Electronic Trading Market Structure Primer

Defining electronic trading is not black and white, with no single definition for a firm or strategy, and trading activities vary across markets (typically dependent upon level of liquidity and trading/post trade infrastructure). Firms of all types – including traditional market participants like broker dealers trading for clients, market makers and asset managers, not just proprietary trading firms or hedge funds – have adopted technologies to enable better trade execution over the years. Markets and market participants are intermingled in today’s environment – trading is a complicated and dynamic ecosystem, with competitive forces and structural and regulatory changes continually shaping the environment – and technology is now part of market DNA.

In this primer from SIFMA Insights, we attempt to define electronic trading by providing an overview of the types of platforms and strategies utilizing a form of electronic trading. Highlights from the primer include:

  • Why Market Structure Matters – Given the need for market liquidity and minimized trading costs, market structure matters. Market structure can drive liquidity and costs to trade. Market participants, therefore, continually strive to create the most efficient markets. This includes adapting new technologies to achieve operational efficiencies, searching for new ways to transact and, generally, sculpting market structure to maximize efficiencies.
  • Answering the Unanswerable Question – Electronic trading is not one thing, and defining it is, therefore, difficult. While the term covers a variety of systems and activities across the trade lifecycle (execution/trading – clearing – settlement), we focus on the execution side in this report. This section details the drivers of, benefits of and concerns around electronic trading.
  • Types of Electronic Trading – This section walks through automated trading strategies, as well as describing common types of electronic trading platforms, activities and trading protocols.
  • The Electronification of Markets – As technological advances and market structure evolved over time, markets and products began the electronification journey from over-the-counter (OTC) to exchange traded, predominantly in search of liquidity and efficiencies. This section diagrams differences between exchange traded and OTC markets and analyzes the percent of electronification across products/markets.
  • Financial Institution Infrastructure Feeds Electronification – The role of the broker-dealer and in particular the markets and securities division has evolved significantly since the global financial crisis. This shift in business structure has enabled the growth of electronic trading.
  • Access to Information Enhances Electronic Trading Capabilities – Access to information establishes the building blocks, along with technological innovations, to creating electronic markets.
  • Looking Across Markets – This section details the electronification journey across different markets (equities, futures & options, UST, corporates and rates).



SIFMA Insights Primers

The primer series from SIFMA Insights goes beyond a typical 101-level brief, breaking down important technical and regulatory nuances to foster a fundamental understanding of the marketplace and set the scene to address complex issues arising in today’s markets.

See our full series here.


Katie Kolchin, CFA
SIFMA Insights