Investing in the Stock Market How Trades Work

Pre-Internet Methods of Trading (The Old Days) Prior to Internet Trading, if a customer wanted to trade a stock, one would have to follow this lengthy process: Customer called their Broker to buy a stock Broker called an Order Center Order Center would contact a Clerk working at the stock exchange. Clerk would coordinate with a Floor Broker on the Trading Floor of the stock exchange. Floor Broker would meet with the specialist for that specific company on the floor. Then that specialist would have to connect this customer’s request with another customer looking to sell the same stock. Once the trade was made, the floor broker would confirm back with clerk, and the chain of communication would make its way back to the customer

Disadvantages of Pre-Internet Trading Time! The lengthy process needed to trade a stock meant that the price could fluctuate greatly between the time the customer made the decision to buy and sell and the time the order was executed (sometimes 2 Days!) Cost: Because a single trade involved up to 5 middle-men, commission rates were significant. The cost to make individual trades prohibited the common private investor from making many trades

The Internet Age of Trading (2000-Present) NYSE: Uses the SuperDOT trading system Customer trades directly from computer Customer’s trade request goes directly to the floor specialist, bypassing most of the human component.

The Internet Age of Trading (2000-Present) Advantages to the Internet Trading Age Time! A standard market order trade can be fully executed in minutes instead of days. Cost!! A regular person can now trade quickly and cheaply. With the advent of internet brokerage accounts tied to the large banks (Fidelity, E*TRADE, etc), middle class people can trade a stock for as little as $5 per trade

Side-Effects of the Internet Age on Trading Volume of Trades: NYSE traded an average of 145 Million shares per day in the early 1990s With the dawn of Internet trading, that Volume increased 8-fold by 2005. An average trading day now sees 3.6 BILLION shares change hands on the exchange Micro pricing: With computers conducting trades so quickly, many large accounts have programs to cut off an individual buyer and drive the price up a fraction of a second before the trade is executed