Electronic Trading – Moving Ahead With the Times
The past few years have seen rapid advances in technology, which has in turn brought about significant changes in the way stock exchanges operate. Electronic trading has to a great extent taken over traditional stock market trading, which is understandable when considering that a computer generated transaction takes place in nanoseconds.
An example of this human versus electronic trading can be seen in the competition between the New York Stock Exchange’s Wall Street trading floor and computer generated trading. Various analysis results reveal that computers consistently win. This holds true even for NYSE’s own computerized platform, NYSE Arca.
To keep up with the times, stock exchanges invest significant amounts on trading technology. However, these fixed costs are readily recouped, after which each trade can be very profitable. This can, to some extent, compensate for lost volumes, which is even being seen in Initial Public Offerings (IPO) – the offering of public company stock on the market for the first time. This is traditionally lucrative business for stock exchanges, as there is generally very active trading on IPOs. However, due to weak market conditions, IPOs have slowed down dramatically, with a resultant decline in revenue to stock exchanges. An additional cause for concern for both Nasdaq and NYSE is the emergence of smaller electronic exchanges which make full use of current technology as well as their lower operating costs to offer a service to investors at extremely competitive prices.
The recent merger between Nasdaq and Nordic exchange company OMX, as well as the merger between NYSE and Euronext have served to diversify the revenues for these exchanges. Moreover, the mergers give these two influential stock exchanges the opportunity to significantly cut expenses. Both Nasdaq and NYSE have expressed their commitment to their shareholders to implement cost savings to the tune of hundreds of millions of dollars.
Investment specialists concede that the stock exchange market sector is complex and affected by many variables. Nevertheless, it can be an exciting and rewarding sector to invest in and although the current bear market is likely to continue for some time and negatively affect trading volumes, investors who hang on through the tough times are likely to be rewarded.