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A Look at the Technology Behind Modern Stock Markets

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A Look at the Technology Behind Modern Stock Markets

Tiny bits of paper litter the trading floors of stock exchanges in all the best classic movies depicting the entrepreneurial adventures of American captains of industry. Of course, floor brokers and traders stopped using pencil and paper many years ago. Advances in technology have forever changed the way stocks and shares change hands these days, and there is very little reason to believe the pace of technological change will slow down any time soon.

Modern stock exchanges generally use their own proprietary order matching systems to manage the high volumes of transactions they facilitate. Because electronic trading dominates the world’s modern stock markets, markets competing for business with other stock markets are keen to stay current with the very latest advances in trading technology. According to The New York Times, electronic trading accounts for roughly 80 percent of all stock trading volume in the United States.

For this reason, there is little wonder why the trading floor of The New York Stock Exchange (NYSE) has become so drastically depopulated. On the floor of the NYSE, Designated Market Makers have replaced stock “specialists” who were once responsible for maintaining a fair and orderly stock market.

To keep up with the rapid growth in stock trading volume, the NYSE upgraded their order management systems so that 100 percent of their trades can be electronically and wirelessly delivered to the NYSE trading posts. With this method, the NYSE can handle 10 billion shares per day in trading volume.

Stock and Option Markets of Chicago

Trading on the Chicago Stock Exchange (CHX) is presently fully electronic. Buying and selling on the CHX  is facilitated through the CHX Matching, which directs order flow from retail stockbrokers, institutional brokers, NASD market makers, and CHX’s own market makers.

The Direct Access Server (DAS) interface of the CHX was developed to provide a streamlined interface for all of the above participants to connect to the CHX Matching System. Chicago is also the home of the Chicago Board Options exchange (CBOE) which is the largest U.S. options exchange and developer of listed stock options.

Trading on the CBOE is conducted both electronically and by open outcry, although 95 percent of CBOE option orders are traded electronically. Most standard option trades on the CBOE are sent through the Exchange’s Order Routing System (ORS).

Option orders of ten contracts or less are sent through the Retail Automated Execution System (RAES), and option orders that cannot be executed immediately are sent to the eBOOK where they can be matched up with future orders. Hand-held terminals — palm-sized computers — are used by market makers working the CBOE option pits to execute option trades and monitor positions.

Equity Trading on the European Continent

The London Stock Exchange was one of the world’s first electronic stock markets. Trading on the London Stock Exchange is presently conducted using the exchange’s proprietary SETSqx Stock Exchange Electronic Trading Service platform.

The London Stock Exchange’s SETSqx system combines the best of the exchange’s existing non-electronically executable quotation service with the functionality of a new stock trading order book.

The SETSqx replaced the exchange’s legacy system for all main equity trading beginning in October of 2007. The benefit of the SETSqx system is that it combines market maker quotes with period auctions. Both market makers and non-market makers are eligible to participate in SETSqx auctions.

Over-The-Counter Markets

The NASDAQ OMX is the second-largest equity trading market on earth. There are almost 4,000 companies listed on the NASDAQ OMX. The NASDAQ OMX provides liquidity across several asset classes including stocks, options, bonds, commodities, exchange-traded funds, and other structured products.

Trading on the NASDAQ OMX is powered by the Genium INET trading platform. This technology was developed to be one of the fastest and most functionally complete trading and order matching systems in the world. The advanced Genium INET trading platform is capable of executing trades for multiple asset classes beyond just stocks and shares, and is licensed by other global exchanges such as the Boerse Stuttgart in Germany.

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