in an unregistered securities offering. The director of the SEC alleged that the businessmen "deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system."[15] After the lawsuit was filed, XRP's price fell by 25%.[16]
Design[edit]
Some popular electronic trading platforms today use a simple interface to minimize trading friction. For example, Robinhood, uses a "minimalist" interface and straightforward colors such as green and red to indicate profit/loss. In addition, as described by Robinhood's UI designer, the use of a familiar swipe up gesture to execute trades further reduces trading friction.[17]
In contrast, E*Trade's interface prominently displays metrics such as analyst recommendations, price targets, income statements, and performance. As a result, the user interface is much less minimalist in nature and this increased complexity encourages investors to make trades in a more measured manner.[17]
While Robinhood's low friction approach has been associated with increased trader performance, E*trade's interface appears to engender greater risk management in traders.[17][18]
Effects[edit]
Algorithmic trading[edit]
With the development of electronic trading platforms, the bar to entering algorithmic trading has been vastly lowered. Many platforms provide APIs that allow users to place orders directly from their code. These platforms also typically provide methods for algorithm designers to obtain market data. For example, the trading platform Interactive Brokers provides an API for users to obtain market data and place trades from within custom programs.[10] Alpaca is another popular platform specifically designed for algorithmic trading that offers clear documentation for a variety of languages and provide testing functionality in their API.[10]
High Frequency Trading(HFT) is a subset of algorithmic trading that involves buying and selling small deal sizes in a very short amount of time.[3] Traders attempt to make money through short term predictions, arbitrage across different markets, or market making.[3] These strategies naturally benefit from low latency and low execution time; as a result, firms must develop and continually update their own custom trading platforms.[3]
References[edit]
- ^ 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.
- ^ "The Death Of The Trading Floor". Investopedia. Retrieved 2021-10-28.
- ^ a b c d Goldstein, Michael A.; Kumar, Pavitra; Graves, Frank C. (2014-04-07). "Computerized and High-Frequency Trading". Financial Review. 49 (2): 177–202. doi:10.1111/fire.12031. ISSN 0732-8516.
- ^ "What Is Globex?". Investopedia. Retrieved 2021-10-28.
- ^ a b Wu, Jennifer (June 1999). "Online Trading: An Internet Revolution" (PDF). MIT.
{{cite web}}: CS1 maint: url-status (link) - ^ a b Bech, Morten L.; Illes, Annamaria; Lewrick, Ulf; Schrimpf, Andreas (2016-03-06). "Hanging Up the Phone - Electronic Trading in Fixed Income Markets and its Implications". Rochester, NY.
{{cite journal}}: Cite journal requires|journal=(help) - ^ "SEC Rules". Securities and Exchange Commission.
{{cite web}}: CS1 maint: url-status (link) - ^ a b c d Mahoney, Paul G.; Rauterberg, Gabriel V. (2017-04-19). "The Regulation of Trading Markets: A Survey and Evaluation". Rochester, NY.
{{cite journal}}: Cite journal requires|journal=(help) - ^ Kim, Kendall (2010-07-27). Electronic and Algorithmic Trading Technology: The Complete Guide. Academic Press. ISBN 978-0-08-054886-9.
- ^ a b c d e f g h i de Campos Costa, Allan (2003-05-09). "Critical Success Factors for Stock Brokerage over the Internet: An Exploratory Study in the Brazilian Market under the Perspective of the Investor". AIS Electronic Library. Retrieved 2021-10-25.
{{cite web}}: CS1 maint: url-status (link) Cite error: The named reference ":1" was defined multiple times with different content (see the help page). - ^ a b c d e f g Chaudhry, Sayan; Kulkarni, Chinmay (2021-06-28). "Design Patterns of Investing Apps and Their Effects on Investing Behaviors". Designing Interactive Systems Conference 2021. Virtual Event USA: ACM: 777–788. doi:10.1145/3461778.3462008. ISBN 978-1-4503-8476-6. Cite error: The named reference ":4" was defined multiple times with different content (see the help page).
- ^ a b Salkar, Tanishq; Shinde, Aditya; Tamhankar, Neelaya; Bhagat, Narendra (2021-06-25). "Algorithmic Trading using Technical Indicators". 2021 International Conference on Communication information and Computing Technology (ICCICT): 1–6. doi:10.1109/ICCICT50803.2021.9510135.
- ^ a b Smith, Kelly Anne (2021-01-28). "Robinhood Halts GameStop Trading, Angering Lawmakers And Investors". Forbes Advisor. Retrieved 2021-11-05.
- ^ a b c d "Barclays and Credit Suisse pay biggest ever fines for dark pool trading". the Guardian. 2016-01-31. Retrieved 2021-11-05.
- ^ "SEC.gov | SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering". www.sec.gov. Retrieved 2021-11-02.
- ^ Browne, Ryan (2020-12-23). "Cryptocurrency XRP plunges 25% after SEC files lawsuit against Ripple". CNBC. Retrieved 2021-11-02.
- ^ a b c Chaudhry, Sayan; Kulkarni, Chinmay (2021-06-28). "Design Patterns of Investing Apps and Their Effects on Investing Behaviors". Designing Interactive Systems Conference 2021. Virtual Event USA: ACM: 777–788. doi:10.1145/3461778.3462008. ISBN 978-1-4503-8476-6.
- ^ Tan, Gordon Kuo Siong (2021-11-01). "Democratizing finance with Robinhood: Financial infrastructure, interface design and platform capitalism". Environment and Planning A: Economy and Space. 53 (8): 1862–1878. doi:10.1177/0308518X211042378. ISSN 0308-518X.