Back in the day, otherwise known as the 1990s, the switch to electronic trading shook the traditional stock exchanges to their core. Most traditionalists spent more time ignoring the inevitable, with one major exchange official declaring publicly that the Internet, and the “World Wide Web” as it was known at its birth, were fads.
In large part, this was due to the inability to conceive of anything that wasn’t part of an existing model and system that was working and making the buy side and sell side rich. The most aware and visionary leaders, however, studied what was about to happen, and not only recognized the threat, but embraced the opportunity.
I know – I was there – and this was no evolution of the mechanics of trading securities; this was a revolution so fast and so fierce that tremendously successful brokers including Morgan Stanley Dean Witter, PaineWebber and Merrill Lynch felt the heat of challengers including Ameritrade, Charles Schwab and E*Trade in what felt like “zero to a thousand” over a period of less than one year.
This happened at the turn of the 21st Century, when, in 1999 SEC ruled that any trading firm could have full access to stocks listed on the New York Stock Exchange (NYSE), and the expansion of the Intermarket Trading System (an electronic-order routing system created in 1978 that originally linked the exchange markets) accelerated.
The NYSE voted to rescind Rule 390 (which prohibited off-exchange trading of stocks listed before April 1979) and with SEC approval, all listed stocks became freely tradable. These changes, combined with the proliferation of electronic communications networks (ECNs) and of course the growth of the Internet, changed the game forever. ECNs functioned as virtual a stock exchanges for off-the-floor trading, where “limit orders” were posted and automatically matched, with size and price visible, but not the identity of the trader.
Like most successful technology-based disruptions, e-trading reduced or eliminated the “middleman” thus reducing trading costs and speeding up the trading process. Instinet Corp., owned by Reuters Group, PLC at the time claimed that its ECN saved its customers $1 billion annually in trading costs, and by 1999 was trading an average of over 150 million shares a day in the U.S., with approximately 7.5 million shares being traded during nonmarket hours, another phenomenon driven by the Chicago Stock Exchange, leveraging MarketXT, Datek Online, NexTrade, Instinet, Wit Capital, and other exchanges that followed suit.
There was confusion followed by resistance, while new fortunes were being minted as incumbents scrambled to change the very foundation of their business models and pricing.
The original ECNs connected to the National Association of Securities Dealers (Nasdaq) trading system, quickly accounted for nearly 1/3 of all trades, driving the success of “start-ups” funded by companies including Bloomberg (Tradebook) and Sungard (Brass), while consortiums of brokerage firms went in on ECNs including Strike, and independent players including Archipelago. Institutional traders gravitated towards electronic trading in what felt like the blink of an eye, with Instinet claiming it processed trades for 90% of U.S.-based institutions.
By 1999, bond trading changed forever when Cantor Fitzgerald’s eSpeed began to replace OTC voice brokered Treasury trading, once again dramatically automating slow and expensive trading processes, and across all these innovations, the entire regulatory environment was forced to adapt; some investors won, some investors lost, bubbles including the Internet bubble were born.
One of the last holdouts to fully adopt electronic trading was the New York Mercantile Exchange (NYMEX) which tried to fend off electronic trading, keeping their open outcry “pits” alive. NYMEX launched after-hours electronic trading with its Access System in 1993. Trading was confined to hours when the pits were closed to protect the local traders and the value of the seats on the floor of the exchange. It wasn’t until 2006 (after a rival exchange introduced an electronic oil contract), the Exchange announced it would launch electronic trading that would take place at the same time as traditional open outcry trading. Very quickly, open outcry trading volume for oil and other commodities shrank dramatically, and in 2008, CME Group, a Chicago-based futures market operator, purchased the NYMEX.
One little secret was: during the early 90’s when NYMEX’s after hour trading platform “Access” was running often there would be major volatility in the evening caused by CNN’s 7×24 hour coverage of things happening in Iraq. As a result, after hour trading activities would be robust creating an opening challenge in the morning as the NYMEX would have to transition from the fully electronic Access platform to open outcry when the local floor brokers arrived. While the floor brokers got their way and managed to keep the platform closed during normal hours, the platform had proved it could handle volume better than people could which sealed open outcry’s faith which officially happened in 2016.
Today, two decades later, “Wall Street” continues to evolve, including addressing the rapid rise (fall) and rise of cryptocurrencies, the most well known of which is Bitcoin, and after an often grueling transition to electronic trading twenty years ago, there is far less resistance to innovation and far more investment in disruption (Disrupt or Be Disrupted).
The creation of completely non-fiat currencies has likewise created huge opportunities for disrupters who understand how to develop and leverage software and networks, but this time the chaos and uncertainty has created a less clear path to widespread adoption. In order to simplify the buying and selling of cryptocurrencies, some entrepreneurs have rolled out Bitcoin ATMs which dispense “regular money” when a debit card is used to tap Bitcoin accounts.
For many early adopters of Bitcoin, anonymity is essential and drew them to crypto currencies in the first place, and in exchange for this convenience, a fee as high as 7-10% is charged for the service which manages Know Your Customer (KYC) and Anti-Money Laundering (AML) in the background.