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What is Electronic Trading?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2016
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Electronic trading, often called e-trading, is a way to buy, sell, and manage investments online. Early forms of electronic trading simply used computers to handle all the price and exchange rate information, giving bulletins on price changes and new offerings at regular intervals. Since the emergence of the internet, however, e-trading is more often used to describe any type of trading that occurs online through electronic brokers. Since its inception, e-trading has attracted millions of investors that rely on the accuracy, efficiency, and speed of the Internet to assist with better investing strategies.

One of the first stock exchanges that had an electronic component was the NASDAQ index, beginning in the early 1970s. Not surprisingly, many of the stocks traded through NASDAQ were high-tech electronic giants, including most of the large computer companies. Since the system predated public access to the Internet, however, much of the business of trading was still done through brokers, phone calls, and physical orders. As more people gained access to the Internet in the late 1990s and first years of the 21st century, it became a logical step to put all the steps of trading online.

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For most investors, electronic trading is quite simple. A person must first create a trading account with an online brokerage, since this is the only access to Internet trading. Choosing a broker is very important, as the services offered can affect how a person is allowed to trade. Brokers will also have access to personal financial data, so be certain to choose a well-respected firm that offers excellent security services. Brokers act as a representative for the trader to the trading exchanges; while the exchanges wouldn't allow an individual with no financial record to simply join in, brokers are known as respected business entities that provide legal trading services.

Once a person has established an electronic trading broker account, he or she can sign in with a user name and password to manage and order buying and selling. If a person wants to buy shares, the linked computers can search for sales for share and return results in mere seconds. Additionally, if there are no shares currently available, the computer systems can keep track and notify the seller the moment a buyer becomes available. These features speed up the process of trading immensely, while limiting the potential for human error.

One of the major issues with electronic trading is the possibility of server failure. Investors could lose millions of dollars if an e-trading website or exchange website fails for even one day. To compensate for this risk, many brokers and exchange webmasters run multiple redundant servers in secure areas. In addition to having generators in case of power outages, servers may be placed many miles apart in case of natural disasters that could destroy nearby backups.

To get a feel for e-trading, consider setting up a simulation account. Many brokerage websites allow potential clients to set up a fake account that will let them practice trading and even analyze trading savvy based on trades versus market information. Trying out a simulation account can not only introduce a novice trader to the services of a brokerage, but can also help improve trading abilities.

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