Edited by Geoffrey Poitras
Chapter 12: The Impact of Electronic Communication Networks on Exchange Trading Floors and Derivatives Regulation
1 Jerry W. Markham and Daniel J. Harty The colorful ‘open outcry’ trading in the ‘pits’ of the Chicago futures exchanges and the bell-ringing opening of trading on the floor of the New York Stock Exchange (NYSE) has long dominated the public perception of how those markets operate. However, exchange trading floors are fast fading into history because the trading of stocks and derivative instruments are moving to electronic communications networks (ECNs) that simply match trades by computers through algorithms at incredibly high speeds and volumes.2 Competition from ECNs has already forced the NYSE and the Chicago futures and options exchanges to demutualize, consolidate and reduce the role of their trading floors, while expanding their own electronic execution facilities.3 This chapter will describe the development of electronic trading through ECNs and how the futures, equity and equity options exchanges responded to that competition. As will be shown, the traditional exchanges paralleled each other in resisting electronic trading in order to preserve their traditional open outcry trading floors. Gradually, after much pressure from market users, those exchanges began to adopt computer-assisted executions as a way of speeding up the trading process, while still preserving their trading floors. That still left the exchanges exposed to competition from the newly arrived and fully electronic ECNs, which quickly grabbed market share from the traditional markets. Finally, the exchanges accepted the inevitable and became fully committed to electronic trading. This chapter will also address the regulatory concerns raised by electronic traders. The ECNs have provided...
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