Introduction to Trading Technologies

Trade automation has facilitated the broad dissemination of popular algorithmic trading strategies by trading service and brokerage firms. The majority of financially significant traded markets have adopted these technologies to the point where the majority of market order flow for these markets is now managed by algorithmic trading systems.

Even for illiquid markets, which until recently have continued to use human trading systems in lieu of automatic execution engines to fill a small percentage of orders, economic rationale suggests that no-trade technology changes may eventually facilitate the transition to full trade automation.

We believe that this remarkable and widespread technological transition is a natural field explication of notable empirical market microstructure regularities first emphasized by D. May.

Trading technologies have evolved at a staggering pace over the last three decades. Advanced technology transforms orders, not immediately matched via automatic trade execution, into option price requests to be managed by the pricing algorithm.

Each pricing algorithm’s dynamics, in turn, is driven by the technology of the relative liquidation process and closings of the reference asset option. This paper contributes by performing a comprehensive analysis of such technologies. We identify a broad class of trading models parameterized to replicate empirical statistical properties of trading in a liquid market.

Using the proposed technology and seed orders from trading algorithms, we demonstrate how the model-implied random and non-random models can act as comprehensive market performance benchmarks for a variety of related empirical analyses and trading signals.

1.1. Historical Overview of Trading Technologies

Throughout history, sailing boats, horses, pigeons, telephone, telegraph, radio, airplanes and computers have all been employed to improve the speed and reliability of information transmission. With these improvements in communication vehicles and channels, transactions can increasingly be spatially and temporally separated.

As a result, the trading arena has gradually evolved from flea markets and bazaars to shop markets with better regulations, further to organized markets with centralized information, and more recently to virtual networks for trading. Moreover, the nature of the assets exchanged has evolved from simple commodities to complex financial products with various attributes.

An increasing number of assets have become directly or indirectly tradable. The organization of trading, the nature of transactions and traditional exchange structures have also undergone significant changes.

Efficient exchange mechanisms enable participants to maximize the gains from exchange. Trading technologies, basically including information and communication technologies for trading, are a group of mechanisms providing efficient infrastructures for market participants to facilitate exchanging assets or rights. With trading technologies, participants can easily search for trading partners, and the unclear value that existed before becomes clearer and the value can be, sometimes immediately, realized with a positive impact on participant wealth.

Technological progress has been frequently accompanied by changes in the organization of economic activities which, more often than not, lead to or are associated with changes in the character of the underlying transactions.