I Online Trading in Stocks Online trading in stocks has been growing by leaps and bounds since the late 1990s, but this has not been the case with most traditional futures markets. In fact, the U.S. futures markets have been slow to catch up. On the other hand, fully electronic trading at the LIFFE exchange in London and the Eurex exchange in Europe has been viable for several years. For many years the "good old boy" network of floor brokers (pit traders) in futures opposed the fully electronic market because it threatened their income. In the past, pit brokers could buy at wholesale prices from the public while selling at retail prices and vice versa by offering to buy at prices lower than the prevailing price and offering to sell at prices higher than the prevailing price. In a rising market they played their game, often with great success when the trading public sold or bought positions at the market. By skillfully judging the market to get the "edge," the pit brokers could buy at a given price and sell almost immediately at a slightly higher price. In addition, they could often sell short at a high price and cover their short positions quickly at a lower price. In effect, the floor broker served as the middle person. Although the mandate of the floor broker in futures was to provide liquidity and make for an orderly market, doubts have risen about the validity of this mandate as trading volume and liquidity have increased. The purpose of the market specialist in stocks has also been, purportedly, to provide liquidity and make for an orderly market. Yet questions have risen here too about whether specialists and pit brokers actually served their supposed purpose. With the advent of fully electronic trading, it has become clear that the historical role of the floor broker is no longer a necessity. The role of the floor broker in futures trading is slowly being replaced by electronic trading platforms, in which buy and sell orders are matched through approved market makers. An example of a fully electronic SSF market is one run by the OneChicago organization, a joint venture of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the Chicago Board Options Exchange. The NQLX in New York also trades SSFs. Orders are matched by computer, thereby giving market participants the best possible execution of their trades at the fastest possible speed. As of the date of writing, approximately 16 exchanges throughout the world trade about 300-plus SSFs. Experience has shown these markets to be efficient and viable. I Time Perspectives and Goals Of the distinct differences between investors, traders, and pure speculators, the essential differences are time based. In other words, investors have a lengthy, or extended, time perspective, whereas traders have a considerably shorter time frame. Because futures contracts have a defined life span (usually one to three years), their use may be more suited to the short term and day traders than to investors. However, for investors who seek to protect a long position in stocks, the possibility of selling short SSFs against a long stock position, even for a limited period, offers a great advantage. preferred stock ~ futures brokers |