Issue #43
Last Update December 24, 2005
Finance Democratization of Markets by David Katz Trading in securities and derivatives (futures, options and other instruments) has always been a situation where insiders had the edge over individual investors. Having nothing to do with market abuses such as insider trading, where those in the know can make use of information not yet released to the general public, this legal insider edge existed simply due to the mechanics of discovering market prices and entering and executing a trade. Recently, that edge has begun to diminish, a trend that will accelerate over the coming years.
Unless the investor was also a “local” (a member of an exchange trading on the exchange floor for his or her own account), all trades on a stock or commodities exchange had to be funneled through an exchange member with a floor presence. Usually, an investor called his broker, gave him the order, and then waited while the order was sent to the broker’s trading desk, and then to the broker’s floor traders on the trading floor of the exchange. The trade was done, and information about trade execution came back to the investor. All of this took time, was prone to error, and often risked slippage (that is, trades placed at a certain price being filled at a less advantageous price) that occurs when too much time passes between placing of the order and filling the order, or when favored traders (including the brokerage firm) are allocated the best prices. Even acquiring the latest market prices represented an uneven playing field: traders on the floor of the exchange immediately knew of price changes, while traders remote from the floor depended on one of several reporting mechanisms that had various degrees of lag unavoidably built in. A lag of as little as thirty seconds in a volatile market could mean the difference between profit and loss.
With the advent of the electronic marketplace, the wall of insider privilege has begun to crack Electronic marketplaces remove the broker and floor broker as information middlemen, and give to the individual, wherever located, the same rapidity and accuracy of execution and immediacy of price discovery that only the floor trader previously possessed. A good example of this is Euronext-LIFFE.
Euronext began as a merger of the Amsterdam, Brussels, and Paris cash and derivative exchanges. Eventually, the London International Financial Futures and Options Exchange (LIFFE) and the Portugese cash and options exchange joined, with LIFFE contributing crucial electronic trading systems. Then, in conjunction with NASDAQ in the United States, Euronext-LIFFE launched NQLX, an electronic exchange for trading single stock futures. (See Single Stock Futures in our February 2002 issue.) At the heart of all these markets is LIFFE Connect, a trading host that handles and matches orders, and interfaces with the clearing system for these exchanges and with the networks and trading front-end software of the exchange members and their customers.
Qualified customers can thus connect directly to the trading process, allowing accurate price discovery, fair and rapid executions, and real-time knowledge of order status. What previously was only able to be accomplished by floor traders can now be done from an office desk or livingroom anywhere in the world.
Other electronic exchanges, in the US and abroad, provide similar capabilities and advantages. The playing field has gotten just a bit more level.
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