The days of men with questionable jacket colours screaming and making hand gestures at each other on a stock trading floor are a relic of a bygone era (sometimes referred to as an “open outcry” system). Today, nearly all stock trades, both at the individual and institutional level, are done electronically from a desk at the push of a button.
Early Electronic Trading
The process of taking buy and sell orders and physically trading stock remained pretty much the same from 1817, in the case of the New York Stock Exchange (NYSE), and 1861, in the case of the Toronto Stock Exchange, until about 1969.
It was then that Instinet was created as the first Electronic Communication Network (ECN) that allowed brokers to post offers to buy and sell stocks even after regular market hours. But in 1971 things really changed when the National Association of Securities Dealers formed the National Association of Securities Dealers Automated Quotations, or NASDAQ.
Although the NASDAQ automated quotes (it didn’t begin its life as an electronic trading system), it basically posted bids and offers on an electronic bulletin board. Later in the decade, the NYSE created a Designated Order Turnaround (DOT) system that allowed brokers to route share orders directly to the specialist on the floor, bypassing floor brokers.
In 1984, the NYSE created SuperDOT, allowing for as many as 100,000 shares to be sent to the floor, which cut out even more brokers. Later, the NASDAQ enlarged its Small Order Execution System, allowing dealers with small trades to give orders electronically rather than over the phone. This was a direct result of many broker-dealers having stopped answering their phones during the stock market crash of 1987.
The 90s saw a huge growth of online and electronic trading as the Internet took shape and more powerful computers became available to the home trader. Beginning in the 2000s, faster hardware and the creation of high-level algorithms allowed computers to decide the pricing, timing and quantity of trades, which paved the way for High-Frequency Trading.
Regulations by the Securities and Exchange Commission also changed and consolidated around this time, forcing the NYSE to go completely electronic and help grow other competing exchanges.
The Bottom Line
While it is difficult to say which is better or worse (outcry vs. electronic), electronic trading allows for higher volumes of trades in customized ways that were not possible before. There is no going back as technology and bandwidth speeds become faster and more powerful. Geography is no longer a consideration, allowing for continuous multilateral interaction. It is a far cry from the trading floors of the past and continues to grow in speed, quantity and execution.