Electronic Trading
Changing the Landscape of the Financial Sector
Using Blockchain and AI
Changing the Landscape of the Financial Sector
Using Blockchain and AI
Trading on ‘stockmarket’ or ‘stock market’ is not a new concept, and the process to buy stocks or sell them has been going on since ages. According to the World Bank, the total value of stocks traded globally survived to reach USD 61.14 Trillion in the year 2019, up from USD 0.298 Trillion in the year 1975, despite of several ups and downs witnessed over the past two decades. In terms of the stocks traded as a share of GDP, this was an increase from 6.1% to 83.9% between 2019 and 1975 (see Figure 1). Before the era of electronic trading, traders had to call their brokerage firms to give ‘buy’ or ‘sell’ orders. A lot of shouting and frantic hand gesturing ensued on the trading floors. However, the dawn of a digital era has prompted traders to gradually transition to electronic trading platforms to enable ‘etrades’. Research Nester showcases how blockchain and artificial intelligence (AI) has transformed stock trading platforms from paper-based documentary trade business to a comprehensive digital approach.
Electronic Trading, also known as online trading or eTrading or online stock broking, is similar to traditional trading wherein there’s buying and selling of shares, bonds, foreign currencies, cryptocurrencies, and other financial instruments, but the big difference here is, all these transactions are conducted online. While some stock exchanges, including the New York Stock Exchange (NYSE), still follow the auction system of trading with specialists physically present on the floors, online trading is spreading around the world owing to its ease and efficiency, and is expected to cross USD 14 Billion by the end of 2027 by growing at about 7% annually.
Electronic trading is simple. One can ‘buy’ or ‘sell’ securities, place market limits, check the status of an order, do market research before a transaction, or view the list of securities one owns, all at the click of a button. All one need is an online trading account and some basic stock market knowledge.
Robo-advisors, algorithms, smart order routers, and many other fintech solutions help to make electronic trading feasible. Robo-advisors are software that use algorithms to trade on behalf of clients. Smart Order Routers make the best possible transaction after carefully considering all the securities offered at different trading venues. However, technology can’t be left unsupervised while trading. The human element is still necessary to understand the market and the logic behind some transactions.
Cryptocurrencies, popularly known as ‘crypto’, are becoming more and more popular these days with the development of electronic trading technology. With the advent of platforms of cryptocurrency banking that specialize in trading crypto pairs, the concept of crypto mining is also growing. For instance, the twenty-four-hour trade volume of cryptocurrency globally nearly doubled to touch close to USD 180 Billion as on the 1st week of November 2022, up from around USD 95 Billion on the 1st week of January 2022. This increase in trade volume of crypto was further noticed to grow exponentially by around 6 times between the 1st week of July 2020 and 1st week of November 2022. On the other hand, a popular cryptocurrency trading platform, Coinbase, which had over 110 million verified users, spread across 100 countries globally, reported having quarterly trade volume of USD 145 billion to power the cryptoeconomy.
The global financial landscape is changing rapidly with the rapid rise of crypto and the availability of a large number of crypto asset management players. Crypto disrupts traditional stock broking models by removing the need for trusted intermediaries, underpinned by distributed ledger technology, also popularly known as blockchain. In today’s date, cryptocurrencies, such as Ethereum, Bitcoin, and Solana among others are known to be at the tip of the crypto iceberg, and the purchase and sales of these digital assets that are traded on crypto exchanges had a market cap of more than USD 1 trillion. The existence of cryptocurrency is largely enabled by blockchain technology (see Figure 2), and using several cryptographic techniques, transfer of funds is being verified and monetary units are being created.
Quick transactions, low risk, cost savings, accessibility, & informed decision- making are some of the benefits of electronic trading. Let us delve into the advantages offered by a reliable electronic trading platform.
Cheaper and Faster Way of Trading – Executing a trade through a broker costs a lot more money when compared to trading online. Electronic trading can occur almost instantaneously. The excess time that traditional trading transactions involve can be a nuisance and end up wasting a lot of money, apart from time.
Single Point of Access – One can choose to buy or sell stocks using an electronic trading account. The platform provides detailed information about every trade transaction undertaken, the amount invested, the profits earned, and other things on a single platform.
Greater Investor Freedom - Trading can be done at the convenience of the investor without interference from the broker. Investors get 24x7 access to their trading accounts from any location and through internet browsers (on a laptop, desktop PCs, etc.) as well as tablets, smartphones, etc.
Good returns on Investments – One can easily make around 15-25% profits a year through smart and strategic investing. The returns on investment depend on the amount invested, the risk tolerance of the investor, and the profitability of the stocks.
Monitor Investments in Real-Time – Traders can keep track of how their assets are performing in real-time using sophisticated user interfaces and digital devices.
Seamless End-to-End Transactions - Once the electronic trading account gets linked with the investor’s bank account, funds can be easily moved around for trading. The electronic trading platform ensures there is a secure, uninterrupted transfer of funds between the bank account and the trading account.
Access to Professional Research- Many electronic trading companies have highly-qualified stock market analysts and experts that can conduct detailed anal
The U.S. is a singular market giant in electronic trading with earnings of over USD 1.6 trillion. Take, for instance, the US-based Fintech Trumid. The electronic trading platform recently announced that it had achieved “record” trade volume, market share, and user participation in the month of February (2023). Its average daily volume (ADV) reached USD 3.5 billion and the market share rose ~80% compared to a year ago.
In the U.S. and the European Union, regulators and market participants are demanding increased electronification of the markets. But Asia-Pacific’s financial markets have long suffered fragmentation. With multiple exchanges and regulatory jurisdictions spread across a vast geographical area, regulatory and product consolidation is unfathomable in the region.
Electronic trading has been gradual in progression in the Asia Pacific region, and has not attained the same levels seen in the U.S. or the EU. American banks and broker-dealers are planning to add more jobs in equities electronic-trading roles in the next few years, according to a survey. About 28% of the firms that were surveyed, said they expected to increase the headcount in execution and analytics consulting, while nearly 24% reported plans of hiring in algorithmic sales division. This, while many Wall Street businesses are considering downsizing their workforces.
The launch of new digital exchanges, the onset of a global pandemic, and the demand for automation across trading processes have all led to the Asia-Pacific region experiencing a transition to electronic and algorithmic trading. Japan’s SBI Holdings collaborated with Sumitomo Mitsui Financial Group in 2021 to launch the Osaka Digital Exchange (ODX). Using blockchain, investors can trade digital assets at high speeds. The Osaka Exchange and Tokyo Commodity Exchange have launched “the next-generation derivatives trading system”, called the J-GATE3.0. This system is expected to increase market liquidity, reduce latency, as well as enhance reliability and convenience for investors and other market users, according to the Japan Exchange Group. Exchanges in Asia-Pacific are increasingly implementing the use of order management systems (OMS) and smart routers that are helping them gain a global competitive advantage. As latency continues to decline with the use of 5G, sophisticated AI and ML techniques will be applied in the electronic trading of financial assets in the region.
Electronic trading is reliable, fast, and profitable. It offers a window into a vast array of securities and markets, enabling access to all the vital information that investors need and regulators require. Electronic trading platforms provide a secure environment to store personal account details as well as industrywide information and ensure that no data is lost. It is a sophisticated modern innovation that makes financial trading simple and viable, and it is available all over the world for use for just a few dollars per trade. Here is a look out of some of the markets that are associated with electronic trading (see Figure 3).
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