The term “trading” is one we hear a lot these days, and for good reason. The industry involves the buying and selling financial assets – things like currencies, commodities, stocks, bonds, and derivatives – in a variety of different financial markets. Why? To make money, of course.
The world of trading has transformed dramatically over the years, due in no small part to innovations in technology. Now, this is a pretty common theme across industries – that is, technology allowing for new possibilities, expansion, and the realization of ambitious ideas.
But how exactly does this work in trading?
Well, first, it’s essential to properly understand how the trading industry works and what it involves. And, from there, we’re going to tell you about the most important ways in which business technology has completely transformed the world of trading.
How Does Trading Work?
To make the explanation a little easier to understand, we’re going to break it down into categories.
Trading takes place in organized (and regulated) financial markets. These days, these markets are both physical and electronic. In terms of the latter, we’re talking about things like stock exchanges. With regards to the latter, it’s more things like online trading platforms, of which there are more and more every day.
Who takes part? Participants in the trading industry include institutional investors (such as hedge funds and mutual funds), individual retail traders, high-frequency traders and market makers.
In the markets, traders buy and sell assets – and there’s a huge range of different assets. For instance, the stock market deals with shares of publicly traded companies. Meanwhile, the foreign exchange market (Forex) trades in currencies.
Just like the way you order a meal, traders place orders to buy or sell assets – they need to specify quantity, price, and specific conditions. Market orders, however, are super time sensitive due to constantly fluctuating market prices – orders are executed as soon as they’re made at the current market price.
To make smart decisions, traders rely on market data. This includes price quotes, historical data, trading volumes and more.
These days, trades are executed electronically by means of trading platforms with orders that are matched by algorithms.
In the same way you use strategy to play games at Grand Rush casino, you’d use strategies when trading too. Essentially, trading is a bit like gambling, and you use your knowledge of the game or the market to make the best decision. Different traders use varying strategies – ranging from day trading to long-term investments.
Trading is financially risky, so traders employ tools like stop-loss orders to limit potential loss and diversify their portfolios to spread (and lower) risk.
All trading is regulated to ensure fairness and maintain market integrity. To do so, there are regulatory bodies that establish rules, monitor market activity, and ensure that everybody is behaving accordingly.
Technology has become an increasingly important part of trading, allowing for electronic trading, algorithmic trading as well as the use of big data and AI.
How Has Business Technology Transformed the World of Trading?
Trading has undergone a profound transformation over the last few decades, driven mostly by significant advancements in business technology. From the trading floors of Wall Street to online platforms accessible to anyone, anywhere in the world with access to the internet, technology has revolutionized the way in which we buy and sell financial assets.
Let’s have a look at the key ways in which business technology has influenced trading and shaped the financial markets.
Electronic Trading Platforms
Old-school trading used to occur in open-outcry settings – exactly what you’ve seen in “The Wolf of Wall Street”. But these days, technology has allowed for the established of electronic trading platforms. These platforms allow traders to execute orders electronically – this has led to increased efficiency, the reduction of human errors and a massive increase in access to global markets 24/7.
Essentially, the adoption of electronic trading has allowed traders to execute transactions with unprecedented speed and precision.
The use of algorithmic trading involves using computer programs to automate trading decisions. These algorithms can analyse market data, execute orders, and manage risk at speeds that are simply not possible for human traders – and certainly not possible at the same level of accuracy.
Algo trading strategies vary from simple to incredibly complex, and because of the possibilities that they provide, they’ve become an integral part of the modern financial markets.
High-Frequency Trading (HFT)
HFT is a subset of algo trading, but it involves a large number of orders at super high speeds. HFT relies on powerful computer systems and low-latency data feeds.
HFT has been quite controversial, but it’s become a dominant force in specific markets, contributing to price efficiency and liquidity. HFT is used mostly by large investment banks, hedge funds and institutional investors.
Big Data and Analytics
Trading is driven by market data to be able to make smart decisions, and with the progression of technology, the industry has become increasingly influenced by big data and sophisticated analytics programs.
Traders and financial institutions use data to gain valuable insights into market trends, to identify opportunities and to manage risk. The ability to process vast amounts of data quickly and accurately has become a competitive advantage in the trading world – if you want to stand a chance in the industry, you simply have to make use of big data and analytics.
Blockchain and Cryptocurrencies
Blockchain technology has introduced a net asset class in the form of cryptocurrencies. The transparency, security, and decentralised nature of blockchains has completely disrupted traditional financial systems, leading to many cryptocurrencies (like Bitcoin and Ethereum) gaining massive popularity as trading assets and investment opportunities.
Artificial Intelligence and Machine Learning
AI and machine learning have allowed traders to make more informed decisions. Furthermore, these technologies can analyse vast data sets, detect patterns, and predict market movements, making them super valuable.
In the most basic sense, technology has allowed people to trade from anywhere by means of mobile trading apps. Furthermore, they’ve mad trading accessible to a far broader audience, democratising trading and allowing anyone to participate in the financial markets.