E-Trade Financial has announced that it plans on rolling out a new global trading platform that will allow

investors to buy and sell stocks in up to seven different countries with account balances being denominated in local currencies. Investors will have the choice to hedge back to the U.S. dollar (something that is extremely important for risk management.) This means that you might actually be able to buy shares of a British bank in an account holding British pounds as the currency; a major shift in the investing landscape! There are a lot of dangers if you don't know what you're doing. Check out The Dangers of Investing in Foreign Bonds for just one example that an investor could face when accessing a global trading platform without training an experience. Although definitely not an area for the inexperienced, it's very, very exciting for those who are familiar with global accounting standards and legal structures. *************************************************************************
Ever dreamed of owning shares of a London based bank with an account denominated in British pounds? How about that favorite real estate development company in Hong Kong? E-Trade Financial, one of the largest online brokerage and financial services firms, rocked the industry a few weeks ago when it announced its plans to roll out a global trading platform for average investors. Imagine that

you know you are going to acquire shares of a company such as U.S. Bancorp or Wells Fargo (both of which I own at the time of this article.) You are due for some major cash windfall such as a bonus, inheritance, or proceeds from the sale of real estate. While you are waiting for these funds, the stock market crashes and you find yourself, after careful analysis, coming to the conclusion that the stock in which you are interested is cheap; dirt cheap. What are you to do? Wait, and hope for the same (or lower) price, taking the risk that by sitting on the sidelines you could have missed the opportunity to buy at an attractive price? Not necessarily. Take a moment to read about the concept of cash carry. There are certain assets with specific characteristics that can lower the cost of financing them long-term. Although not appropriate for most investors, for those with the right training, professional oversight, and understanding, it can be a useful tool. American's least favorite day - tax day - is getting closer. Do you
know what qualifies as a short-term gain or loss? How about long-term? Did you know that long-term gains have far more favorable tax rates? Fire up your printer and learn everything you can about your capital gains taxes before it's too late! **********************************************************************************

Historically, stock markets were physical locations where buyers and sellers met and negotiated. With the improvement in communications technology in the late 20th century, the need for a physical location became less important, as traders could transact from remote locations. One of the earliest examples of widespread electronic trading was on Globex, the CME Groups electronic trading platform that allows access to a variety of financial, foreign exchange and

commodity markets. The Chicago Board Of Trade produced a rival system that was based on Oak Trading Systems Oak platform which facilitated E Open Outcry, an electronic trading platform that allowed for electronic trading to take place alongside the trading that took place in the CBOT pits. Oak Trading Systems continues to offer access to global markets via various software applications, including demo packages, and products are available through reputable brokerage firms such as EHedger LLC [1]. Electronic trading makes transactions easier to complete, monitor, clear, and settle. NASDAQ, set up in 1971, was the world's first electronic stock market, though it originally operated as an electronic bulletin board, rather than offering straight through processing (STP). By early 2007, organizations like the Chicago Mercantile Exchange were creating electronic trading platforms to support the emerging interest in trading within the foreign exchange market. Today many investment firms on both the buy side and sell side are increasing their spending on technology for electronic trading.[citation needed] Many floor traders and brokers are being removed from the trading process. Traders are relying on algorithms to analyze market conditions and then execute their orders. Dates of introduction of electronic trading by the leading exchanges in 120 countries are provided in a Journal of Finance article published in 2005 Financial market design and the equity premium: Electronic vs. floor trading,.[2] There are, broadly, two types of trading in the financial markets:

Business-to-business (B2B) trading, often conducted on exchanges, where large investment banks and brokers trade directly with one another, transacting large amounts of securities, and Business-to-consumer (B2C) trading, where retail (e.g. individuals buying and selling relatively small amounts of stocks and shares) and institutional clients (e.g. hedge funds, fund managers or insurance companies, trading far larger amounts of securities) buy and sell from brokers or "dealers", who act as middle-men between the clients and the B2B markets.

While the majority of retail trading probably now happens over the Internet, retail trading volumes are dwarfed by institutional, inter-dealer and exchange trading.[citation needed] Before the advent of eTrading, exchange trading would typically happen on the floor of an exchange, where traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another - a process known as open outcry or "pit trading" (the exchange floors were often pit-shaped - circular, sloping downwards to the centre, so that the traders could see one another). For instruments which aren't exchange-traded (e.g. U.S. treasury bonds), the inter-dealer market substitutes for the exchange. This is where dealers trade directly with one another or through inter-dealer brokers (i.e. companies like GFI Group, BGC Partners and Garban, who act as

middle-men between dealers such as investment banks). This type of trading traditionally took place over the phone but brokers are beginning to offer eTrading services. Similarly, B2C trading traditionally happened over the phone and, while much of it still does, more brokers are allowing their clients to place orders using electronic systems. Many retail (or "discount") brokers (e.g. Charles Schwab, E-Trade) went online during the late 1990s and most retail stock-broking probably takes place over the web now.[citation needed] Larger institutional clients, however, will generally place electronic orders via proprietary electronic trading platforms such as Bloomberg Terminal, Reuters 3000 Xtra, BondsPro, Thomson TradeWeb or CanDeal (which connect institutional clients to several dealers), or using their brokers' proprietary software.

[edit] Impact
The increase of eTrading has had some important implications:

Reduced cost of transactions - By automating as much of the process as possible (often referred to as "straight-through processing" or STP), costs are brought down. The goal is to reduce the incremental cost of trades as close to zero as possible, so that increased trading volumes don't lead to significantly increased costs. This has translated to lower costs for investors. Greater liquidity - electronic systems make it easier to allow different companies to trade with one another, no matter where they are located. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets. Greater competition - While etrading hasn't necessarily lowered the cost of entry to the financial services industry, it has removed barriers within the industry and had a globalisation-style competition effect. For example, a trader can trade futures on Eurex, Globex or LIFFE at the click of a button - he or she doesn't need to go through a broker or pass orders to a trader on the exchange floor. Increased transparency - Etrading has meant that the markets are less opaque. It's easier to find out the price of securities when that information is flowing around the world electronically. Tighter spreads - The "spread" on an instrument is the difference between the best buying and selling prices being quoted; it represents the profit being made by the market makers. The increased liquidity, competition and transparency means that spreads have tightened, especially for commoditised, exchange-traded instruments.

For retail investors, financial services on the web offer great benefits. The primary benefit is the reduced cost of transactions for all concerned as well as the ease and the convenience. Webdriven financial transactions bypass traditional hurdles such as logistics.

[edit] Technology and systems

Etrading systems are typically proprietary software (etrading platforms or electronic trading platforms), running on COTS hardware and operating systems, often using common underlying protocols, such as TCP/IP. Exchanges typically develop their own systems (sometimes referred to as matching engines), although sometimes an exchange will use another exchange's technology (e.g. e-cbot, the Chicago Board of Trade's electronic trading platform, uses LIFFE's Connect system), and some newer electronic exchanges use 3rd-party specialist software providers (e.g. the Budapest stock exchange and the Moscow Interbank Currency Exchange) use automated trading software originally written and implemented by FMSC, an Australian technology company that was acquired by Computershare, and whose intellectual property rights are now owned by OMX. Exchanges and ECNs generally offer two methods of accessing their systems

an exchange-provided GUI, which the trader runs on his or her desktop and connects directly to the exchange/ECN, and an API which allows dealers to plug their own in-house systems directly into the exchange/ECN's.

From an infrastructure point of view, most exchanges will provide "gateways" which sit on a companies' network, acting in a manner similar to a proxy, connecting back to the exchange's central system. ECNs will generally forego the gateway/proxy, and their GUI or the API will connect directly to a central system, across a leased line. Many brokers develop their own systems, although there are some third-party solutions providers specializing in this area. Like ECNs, brokers will often offer both a GUI and an API (although it's likely that a slightly smaller proportion of brokers offer an API, as compared with ECNs), and connectivity is typically direct to the broker's systems, rather than through a gateway. Investment banks and other dealers have far more complex technology requirements, as they have to interface with multiple exchanges, brokers and multi-dealer platforms, as well as their own pricing, P&L, trade processing and position-keeping systems. Some banks will develop their own etrading systems in-house, but this can be costly, especially when they need to connect to many exchanges, ECNs and brokers. There are a number of companies offering solutions in this area. ******************************************************************************

introduction When it comes to electronic trading, for most individual investors, taking a long-term buy-andhold approach is probably the best strategy. Most of us simply don't have the time or the expertise to trade for a living. But for some investors, trading can be an extremely lucrative profession.
There have always been professionals who made their living off of trading. It wasn't until recently, however, that technology enabled individuals who weren't working for a brokerage to directly access the markets. This tutorial will delve into the workings of the electronic systems that allow this direct access. We'll also talk about the differences between the New York Stock Exchange (NYSE) and the Nasdaq and learn how market trades are executed, both by market makers and by specialists. Whether you are an aspiring trader or a seasoned investor looking to find out how it all works, this tutorial explains all the nitty-gritty electronic trading systems in layman's terms. Is electronic trading a new way for you to build you own portfolio? Read on to find out!

Electronic Trading: The Role of a Specialist

The NYSE facilitates trading through a human being who is known as the specialist. Each stock listed on the NYSE is allocated to a specialist and all the buying and selling of a stock occurs at the location of this person, known as "the trading post." Buyers and sellers represented by a floor trader will meet at the trading post to learn about the best current bid and ask price for a security. These bid and ask offers are called out loud and indicate the current prices to any interested party. A trade will be executed when the bid and ask orders meet. The specialist doesn't only match up buyers and sellers. Many specialists are forced to hold an inventory of shares themselves to minimize the imbalance of buy and sell orders. The specialist does this until an equilibrium price is reached, which is when demand and supply are very close. Buying an inventory of stocks is not a common occurrence. In fact, it is estimated that a specialist will be in on only one out of every 10-15 trades. Another duty that a specialist attends to occurs if a customer's order is priced at a level higher than the lowest ask, or lower than the best bid price (known as a stop order). The specialist will then hold the order and execute it if and when the price of the stock reaches the level specified by the customer. (For related reading, check out Understanding Order Execution and The Basics Of Order Entry.) A final responsibility of the specialist is to find a fair price for each of the stocks that he or she is responsible for at the beginning of every trading day. This fair price is based on the current supply and demand of the stock. The NYSE opens for trading at 9:30am, but if the specialist can't find a fair price, he or she may delay the opening of trading on a stock until that fair price is found. It is the specialist's job to act in a way that benefits the public. Because specialists are responsible for keeping the market in equilibrium, they are required to execute all customer orders ahead of their own.

Electronic Trading: The Role of a Market Maker Market makers compete for customer order flows by displaying buy and sell quotations for a guaranteed number of shares. The difference between the price at which a market maker is willing to buy a security and the price at which the firm is willing to sell it is called the market maker spread. Because each market maker can either buy or sell a stock at any given time, the spread represents the market maker's profit on each trade. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. There can be anywhere from four to 40 (or more) market makers for a particular stock depending on the average daily volume. The market makers play an important role in the secondary market as catalysts, particularly for enhancing stock liquidity and, therefore, for promoting long-term growth in the market. Market makers must maintain continuous two-sided quotes (bid and ask) within a predefined spread. A market is created when the designated market maker quotes bids and offers over a period of time. They ensure there is a buyer for every sell order and a seller for every buy order at any time. Once the market maker has entered a price, he or she is obligated to either buy or sell at least 1,000 securities at that advertised price. Once the market maker has either bought or sold these shares, he or she may then "leave the market" and enter a new bid or ask price to make a profit on the previous trade. For example, let's say that a market maker has entered a sell order for Microsoft (MSFT) and the bid/ask is $65.25/$65.30. The market maker can try to sell shares of MSFT at $65.30. If this is what the market maker chooses to do, he or she can then turn around and enter a bid order to buy shares in MSFT. The market maker can bid higher or lower than the current bid of $65.25. If he or she enters a bid at $65.26 then a new market is created (referred to as making a market) because that bid price is now the best bid. If the market maker attracts a seller at the new bid price of $65.26 then he or she has successfully "made the spread." The market maker sold 1,000 shares at $65.30 and bought these shares back at $65.26. As a result, the market maker made $40 (1,000 shares x $0.04) on the difference between the two transactions. This might not seem like much, but doing this repeatedly with larger order sizes can provide lucrative profits. All day long market makers do this, providing liquidity to individual and institutional investors. The major risk for the market maker is the time lapse between the two transactions; the faster he or she can make the spread the more money the market maker has the potential to make. However, making money from the differences in bid and ask prices is not the only function of market makers. Their first priority is to provide liquidity to their own firm's clients, for which they will receive a commission. They may also facilitate trading for other brokerage firms, which is very similar to the duties of a specialist. It should also be noted that market makers are required by law to give customers the best bid or ask price for each market order transaction. This ensures a fair and reasonable two-sided market. If these regulations were not in place, customers' profits would be gouged and share prices would be much more volatile than they already are.

Electronic Trading: SuperDOT nitially introduced as DOT, the SuperDOT system (Super Designated Order Turnaround System) is an electronic system used to place orders for stocks that are listed, which usually refers to those trading on the New York Stock Exchange (NYSE). Keep in mind that SuperDOT is not to be confused with an electronic communication network (ECN). The SuperDOT order-routing system facilitates the transmission of both market and limit orders directly to the trading post (and specialist) where the particular security is traded. This allows for a more efficient transaction because the order can be delivered directly to the specialist rather than phoned down to a floor trader and done manually. SuperDOT can be used for trades under 100,000 shares with priority given to orders of 2,100 shares or less. More than three-quarters of the orders executed through the NYSE are done through the assistance of the SuperDOT system. After the order has been executed, the report of the transaction is sent back to the broker through the SuperDOT system. This means faster execution of the order and faster reporting of the trade. While most individual investors cannot have access to SuperDOT directly, there are complimentary systems offered by many brokers that replicate similar order executions provided by SuperDOT. Originally, the SuperDOT system was designed for small order entry, but increasingly, SuperDOT has played a big role in portfolio or basket trading.

Electronic Trading: Electronic Communications Networks (ECNs)

An electronic communication network (ECN) is an electronic system that attempts to facilitate (for market makers) or eliminate (for individual investors) third party orders entered by a client's brokerage to be executed in whole or in part. ECNs network major brokerages and traders so that they can trade between themselves without having to go through a middleman. The advantage of an ECN is that it displays orders in real time, whereas on the NYSE, most investors are limited to only viewing the best bid and ask prices. There are several variations of ECNs in the market, each of which are slightly different. Here are some of the more popular ones and a summary of their basic characteristics: Instinet Instinet was the first ever ECN, founded in 1969. It was originally a way for brokerages to display bid and ask prices for practically every stock in North America and abroad and was first used by institutions to transact with each other. Today it also includes a select group of smaller brokerages. Instinet is used to execute a large proportion of orders on Nasdaq and is primarily entered by market makers. Because of this exclusive access many of the large block orders on Nasdaq stocks are traded through Instinet. More recently, Instinet has tried to level the playing field by lowering access fees and allowing individual investors and small firms to access its orders. SelectNet This electronic system is primarily used for trading between market makers. SelectNet is known as a negotiable system, which means that market makers may or may not execute your order immediately, as on other ECNs, although they are required to execute immediately if the order is at the advertised price and it appears on the market maker's screen. SelectNet is popular among traders because orders can be preferenced, which allows a trader to isolate and trade with a particular market maker. This is advantageous because traders can target market makers who are active in the stock he/she wants to trade. This way the trader will get immediate attention, which usually results in a faster execution.

There are a few networks that are used to facilitate trading on Nasdaq stocks. One, the small order execution system (SOES), we will discuss next, but there are also other ECNs offered by Bloomberg, Terra Nova and others. Electronic Trading: Small Order Execution System (SOES) The lack of liquidity after the 1987 market crash lead the Nasdaq to implement a mandatory system to provide automatic order execution for individual traders with orders less than or equal to 1,000 shares. (For stocks with low volume, it may be less than 200 shares). Market makers must accept small order execution system (SOES) orders and so this provides excellent liquidity for smaller investors and traders. There are several restrictions for those who are using SOES, rather than a traditional ECN, to place their orders. 1) Trades may not be in excess of 1,000 shares for a particular stock. 2) SOES doesn't not allow trades in stocks that are trading at prices greater than $250 per share. 3) Once a trader places an order through SOES, he or she must wait at least five minutes to place a trade through SOES on the same stock. 4) Short selling through SOES must comply with SEC rules and be on a zero plus tick basis only. 5) Institutions and brokers are not allowed to place orders for their own accounts through SOES, but they can for a client's account. 6) Market makers must honor their advertised bid/ask prices to SOES orders, provided that they are for the amount that the market maker is looking for. Initially, when SOES was mandatory, it was met with heavy pessimism from Nasdaq member firms because it forced them to execute all SOES trades that met the market maker's advertised price. There were significant limitations implemented to prevent day traders from exploiting the system and taking advantage of old prices quoted by market makers. SOES has revamped the trading market for individual investors. It has given small investors and traders the opportunity to compete on a level playing field for access to orders and execution.

Electronic Trading: Level I, II and III Access

There are a variety of ways in which Nasdaq quotes security prices to the public. These levels vary on the amount of information and access they provide to investors. Level I This type of quote is most often published on the net as a "real-time quote." Level I consists of real-time bid/ask quotes for securities trading on the Nasdaq stock market. This type of access does not disclose who is bidding or asking for the stock, and it does not show how many shares the market maker is looking for. Real-time quotes show the current quote, but it may be from a different lot than what you are trading. Market makers love clients with this type of access because it doesn't show you the order sizes, and therefore your order may be passed around or held until market makers can profit from your order. Level II

This type of quotation system is a step up from the Level I. Level II access provides real-time access to the quotations of individual market makers registered in every Nasdaq-listed security as well as the offering or bidding lots that they are looking for. This level of access also gives the name of the market maker looking to trade the stock. It allows traders to see what market makers are showing the most interest in a stock and to identify the patterns for each market maker. Level II access is available over the internet - but at a cost. This can range in the hundreds of dollars per month depending on the company. For clients placing a large number of trades, the firm may waive the access fee because they will make up the costs on your commissions. Level III This is a trading service consisting of everything in Level II plus the ability to enter quotes, execute orders and send information. This service is restricted to NASD member firms that function as registered market makers. Level III allows you to enter bid/ask quotes as the trades are being executed right in front of you. It is the fastest way to execute a trade and is typically found only on the trading floors of brokerage firms and market makers. Electronic Trading: Conclusion

If you are a long-term investor, you can take this tutorial with a grain of salt. At least now you have some insight into how electronic systems give direct access to the market. We hope this has enlightened your outlook and helped you achieve a greater understanding of how the execution of stock orders is done. For those who are looking to become a trader, this is the tip of the iceberg and we'd advise you to do a lot more research in this area before jumping in. Let's recap what we have learned:

The NYSE is an auction market and uses specialists to trade securities. The Nasdaq is an OTC market where trading is facilitated through market makers. Each stock listed on the NYSE is allocated to a specialist who matches up buyers and sellers, provides liquidity and finds the fair price at the beginning of each trading day. A market maker provides continuous bid and offer prices within a prescribed percentage spread for shares in which they are designated to make a market. SuperDOT system is an electronic system used to place orders for stocks on the NYSE. ECNs network major brokerages and traders, so that they can trade between themselves without involving a middleman. SOES is an automatic order execution for individual traders with orders less than or equal to 1,000 shares. There are three levels on the Nasdaq that vary on the amount of information and access they provide to investors.