A Brief History of Online Trading

Although most people imagine stock trading floors as a mass free-for-all with suited types screaming and making frantic hand gestures as they buy and sell their stocks, this scene is actually a relic from a bygone era. It’s still a free-for-all of course, but today’s market traders are an entirely different bunch, for the most part staring at computer screens and making virtually all of their trades at the push of a button.

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Although online trading seems like a recent innovation, but traders have actually been using computers to aid their transactions for several decades already.

Origins of online trading

The history of online trading can be traced back to the introduction of the Instinent Electronic Communication Network (ECN) that was first introduced to the New York Stock Exchange (NYSE) back in 1969. It was an innovation that allowed traders to buy and sell outside of regular market hours for the first time, and was quickly followed by the creation of the NASDAQ exchange in 1971.

NASDAQ was an automated system that allowed traders to post bids and offers on an electronic bulletin board. Later, NASDAQ added a Designated Order Turnaround (DOT) system that gave traders the ability to transmit their share orders straight to specialist on the floor on the exchange, meaning that regular floor brokers could be bypassed for the first time.

Further technological innovations followed, with the creation of SuperDOT by the NYSE in 1984 allowing for up to 100,000 shares to be sent direct to the trading floor, further eliminating the need for traditional brokers. NASDAQ followed up by enlarging its Small Order Execution System, giving traders the ability to make small deals using a computer rather than by doing so over the phone. This innovation came about as a result of numerous stock brokers deciding not to answer the phone following 1987’s stock market crash.

Online trading today

The advent of the Internet was quickly seized upon by traders of all shapes and sizes. Combined with the availability of more powerful computer hardware, which led to the design of high-powered algorithms, it became possible for humans to automate decisions like the timing, pricing and quantity of their stock market trades. These kinds of technology developments in online trading platforms have since helped to redefine the limits of commodity trading, paving the way for the high-frequency trade volumes that are typical of this new era.

With the Internet came the need for more regulations, and in the early 2000s the NYSE exchange made the decision to go 100 percent electronic, with many other competing exchanges quickly following suit.

While some older traders may reminisce about the days when they could bark orders to brokers on the stock exchange floor, the reality is that technological innovations have irreversibly altered the way trading is done. Today, traders can perform vastly higher volumes of trades in ways that simply weren’t possible back in the old days. With technology advancing further and bandwidth speeds getting faster and faster all the time, there’s no looking back.

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