Stock trading, throughout its history, has been dominated by the stock market exchanges – physical trading locations like the New York Stock Exchange or the London Stock Exchange complete with trading floors, tons of television screens, and hundreds of traders in jackets running around with little slips of paper.
It has also been dominated by thousands of brokers sitting on phone lines, calling in buy and sell orders from their clients and institutions to the trading room floor. During this time, trades would be routed via phone (or even telegram, in some instances) to be executed on the floor at a major exchange, a process that would take many minutes at best and hours at worst.
Now, with the advent of electronic trading, the old ways are going away and are being replaced by faster and more efficient methods of trading stocks in a digital, always-connected age. Here, I’ll talk about electronic stock trading, and give you an overview of the capabilities it offers modern-day traders.
The Anatomy of a Trade
Traders who have been trading longer than a decade probably remember the old days (I use that term relatively) of trading stocks. Before the magic of the Internet came into being, you had to either:
- Be a licensed stock broker with a connection to New York (or a spot on the trading floor), or
- Hire a licensed stock broker
To place a trade was a relatively tedious task involving calling your broker, explaining to him what you wanted to have happen, waiting for him to place the order, and repeating for each subsequent order after that. If you wanted an update, you had to ask, or wait for a phone call.
Now, the anatomy of a trade is pretty much the same – except the parts are all different, and the process itself is extremely expedited.
With electronic stock trading, you can log onto an online brokerage, like OptionsXpress, Scottrade, TradeKing, or any other institution and create your own trading account (as long as you are of age). Making a trade is as simple as clicking a couple of buttons and sending the digital packet on its way.
Once the information leaves your account (not physically; digitally), it is matched to a buyer or seller electronically through a computer network. These other buyers and sellers are represented by their own brokerages (or by themselves, if they are institutions), and may or may not be on the actual trading floor at the NYSE (NASDAQ doesn’t have a physical floor).
Even though you are submitting your order at the speed of light, it isn’t filled instantaneously. Yes, it is extremely fast, especially when compared to a human-operated system, but it does take time. If you are trading an illiquid stock with low volume, you can experience noticeable delays because finding a buyer or seller to match and agree to your order can be tricky.
Once the trade is confirmed through the computer network or electronic communication network (ECN), it is routed back to your account via your online brokerage and you see a confirmation of the trade.
Capabilities of Online Trading
It’s hard to overstate how impactful online trading has been on the trading community. With the advent of the Internet, online trading became not just a reality, but a commonplace event. The first instance of online trading actually came in 1982, through a company called North American Holding Corp. The first major, widespread, ‘discount’ brokerage was E*TRADE, which originally was known as Trade*Plus.
The technical ability to trade stocks online has been around for decades. The affordable version that is widely available to the public didn’t come around until relatively recently, when companies like OptionsHouse and TD Ameritrade brought online trading to the masses.
Since then, the general public has had the ability to research trades quickly and effectively, see real-time quotes streaming from a wealth of resources online, place basic and complicated orders on stocks, bonds, mutual funds, commodities, currencies, and other assets, and even take advantage of trading on margin and using leverage.
There is no limit to the amount of financial data that is available to the average investor now because of electronic stock trading. The world of stock trade analysis has even grown because of the Internet; now you can take your pick of basic or complicated stock metrics and indicators that can be deployed with the press of a button.
Easy and affordable access to placing orders, following stocks, and using metrics are all capabilities available to you today because of the Internet, online brokerages, and electronic trading networks.