Stock Exchanges Merge/High Speed Technologies Force Massive Changes

The human element on trading floors continues to dwindle. For example, the Wall Street bastion known as the New York Stock Exchange has slashed employee count and lost a massive amount of trading market share. To fight back, the NYSE bought its own electronic trading unit, NYSE Arca, formerly known as Archipelago. The investment was successful to some extent, but it was not enough to counteract continuing evolution of the exchange industry.

Exchanges worldwide are racing to provide the fastest possible trades in order to retain professional investment clients. Over the past few years, upstart electronic exchanges have forced the leader, the NYSE Euronext, to adapt and invest millions in high-speed electronic trading technology. At the beginning of 2013, the Tokyo Stock Exchange remade itself into the Japan Exchange Group by acquiring the important Osaka (Japan) Securities Exchange. This consolidated the two firms into a single powerful entity featuring advanced technologies.

NYSE is far and away the world’s largest exchange. In August 2023, it had a market capitalization (the total value of all shares listed on the exchange) of about $25.0 trillion, followed by the NASDAQ – US with $21.7 trillion and Euronext with $7.2 trillion. These numbers are from VisualCapitalist.com.

To successful stock and options traders, three things count: 1) the speed with which the trade is executed (counted in microseconds), 2) the cost of the trade, and 3) a trader’s ability to use multiple exchanges when possible, to avoid tipping off other traders and driving up the price of a stock. Some exchanges offer better features than others, and the competition between exchanges remains fierce.

Meanwhile, the competition between the largest traders is fierce as well. A major trend is called “high-speed” trading by “high frequency” traders. Firms are able to execute trades for hundreds of millions of shares daily with a relatively small number of employees utilizing the latest in technology. Costs are slashed, liquidity is enhanced, and the profits can be astonishing. High-frequency trading (HFT) has moved into markets of all types, including commodities markets.

The leading electronic exchanges and trading offices invest immense sums in installing and maintaining the fastest possible communications connections, computers and algorithms. The small numbers of people who are highly experienced and skilled in this arena are in very high demand.

HFT involves the use of extremely fast computer systems and special algorithms in order to place large numbers of buy and sell orders on stock exchanges, often in small batches that may total thousands of trades in a few seconds or even a fraction of a second. The intent is to minimize risk on the part of the trader, while earning a small profit per trade, on vast numbers of trades in a short period of time. The development of effective software that triggers trades automatically based on constant real-time market data analysis is critical to the process.

The highest speeds may be attained in a practice called co-location. Traders’ data centers are being built with servers that literally share the same data host as the exchanges themselves. The proximity shaves milliseconds off trade times and is quickly being adopted by exchanges around the world. During 2015, Hibernia Atlantic, a New Jersey-based undersea cable company, completed a $300 million transatlantic fiber-optic cable called Project Express, connecting London and New York and enabling transatlantic transaction speeds to drop from 64.8 milliseconds to 59.6 milliseconds. The latest technology uses an experimental hollow cable called hollow-core fiber. The cable is made of glass and carries data encoded as beams of light, which takes about one-third less time to send data than through standard fiber. The majority of trades are made electronically, which vastly accelerates trading speeds.

A new stock exchange, called Members Exchange (MEMX), began trading in September 2020. Backed by BlackRock, Morgan Stanley, Fidelity Investments and Citadel Securities, among others, the exchange offers a low-cost alternative to the fees charged by traditional exchanges such as NYSE and Nasdaq.

U.S. initial public offerings (IPOs) are now digitized thanks to a platform from Capital Markets Gateway LLC. IPO managers use the platform to view data and analytics of follow-on stock sales, block trades and IPOs. Commission breakdowns are also available. In the past, managers of IPOs and other public offerings had to wait a day for news of allocations and pricing via phone. Franklin Templeton, Fidelity Investments, Goldman Sachs Group, JPMorgan Chase and Morgan Stanley were early backers.

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