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Electronic Trading in Stock Markets

  • Hans R. Stoll

Modern trading technology clashes with the traditional organization of a stock exchange, where transactions were consummated via face-to-face negotiation. The modern trading facility is no longer a place. Rather, it is a computer system over which transactions are entered, routed, executed and cleared electronically with little or no human intervention. In this article, I examine how electronic trading has altered stock markets. I begin with an overview of how the stock trading process works and then address a number of questions. How have the jobs of traditional stock market dealers on the NYSE and on Nasdaq been affected by electronic trading? How do electronic communications networks differ from traditional markets? How has electronic trading affected bid-ask spreads and commission costs? What subtle issues arise in electronic trading when dealer and customer interests diverge? Will computer programs replace human judgment? What is the effect of electronic trading on the number and types of securities markets? What is the role of regulation in electronic markets?

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/089533006776526067
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 20 (2006)
Issue (Month): 1 (Winter)
Pages: 153-174

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Handle: RePEc:aea:jecper:v:20:y:2006:i:1:p:153-174
Note: DOI: 10.1257/089533006776526067
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  1. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
  2. Sofianos, George & Werner, Ingrid M., 2000. "The trades of NYSE floor brokers," Journal of Financial Markets, Elsevier, vol. 3(2), pages 139-176, May.
  3. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. " Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-60, December.
  4. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
  5. Bacidore, Jeffrey & Battalio, Robert H. & Jennings, Robert H., 2003. "Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange," Journal of Financial Markets, Elsevier, vol. 6(3), pages 337-362, May.
  6. Stoll, Hans R. & Schenzler, Christoph, 2006. "Trades outside the quotes: Reporting delay, trading option, or trade size?," Journal of Financial Economics, Elsevier, vol. 79(3), pages 615-653, March.
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