Global Finance Electronic Trading PDF

Electronic trading in wholesale financial markets: its wider impact and policy issues Electronic trading is a force for change across markets, enabling a greater variety of trading arrangements, which in turn can affect the performance of markets and welfare more generally. One is the degree of fr...

Electronic trading in wholesale financial markets: its wider impact and policy issues Electronic trading is a force for change across markets, enabling a greater variety of trading arrangements, which in turn can affect the performance of markets and welfare more generally. One is the degree of fragmentation or consolidation of trading arrangements, where it is argued that electronic trading can facilitate either effect. The other is the degree of transparency of trading information, where the hugely expanded possibilities that electronic trading offers highlight the choices in this controversial topic. Policy-makers are interested in the wider impact of changes to trading arrangements on the broader economic and financial system. But policy judgments need to be made carefully because the effects can be market specific, uncertain or even counter-intuitive. Moreover, problems arising in market arrangements may prove short term or self-correcting. These considerations all bear on the judgments on whether or how to intervene to address apparent market failures. Electronic trading is transforming financial markets. It can reduce costs, extend participation and remove many physical limitations on trading arrangements. It allows much greater volumes of trades to be handled, and permits customization of processes that until recently would have been technically impossible or prohibitively expensive. It is a major force for changes in 'market architecture'---the key features of market structure such as participation arrangements, venues and trading protocols These effects of electronic trading in turn have a real influence on the prices and quantities that result from the trading process. And they can also affect aspects of a market's 'quality'---its performance across attributes such as liquidity, trading costs, price efficiency and resilience to shocks. This matter because market quality has broader welfare implications---such as through the contribution of the efficiency of the financial system to economic growth and through the performance of markets and their resilience to financial instability. So, the impact of electronic trading is of considerable interest to market participants and policy-makers alike. **Contrasting developments in electronic trading** Though electronic trading has been used in some markets for well over a decade, its penetration has been very uneven across different sectors. Take-up has been affected by the form of existing market structures, regulatory and competitive factors, and the varied needs of traders. Typically, deep, liquid markets, with broadly standard asset classes and straightforward trade types are 'easiest' to migrate to electronic trading. The spread of electronic trading depends also on what is achievable with current trading technology: further innovation will enable further waves of change to market. **Equity Markets** The liquidity and relative homogeneity of major equity securities make it reasonably straightforward and cost-effective for them to move to electronic trading. But experience in the United States and Europe has been very different even for the same type of assets. The US equity market has seen a proliferation of alternative electronic trading venues, whereas Europe has been more notable for electronic systems being incorporated within mainstream exchanges. The regulatory and competitive environments appear to have been significant influences on these outcomes. The two largest markets in the United States have broadly maintained the framework of their 'traditional' arrangements---the floor trading of the New York Stock Exchange and the telephone/screen-based market of Nasdaq---albeit both with very high levels of automation. This meant that wholly electronic systems were able to position themselves as alternatives, offering trading methods (especially electronic order books) unavailable at mainstream venues. The entry of a number of alternative electronic venues around the Nasdaq market was also encouraged by a regulatory change affecting the display of orders. In contrast, existing exchanges in Europe moved many of their own systems to electronic trading. Compared with the United States, their environment was probably less influenced by regulation; competitive pressures (including from demutualization) encouraged exchanges to introduce electronic trading themselves. It has meant less opportunity for separate off-exchange trading systems---it is more difficult for entrants to offer some particular advantage that could not be found on the exchanges. **Activity** 1. What is a wholesale market? 2. Does whole sale market have a huge difference in retail market? Why? 3. What is an equity market? Is it considered as a wholesale? Explain.