What Happens When Traders Quit Stock Exchanges for Online Trading

3 weeks ago 7ring Comments Off on What Happens When Traders Quit Stock Exchanges for Online Trading

Hong Kong’s stock exchange has become the first to close down its physical trading floor after 31 years. Because of the changing nature of markets, Hong Kong may just be the first of many to follow this route. The rationale behind the closure is, of course, the rise of electronic and Internet trading.

According to the BBC, Hong Kong’s stock exchange was home to more than a thousand floor traders at its peak. Now, its floor is being considered for renovation and subsequently will be turned into a space for conventions and exhibitions.

What trading floor?

Stock exchanges are crucial to their national, and indeed the global, economy. They allow stock brokers and traders to buy and sell shares of stock, bonds and other securities at a central location. However, with the rise of Internet trading, such centralization is no longer strictly necessary. Exchanges can do more and more of their work online, obviating the need for a physical presence anywhere.

Even for exchanges that maintain a physical presence, like the New York Stock Exchange (NYSE), more of their activity is happening behind the scenes and off the trading floor. In fact, NYSE’s matching engine is actually located off-site in Mahwah, New Jersey, in a 400,000 square foot facility. For a price, the NYSE sells colocation services to various high frequency trading (HFT) firms, allowing them the fastest access to the exchange’s matching engine.

Beginning of a trend?

What will happen when more exchanges follow in Hong Kong’s footsteps and close their physical trading floors? It’s likely that traders will begin to tolerate greater amounts of decentralization, and barriers to entry for new exchanges will be lowered. Anyone who has regulatory approval and the right technology would be able to open an exchange without leasing actual office space needed to accommodate a trading floor.

As digital currency continues to go more mainstream, so too may its adherents’ attitude toward exchanges. Cryptocurrency enthusiasts are used to dealing with a number of different, small-scale online exchanges and are comfortable working without the assistance of brokers or other centralized third-parties. If digital currency really does continue to grow in the way many enthusiasts believe it will, physical trading floors could be rendered obsolete even more rapidly.

As electronic and online trading grows in popularity, software manufacturers will likely hone their offerings, enabling more and smaller exchanges to develop. Hong Kong may set a good or bad precedent depending on traders’ perspectives. Time will tell if other exchanges follow their lead.