Electronic trading system in financial markets has proved to be very helpful. However, there are certain securities and investors who still have a different opinion about electronic trading. Electronic trading in financial markets has gained prominence over the years.
As per the definition of Securities and Exchange Commission or SEC, the Electronic Communication Networks or ECNs is referred to as an “electronic trading systems that automatically match buy and sell orders at specified prices”. It is stated that electronic trading in financial markets is an important part of the present day securities markets.
It was found that as of August 2002, 40% of the trading of securities on NASDAQ comprised ECNs or electronic communication networks.
Importance of electronic trading system in financial markets:
Owing to the implementation of electronic trading in financial markets, the cost of trading has become less. In this system, no brokers are required. In fact, the electronic trading venue serves as a platform where the sellers and the buyers meet. The operating margins (average) of of the dealers on NASDAQ as well as New York Stock Exchange are 25% and 50% respectively. By trading on the electronic trading system, these operating margins may be lowered further.
The speed of trade execution is comparatively faster in case of an electronic trading system.
The ECN or electronic trading network’s limit order allows traders to get complete information on price as well as market centers. The ECN permits traders to ascertain market conditions in a more efficient manner.
Electronic trading in financial markets also extends anonymity to the dealers. Anonymity is vital for the “informed institutional investors”. This is in contrast to the traders who are less informed. These traders(who are less informed) tend to imitate the trading strategies of the well informed lot.
In addition to trading stocks, the bond market and the foreign exchange market is also traded electronically. Studies reveal that as of 1995, about 25% of the trading activities were carried out electronically. By the year 1998, the figure went up to 50% from 25%. It has been observed that even though the foreign exchange market has adapted to trading electronically, the bond market has taken some time to switch over.
Electronic trading in financial markets not welcome by all:
Reports suggest that the electronic trading system may not be appropriate for all securities, market environment and investors. Owing to information dissemination through electronic trading system, even though the trading costs may be less, nevertheless, the effectiveness of the electronic trading system in financial markets need to be proved when the markets are volatile.