Electronic Market Microstructure

Electronic trading; a phrase for all Electronic trading, what is it, or more importantley what has it become!? It means so many differnet things to so many differnt people, from the buy-side to the sell-side it mean vastley different things. Within Broker-dealers it depends where you sit on the way in which you would define electronic trading. Traditionally, and I think purely, it has been defined by the following:

“Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller through electronic media to create a virtual market place. Markets such as the new age stock exchanges are a prime example for such and electronic market place.“

–Wikipedia

This definition is certainley true but it is an all encompassing statement and begs to be described more. I think we should explore it, break it down and understand all its complexities. Lets first outline a taxonomy that covers alot of the areas that include electronic trading or are effected by electronic trading  and then I will drill into them one by one.

• Electronic Communication Networks – ECNs (The renaissance, trading off one’s own book)
• Electronic Match Making (Electronic Market Place)
• Electronic Market Aggregation (Allowing traders to view all [or more] liquity)
• Direct Market Acccess (Through technology allowing end users direct access to markets)
• Algorithimic Trading (using sophisticated math to make trading process decisions)
• Program Trading (using sophisticated algorithims to make execution decisions)
• Automated Trading-Black Box (using sophisticated algorithims to make trading choices)
• Block & basket Orders using Program Trading (algorithims to make execution decisions)
• Electronic Trade entry and order routing (Electronic order creation, routing and transmission)
• Desk-level Electronic Rsk Management ( realtime automated margin, credit or limit control)
• Automated Electronic trade crossing (Reg. Capital Optimization)
• Automated Electronic Position Netting (Reg. Capital Optimization & Risk Management)
• Electronic Cross-product access with Cross-product leverage and Margins
• Data concerns in an Electronic Trading Microstructure
• Reglatory concerns in an Electronic Trading Microstructure

Electronic trading and Regulations: The most current, REG. NMS With the expected increase in market-data volumes anticipated from Reg. NMS, firms need to focus on their data management capabilities, including storage, archiving, retrieving and securing data. Since data is the core to a lot of the regulations, firms must get ready to handle this and be able to route all this market data into pre-trade and trade analysis, which is tied into Reg. NMS as well a key requirement to the electronic trading microstructure of the future. Electronic trading systems of the future will need retool their algorithms to do more-effective order routing, since broker-dealers will need to prove they delivered best execution under Reg. NMS, firms need to understand there will be a need for next-generation analytics that can allow broker-dealers to provide best execution. That entails going through post-trade data and coming up with the analytics. This involves crunching through post-trade data and coming up with analytics. Firms also need to investigate the need for next-generation analytics to sift through and do pattern recognition, using computational intelligence, on hundreds of thousands of trades that a broker-dealer may conduct over the course of three months to allow for full compliance.

Electronic trading; the Future

The business of Electronic Trading, in its various forms, has not seen the growth period about to come. With advances in computing and the availability of massive amounts of data we will be able to implement new business strategies that were impossible only a few years ago. Advances in; (i) model-driven trading , (ii) computational methods, (ii) High-speed vector data-bases (KX, Xenamorph and Vhayu) (iii) high frequency market data, and (iv) the evolution of enabling technologies; such as available 64-bit processors, high performance data managers and grid computing.

The business of Electronic Trading is not just depended on technology; there are many business dependencies as well including regulations, standardization and market microstructure that will play a profound role in the market opportunities. For instance, the globalization of securities processing such as MIFID and Reg. NMS, have an equally effect on the electronic markets. With global standardize clearing and settlement process will accelerate electronic transitions.  …to be continued.