ELECTRONIC TRADING

FLOOR-BASED TRADING

Trading financial instruments has historically required face-to-face communication at physical locations.

How they work:Brokers arrange tradesreporters report the tradesofficials watch for trading abusesrunners carry messages to and from brokers.

This system in labour intensive

FLOOR-BASED TRADING

When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. (about.com)

Here is a step-by-step walk through the execution of a simple trade on a floor-based system. A client tells his broker (e.g. Kestrel Capital) to buy 100 shares of

KenGen at market. Kestrel’s order department sends the order to their floor clerk on

the exchange. The floor clerk (the reporter) alerts one of the Kestrel’s floor

traders who finds another floor trader willing to sell 100 shares of KenGen.

The two agree on a price and complete the deal. The notification process goes back up the line and Kestrel calls the client back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, the client will receive the confirmation notice in the mail.

Floor-based trading systems are particularly expensive:they require well-trained floor brokers to

operate well.Floor brokers cannot communicate

directly with clients, so clients give their orders to sales brokers who forward them to the floor brokers

Exchanges must acquire and/or build suitable trading floors

Currently, a floor-based market has telecommunications systems to route orders in and market data and trade confirmations out.

Floor-based markets also invest in various information display systems to assist their floor-based traders.

NSE FLOOR-BASED TRADING

NYSE TRADING FLOOR

AUTOMATED TRADING SYSTEM

The ATS is a robust and efficient trading software The software is accessed on the trading floor via a

Local Area Network. It can also be accessed via remote trading from the

member firm offices on a Wide Area Network The ATS links to the central depositories Redundancy in the hardware and software is built

into the system The NSE exercises complete control and

management over the ATS. Only the NSE can grant or deny access to the ATS.

THE NSE (ELECTRONIC) TRADING FLOOR

ATS MARKET STRUCTURE

A trading system’s market structure includes the set of rules governing its trade execution mechanism and the amount of price and quote data it releases.

Market structure types: a continuous limit order book, a single-price auction a trading system with passive pricing.

ELECTRONIC LIMIT ORDER BOOK

Traders continuously post bids and offers on the system for other participants to view.

The order book displays orders and typically ranks them by price and then by time.

A limit order book does not typically display the user’s identity, the order’s entry time, or the period for which the order is good.

A participant either initiates a trade with an order already on the order book or places a new limit order in the book.

The limit order book automatically and immediately matches orders of similar prices, and a trade occurs.

LIMIT ORDER BOOK... ...

... ...

RELIABILITY IN THE ATS Automated trading systems must be reliable because

trading stops when the computer or network is down. Steps Automated Markets Take to Create Reliable

Trading Systems: Use fault-tolerant computer hardware. Build redundant computer systems. Build redundant network connections, e.g. by routing network

connections through different vendors and through different physical paths.

Provide backup power supplies. Replicate all systems at a remote “hot disaster recovery site” to

which all activity can instantly switch should some disaster affect the primarily processing site.

Build-in significant excess capacity to protect against unexpected surges in demand.

Maintain redundant data backup procedures.