Electronic trading platform

As of 2007, a broker could not fulfill an order flow without some electronic technology involved.[7] The accessibility of trading outside of a floor trading center has drastically increased the amount of market participants who are not a part of the financial industry. These participants, or retail traders, grew to account for 25% of the stock market's activity in 2020.[1]

With investors not needing to visit a floor exchange such as the NYSE, trade execution over longer-range networks has caused discrepancies in trading speed.[8] The travel of data over the Internet, incurring many network switches, also brings on additional time delays.[8] The trade of a stock closer to market central computers in the NYC area executes 2.8% faster than one outside of the NYC area.[8] A trade in the NYC area experiences a bid-ask spread 0.75 cents lower than one outside NYC, reducing aggregated costs significantly.[8]

This encourages traders within the NYC area to adopt strategies that harness their advantage of speed.[8] Some exchanges offer co-location: the benefit of executing trading algorithms near large central computers remotely.[8] Co-location's demand quickly grew for trading organizations. From 2008 to 2010 alone, NASDAQ's co-location business grew 25%, and companies began executing fully automated trades to take advantage of the reduced latency.[8]

In 1995,[9] the U.S. Securities and Exchange Commission (SEC) promulgated Rule 17a-23, which required any registered automated trading platform to report information including participants, orders, and trades every quarter.[10] Requiring platforms to comply with enhanced pre- and post-trade transparency requirements has provided a stronger incentive for users to trust electronic trading platforms.[8]

Market fragmentation[10] led some Nasdaq market makers on Instinet to quote prices that were better than their own quotes on Nasdaq. To address this discrepancy, the SEC introduced the Order Handling Rules in 1996.[10] These rules required stock exchange specialists and Nasdaq market makers to publicly display any price quoted on a proprietary trading system that represented an improvement of their displayed prices.[10] Another Order Handling Rule required a market maker to display the size and price of any customer limit order that either increased size at the quoted price or improved the market maker's quotation.[10]

Decimalization was instituted in 2001 by the SEC, requiring market makers to value financial instruments by increments of $0.01 as opposed to the previous standard of $.0625.[11] This change significantly lowered margins, providing an incentive for big dealers to utilize electronic management systems, and eventually lead to lowered trading costs.[11]

Electronic trading platforms often provide historical data, including graphs, to their customers to inform trading decisions.[12] These graphs can often be expanded to include a wide range of dates, and can be used in a technical analysis of a certain instrument.[12] For example, online brokerage E-Trade provides metrics including analyst recommendations, price targets, income statements, and data on past performance.[13]

Trading platforms often provide current news to inform users' decisions of their trades.[12] This can include articles on specific companies, or updated ratings given by independent firms specializing in certain commodities.[12] On some applications, this specialized news allows retail traders to have access to the same information their professional counterparts.[7] Notably, Robinhood features market news for their assets, and sends push notifications close to earning events.[7]

Another feature commonly found on trading platforms is the ability to track the user's portfolio, and this can influence trades based on how a trader has been performing.[12] For example, E-Trade displays the assets included in a user's portfolio, and compares them to sample portfolios.[7]

Electronic trading platforms also commonly provide Application Programming Interfaces (APIs) that allow users to execute trades, view current and historical data, and evaluate trading performance.[14] These APIs are often used with algorithmic trading strategies.[14]

One of the most famous controversies involved the GameStop short squeeze, where thousands of retail investors attempted to short squeeze the GameStop stock.[15] Due to alleged concern about the harms of short-term volatility, Robinhood halted the purchase of the GameStop stock.[16] The trading platform's ability to halt the purchase or the sell of a specific stock proved controversial, as the subsequent reduction in volume can cause a stock's price to swing in a platform's favor.[15]

Dark pools are private exchanges for trading commodities such as stocks and bonds that are not accessible to the public, and offer secrecy surrounding trade execution.[17] Barclays and Credit Suisse were fined $154M in 2014 for allowing high-frequency traders to exploit the dark pool exchanges on their trading platform.[17] The controversy arose when Barclays and Credit Suisse told clients that it was monitoring their platforms for high-speed traders, but in reality permitted “the most aggressive and predatory high-speed traders”.[17] Credit Suisse ended up paying $24.3 million in disgorgement to repay losses.[17]

The electronic cryptocurrency exchange Binance has been under investigation by the U.S. in 2021 for money-laundering and tax evasion.[13] The DOJ and IRS believe that Ripple used Binance to finance illegal international activities.[7]

The SEC indicted the cofounder and current CEO of Ripple Labs, Inc. for raising over 1.3 billion dollars through the sale of the digital asset XRP in an unregistered securities offering. The director of the SEC alleged that the businessmen "deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system."[18] After the lawsuit was filed, XRP's price fell by 25%.[19]