Finance:Electronic trading platform

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Short description: Software for trading financial products

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. These products include products such as stocks, bonds, currencies, commodities, and derivatives. The first widespread electronic trading platform was Nasdaq. The availability of such trading platforms to the public has encouraged a surge in retail investing.[1]

These platforms are available on mobile devices, but may provide a website counterpart or Application Programming Interface (API).

Historic development

Before the advent of electronic trading, person-to-person trades were made on physical exchanges for centuries in the U.S.[2] The NYSE was by far the most prominent 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.[3] It rapidly gained popularity and by 1992, it accounted for 42% of trade volume in the US.[4] With the advent of electronic financial markets, electronic trading platforms were also soon launched. In 1992, Globex became the first electronic trading platform to reach the market.[5] E*Trade, a company that started as an online brokerage service, soon also launched its own platform aimed at the consumer.[6] These platforms rapidly gained popularity with E*Trade's growth rate at 9% per month in 1999.[6]

Effects on Latency

As of 2007, a broker cannot fulfill an order flow without some electronic technology involved.[7] The accessibility of trading outside of a floor trading center has drastically increased the amount of market participants who are not a part of the financial industry. These participants, or retail traders, grew to account for 25% of the stock market's activity in 2020.[1]

With investors not needing to visit a floor exchange such as the NYSE, trade execution over longer-range networks has caused discrepancies in trading speed.[8] The travel of data over the Internet, incurring many network switches, also brings on additional time delays.[8] The trade of a stock closer to market central computers in the NYC area executes 2.8% faster than one outside of the NYC area.[8] A trade in the NYC area experiences a bid-ask spread 0.75 cents lower than one outside NYC, reducing aggregated costs significantly.[8]

This encourages traders within the NYC area to adopt strategies that harness their advantage of speed.[8] Some exchanges offer co-location: the benefit of executing trading algorithms near large central computers remotely.[8] Co-location's demand quickly grew for trading organizations. From 2008 to 2010 alone, NASDAQ's co-location business grew 25%, and companies began executing fully automated trades to take advantage of the reduced latency.[8]

Regulations

Information reporting

In 1995,[9] 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.[10] Requiring platforms to comply with enhanced pre- and post-trade transparency requirements has provided a stronger incentive for users to trust electronic trading platforms.[8]

Order Handling Rules

Market fragmentation[10] led some Nasdaq market makers on Instinet to quote prices that were better than their own quotes on Nasdaq. To address this discrepancy, the SEC introduced the Order Handling Rules in 1996.[10] 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.[10] Another Order Handling Rule required a market maker to display the size and price of any customer limit order that either increased size at the quoted price or improved the market maker's quotation.[10]

Decimalization

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.[11] This change significantly lowered margins, providing an incentive for big dealers to utilize electronic management systems, and eventually lead to lowered trading costs.[11]

Features

Historical Data

Electronic trading platforms often provide historical data, including graphs, to their customers to inform trading decisions.[12] 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.[12] For example, online brokerage E-Trade provides metrics including analyst recommendations, price targets, income statements, and data on past performance.[13]

Current News

Trading platforms often provide current news to inform users' decisions of their trades.[12] This can include articles on specific companies, or updated ratings given by independent firms specializing in certain commodities.[12] On some applications, this specialized news allows retail traders to have access to the same information their professional counterparts.[7] Notably, Robinhood features market news for their assets, and sends push notifications close to earning events.[7]

Portfolio Tracking

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.[12] For example, E-Trade displays the assets included in a user's portfolio, and compares them to sample portfolios.[7]

APIs

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.[14] These APIs are often used with algorithmic trading strategies.[14]

Controversies

Robinhood

One of the most famous controversies involved the GameStop short squeeze, where thousands of retail investors attempted to short squeeze the GameStop stock.[15] Due to alleged concern about the harms of short-term volatility, Robinhood halted the purchase of the GameStop stock.[16] The trading platform's ability to halt the purchase or the sell of a specific stock proved controversial, as the subsequent reduction in volume can cause a stock's price to swing in a platform's favor.[15]

Dark Pool Trading

Dark pools are private exchanges for trading commodities such as stocks and bonds that are not accessible to the public, and offer secrecy surrounding trade execution.[17] Barclays and Credit Suisse were fined $154M in 2014 for allowing high-frequency traders to exploit the dark pool exchanges on their trading platform.[17] The controversy arose when Barclays and Credit Suisse told clients that it was monitoring their platforms for high-speed traders, but in reality permitted "the most aggressive and predatory high-speed traders".[17] Credit Suisse ended up paying $24.3 million in disgorgement to repay losses.[17]

Alt Exchange Controversies

The electronic cryptocurrency exchange Binance has been under investigation by the U.S. in 2021 for money-laundering and tax evasion.[13] The DOJ and IRS believe that Ripple used Binance to finance illegal international activities.[7]

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."[18] After the lawsuit was filed, XRP's price fell by 25%.[19]

Design

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.[7]

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.[7]

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.[7][20]

Algorithmic Trading

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.[21] 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.[12]

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.[4] Traders attempt to make money through short term predictions, arbitrage across different markets, or market making.[4] 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.[4]

See also

References

  1. 1.0 1.1 Mecane, Joseph. "Citadel Securities' Mecane Says Volatility Behind Rise in Retail Investing". https://www.bloomberg.com/news/videos/2020-07-09/citadel-s-mecane-says-volatility-behind-rise-in-retail-investing-video. 
  2. Weber, Bruce W. (2006-05-01). "Adoption of electronic trading at the International Securities Exchange" (in en). Decision Support Systems. Economics and Information Systems 41 (4): 728–746. doi:10.1016/j.dss.2004.10.006. ISSN 0167-9236. https://www.sciencedirect.com/science/article/pii/S0167923604002337. 
  3. "The Death Of The Trading Floor" (in en). https://www.investopedia.com/financial-edge/0511/the-death-of-the-trading-floor.aspx. 
  4. 4.0 4.1 4.2 4.3 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. https://heinonline.org/HOL/Page?handle=hein.journals/dltr9&div=16&g_sent=1&casa_token=gwyylQngspYAAAAA:zLuvWPPpSroAxUbOKz81PLTQBtLpl1J86NPF46oqDXkRFhXDyHAAl3iH2ebdgpkbMV7s5bOaPg&collection=journals. 
  5. "What Is Globex?" (in en). https://www.investopedia.com/terms/g/globex.asp. 
  6. 6.0 6.1 Wu, Jennifer (June 1999). "Online Trading: An Internet Revolution". https://web.mit.edu/smadnick/www/wp2/2000-02-SWP%234104.pdf. 
  7. 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Chaudhry, Sayan; Kulkarni, Chinmay (2021-06-28). "Design Patterns of Investing Apps and Their Effects on Investing Behaviors" (in en). Designing Interactive Systems Conference 2021 (Virtual Event USA: ACM): 777–788. doi:10.1145/3461778.3462008. ISBN 978-1-4503-8476-6. https://dl.acm.org/doi/10.1145/3461778.3462008. 
  8. 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 Wu, Fei (2010-06-10). "Speed, distance, and electronic trading: New evidence on why location matters". Journal of Financial Markets 13. https://www.sciencedirect.com/science/article/pii/S1386418110000224. Retrieved 6 November 2021. 
  9. "SEC Rules". https://www.sec.gov/rules/final/17a23.txt. 
  10. 10.0 10.1 10.2 10.3 10.4 Mahoney, Paul G.; Rauterberg, Gabriel V. (2017-04-19) (in en). The Regulation of Trading Markets: A Survey and Evaluation. Rochester, NY. https://papers.ssrn.com/abstract=2955112. 
  11. 11.0 11.1 Kim, Kendall (2010-07-27) (in en). Electronic and Algorithmic Trading Technology: The Complete Guide. Academic Press. ISBN 978-0-08-054886-9. https://books.google.com/books?id=xYaW3l23h4sC&pg=PP1. 
  12. 12.0 12.1 12.2 12.3 12.4 12.5 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". https://aisel.aisnet.org/cgi/viewcontent.cgi?article=1084&context=bled2003. 
  13. 13.0 13.1 "Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths" (in en). Bloomberg.com. 2021-05-13. https://www.bloomberg.com/news/articles/2021-05-13/binance-probed-by-u-s-as-money-laundering-tax-sleuths-bore-in. 
  14. 14.0 14.1 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. ISBN 978-1-6654-0430-3. https://ieeexplore.ieee.org/document/9510135/;jsessionid=ZJLufBii-mcZQdObB8eSgRg23PNGexfzCxOboHEHj1QR5ECfByx9!1404342409. 
  15. 15.0 15.1 Smith, Kelly Anne (2021-01-28). "Robinhood Halts GameStop Trading, Angering Lawmakers And Investors" (in en-US). https://www.forbes.com/advisor/investing/robinhood-gamestop-trading/. 
  16. "Keeping Customers Informed Through Market Volatility". Under the Hood. 28 January 2021. https://blog.robinhood.com/news/2021/1/28/keeping-customers-informed-through-market-volatility. 
  17. 17.0 17.1 17.2 17.3 "Barclays and Credit Suisse pay biggest ever fines for dark pool trading" (in en). 2016-01-31. http://www.theguardian.com/business/2016/jan/31/barclays-and-credit-suisse-to-pay-biggest-ever-fines-for-dark-pool-trading. 
  18. "SEC.gov | SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering". https://www.sec.gov/news/press-release/2020-338. 
  19. Browne, Ryan (2020-12-23). "Cryptocurrency XRP plunges 25% after SEC files lawsuit against Ripple" (in en). https://www.cnbc.com/2020/12/23/cryptocurrency-xrp-plunges-25percent-after-sec-files-lawsuit-against-ripple.html. 
  20. Tan, Gordon Kuo Siong (2021-11-01). "Democratizing finance with Robinhood: Financial infrastructure, interface design and platform capitalism" (in en). Environment and Planning A: Economy and Space 53 (8): 1862–1878. doi:10.1177/0308518X211042378. ISSN 0308-518X. https://doi.org/10.1177/0308518X211042378. 
  21. joyc (2021-07-05). "11 Popular Stocks APIs for 2021" (in en). https://www.programmableweb.com/news/11-popular-stocks-apis-2021/brief/2021/07/05.