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The Trading Floor Goes Digital

17 August 2013 in Trading Ideas

Forget the personal computer – is there anything becoming more antiquated than the old-school trading floor?

And now, it’s not only people using digital platforms to execute trades, it’s massive, high-speed computers trading with each other. The online trading revolution isn’t on its way – it is, for the most part already here. According to data provider Celent, electronic trading accounts for about 70% of overall trading volume in the US.1

What’s more, signs are pointing for the growth in trading via online networks to continue. That’s the thesis behind our newest Electronic Trading motif, a portfolio of stocks of companies that provide online trading platforms and brokerage services.

As trading volumes slide in mature markets like US and European equities, increases in electronic trading are showing up in additional investment classes and emerging-market exchanges. For example, recent research from Greenwich Associates showed that the share of US market participants trading foreign-exchange instruments electronically rose to 81% in 2012 from 76% a year earlier.2

In addition, higher adoption in Asia is boosting the number of electronic trading platforms available in those marketplaces. Late last year, Goldman Sachs said 42% of its stock-trading business was electronic, up from 37% a year earlier.1

The rise in electronic trading has risen as more competitors enter the market to meet the demand for lower-cost, quick-executing trades, which, in turn, has spurred advancements in technology to make everything even quicker.

However, new regulations also may play a part in boosting electronic trading further. The Dodd-Frank Reform Act is mandating that many complex derivatives, such as credit-default, interest rate, and commodity swaps, become exchange-listed, creating a potentially bigger market for electronic trading.3

Of course, any continued decline in overall trading volumes could become a serious headwind for electronic exchange providers, but investors anticipating continued growth in online trades may find this investment worth a closer look.

1Alison Tudor, “Trading in Asia Changes Bit by Bit,” WSJ.com, Dec. 16, 2012.

2“Electronic FX Trading Intensifies,” marketsmedia.com, April 16, 2013, http://marketsmedia.com/electronic-fx-trading-intensifies/, (accessed Aug. 14, 2013).

3Silla Brush, “Wall Street Wins Rollback in Dodd-Frank Swap-Trade Rules,” Bloomberg.com, May 16, 2013, http://www.bloomberg.com/news/2013-05-16/banks-set-to-win-rollback-in-dodd-frank-swap-trade-rules.html, (accessed Aug. 14, 2013).