Electronic Trading System

Electronic Trading System

Electronic Trading System is a platform where all types of financial securities like shares, debentures, derivatives, mutual funds, etc. are traded online. It is also known as an online trading system. The institutional investors, broker-dealers, and market makers can trade directly through an Electronic Communications Network, or ECN which matches buying and selling orders at stated prices instead of entering the exchange and trade on the floor. This system has bought a revolution in the trading system in the stock markets all over the world.

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History of Electronic Trading System:

The first online trading system was started by a firm named Instinet in the year 1967. The pioneers intended to compete with the New York Stock Exchange through computer connections, without slowing or interrupting experts from major institutions such as banks, mutual funds, and insurance firms. After this, in 1970 the NASDAQ (National Association of Security Dealers Automated Quotations) stock exchange was introduced and it one of the first markets where technology replaced physical interaction. This was followed by other systems. CME’s Globex was introduced in 1992, Eurex appeared in 1998 and several other exchanges developed their own electronic platforms. The first electronic trading platform in India was introduced by the National Stock Exchange (NSE), which revolutionized stock trading in the country.

How does it work?

First of all, to start trading with the online trading system one should have the basic knowledge of the stock market:

A stock market is a place where buyers and sellers meet to trade their shares. Whenever the company wants the money for the business, for expansion of its operation, they try to sell the stock of the company to raise the capital. The companies sell their stock in the market through an Initial Public Offering i.e. IPO. Once the company’s stocks are listed on the exchange, then the investors can trade that share. Thus, we can say that the stock market or the share market is the place where buyers and sellers meet to exchange their security on an agreed price to earn maximum return from the market.

Second, the investor should have the Brokerage Account: 

For trading online the individual should find a proper broker who is registered with The Securities and Exchange Commission (SEC ) for U.S. Markets or SEBI (Security Exchange Board of India) for the Indian markets and have to open an online trading account or a brokerage account. With the help of this account, the trader can sell and buy his security through its broker and earn a profit.

Third thing that an individual should do is to learn to analyze the market:            

What is the trend in the market? What are the reasons for the market to move upwards or falling down? Such an analysis should be done by the investor to earn a maximum return. Past year trends should also be analyzed for the future movement of the market. Other than this the investor should also analyze the company’s data in which they want to invest and try to compare the market and companies’ analysis to know a clear scenario of the investment.

Final Execution of Orders:

The market structure of the trading system involves a combination of rules regulating its trade execution process and the volume of price and quote data it issues. A participant can enter into the database quantity of securities and the prices at which he/she wants to sell, and the transaction is executed as soon as he/she finds a matching sale or purchase order from a counterparty. The electronic system matches orders with a price/time priority and thus eliminates the time, costs, and risk of mistake, as well as theft, resulting in increased operating performance. It allows for quicker integration of price-sensitive information into prevailing prices, thereby increasing the informational performance of markets. Stocks are retained in a dematerialized format that helps to maintain and sell easily, transparently, and effectively.

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Advantages of Electronic Trading System: 

  • The first and the biggest advantage of an electronic trading system is it provides easy access to the investor. Investors can access the market at any time they want and also they can monitor the foreign market also which helps them for better analysis. The settlement of the transaction rate is also fastening up which helps the market to grow faster.
  • With the help of an electronic trading system, investors do not have to go physically to trade shares they can trade shares through an internet connection which saves time. Not only shares but other instruments like bonds, derivatives, mutual funds, and commodities can also be traded easily.
  • Through online trading, investors are now free from paying commission to the broker because now all the activity is carried out by the investor itself and he doesn’t have to depend on the brokers to put the order for purchase and sell.
  • It is cheaper compare to offline because there are no transaction fees involved and thus it becomes easier and cheaper for the investor to trade online. Various companies provide various tools to use online trading according to the user’s convenience. Thus this helps the investor to trade more easily.

Disadvantages of Electronic Trading System: 

  • As this system works online and if any error occurs in the network or the internet connection, then the traders will not able to place an to buy and sell order.
  • With the advantage of not paying extra fees to a broker, there is also a disadvantage that you do not get any kind of advice about the markets from the broker.
  • Through an electronic trading system, we can monitor the market 24 x 7,  so it motivates the investor to invest lots of money. However, there is a risk that the investor may lose this money very easily.                                               


Author: Charmi Mehta

About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.


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