E Trading First Sumbission

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E-Trading

Introductory Document

Submitted by:

y Soha Zulfiqar

y Hira Hasan

y Summaiyah Fatima

y Yahya Vana



TABLE OF CONTENTS

Trading .................................................................................................................................................................. 4

Two Basic Methods ............................................................................................................................................ 4

Exchange floor................................................................................................................................................ 4

Electronically .................................................................................................................................................. 5

ELECTRONIC TRADING ............................................................................................................................................ 6

Background........................................................................................................................................................ 6

TYPE OF TRADES................................................................................................................................................. 7

Business-to-business (B2B) trading: ................................................................................................................ 7

Business-to-consumer (B2C) trading ............................................................................................................... 7

Impact................................................................................................................................................................ 8

Reduced cost of transactions .......................................................................................................................... 8

Greater liquidity ............................................................................................................................................. 8

Greater competition....................................................................................................................................... 8

Increased transparency................................................................................................................................... 8

Tighter spreads............................................................................................................................................... 8

Technology & Systems........................................................................................................................................ 9

KINDS OF TRADES............................................................................................................................................. 10

Foreign Exchange Trading ............................................................................................................................. 10

Commodity Trading ...................................................................................................................................... 16

Future Trading.............................................................................................................................................. 17

Option Trading ............................................................................................................................................. 19

Online Trading Tools ............................................................................................................................................ 19

Stock Screener ................................................................................................................................................. 19

Stock Charting .................................................................................................................................................. 20

Technical Indicators.......................................................................................................................................... 20

Market Data..................................................................................................................................................... 20



Practice Account .............................................................................................................................................. 20

MAKING AN E-TRADE ........................................................................................................................................... 20

Broker Trader Backup Systems ......................................................................................................................... 21



TRADING

Trade = Buy or Sell

To trade means to buy and sell in the jargon of the financial markets. How a system that can

accommodate one billion shares trading in a single day works is a mystery to most people. No

doubt, our financial markets are marvels of technological efficiency.

Yet, they still must handle your order f or 100 shares of Acme Kumquats with the same care and

documentation as my order of 100,000 shares of MegaCorp.

You dont need to know all of the technical details of how you buy and sell stocks, however it is

important to have a basic understanding of how the markets work. If you want to dig deeper,

there are links to articles explaining the technical side of the markets.

TWO BASIC METHODS

There are two basic ways exchanges execute a trade:

y On the exchange floor

y Electronically

There is a strong push to move more trading to the networks and off the trading floors; however this push is meeting with some resistance. Most markets, most notably the NASDAQ ,

trade stocks electronically. The futures markets trade in person on the floor of several

exchanges, but thats a different topic.

EXCHANGE FLOOR

Trading on the floor of the Karachi Stock Exchange is the image most people have thanks to

television and the movies of how the market works. When the market is open, you see

hundreds of people rushing about shouting and gesturing to one another, talking on phones,

watching monitors, and entering data into terminals. It could not look any more chaotic.

Yet, at the end of the day, the markets workout all the trades and get ready f or the next day.

Here is a step-by-step walk through the execution of a simple trade on the NYSE.



ELECTRONIC TRADING

Electronic trading, sometimes called etrading, is a method of trading securities (such as stocks,

and bonds), f oreign currency, and exchange traded derivatives electronically. It uses

inf ormation technology to bring together buyers and sellers through electronic media to create

a virtual market place. Etrading is widely believed to be more reliable than older methods of

trade processing, but glitches and cancelled trades do occur.

BACKGROUND

Historically, stock markets were physical locations where buyers and sellers met and

negotiated. With the improvement in communications technology in the late 20th century, the

need f or a physical location became less important, as traders could transact f rom remote

locations.

One of the earliest examples of widespread electronic trading was on Globex, the CME Groups electronic trading platf orm that allows access to a variety of financial, f oreign exchange and

commodity markets. The Chicago Board Of Trade produced a rival system that was based on

Oak Trading Systems Oak platf orm which f acilitated E Open Outcry, an electronic trading

platf orm that allowed f or electronic trading to take place alongside the trading that took place

in the CBOT pits. Oak Trading Systems continues to offer access to global markets via various

sof tware applications, including demo packages, and products are available through reputable

brokerage firms such as EHedger LLC

Electronic trading makes transactions easier to complete, monitor, clear, and settle. NASDAQ , set up in 1971, was the world's first electronic stock market, though it originally operated as an

electronic bulletin board, rather than offering straight through processing (STP). By early 2007,

organizations like the Chicago Mercantile Exchange were creating electronic trading platf orms

to support the emerging interest in trading within the f oreign exchange market.



Today many investment firms on both the buy side and sell side are increasing their spending

on technology f or electronic trading. Many floor traders and brokers are being removed f rom

the trading process. Traders are relying on algorithms to analyze market conditions and then

execute their orders.

Dates of introduction of electronic trading by leading exchange in 120 countries is provided in a

Journal of Finance article published in 2005 Financial market design and the equity premium:

Electronic vs. floor trading,. Leading academic research in this field is conducted by Professor

Ian Domowitz and Professor Panka j Jain.

TYPE OF TRADES

There are, broadly, two types of trading in the financial markets:

BUSINESS-TO -BUSINESS (B2B) TRADING:

Of ten conducted on exchanges, where large investment banks and brokers trade directly with

one another, transacting large amounts of securities, and

BUSINESS-TO -CONSUMER (B2C) TRADING

Where retail (e.g. individuals buying and selling relatively small amounts of stocks and shares)

and institutional clients (e.g. hedge funds, fund managers or insurance companies, trading f ar

larger amounts of securities) buy and sell f rom brokers or "dealers", who act as middle-men between the clients and the B2B markets.

While the ma jority of retail trading probably now happens over the Internet, retail trading

volumes are dwarfed by institutional, inter-dealer and exchange trading.Bef ore the advent of

eTrading, exchange trading would typically happen on the floor of an exchange, where traders

in brightly colored jackets (to identify which firm they worked f or) would shout and gesticulate

at one another - a process known as open outcry or "pit trading" (the exchange floors were

of ten pit-shaped - circular, sloping downwards to the centre, so that the traders could see one

another).

For instruments which aren't exchange-traded (e.g. U.S. treasury bonds), the inter-dealer

market substitutes f or the exchange. This is where dealers trade directly with one another or

through inter-dealer brokers (i.e. companies like GFI Group, BGC Partners and Garban, who act

as middle-men between dealers such as investment banks). This type of trading traditionally

took place over the phone but brokers are beginning to offer eTrading services.



Similarly, B2C trading traditionally happened over the phone and, while much of it still does,

more brokers are allowing their clients to place orders using electronic systems. Many retail (or

"discount") brokers (e.g. Charles Schwab, E-Trade) went online during the late 1990s and most

retail stock-broking probably takes place over the web now.

Larger institutional clients, however, will generally place electronic orders via proprietary ECNs

such as Bloomberg, TradeWeb or CanDeal (which connect institutional clients to several

dealers), or using their brokers' proprietary sof tware.

IMPACT

The increase of eTrading has had some important implications:

REDUCED COST OF TRANSACTIONS

By automating as much of the process as possible (of ten referred to as "straight-through

processing" or STP), costs are brought down. The goal is to reduce the incremental cost of

trades as close to zero as possible, so that increased trading volumes don't lead to significantly

increased costs. This has translated to lower costs f or investors.

GREATER LIQUIDITY

Electronic systems make it easier to allow different companies to trade with one another, no

matter where they are located. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets.

GREATER COMPETITION

While etrading hasn't necessarily lowered the cost of entry to the financial services industry, it

has removed barriers within the industry and had a globalization-style competition effect. For

example, a trader can trade futures on Eurex, Globex or LIFFE at the click of a button - he or she

doesn't need to go through a broker or pass orders to a trader on the exchange floor.

INCREASED TRANSPARENCY

Etrading has meant that the markets are less opaque. It's easier to find out the price of

securities when that inf ormation is flowing around the world electronically.

TIGHTER SPREADS



The "spread" on an instrument is the difference between the best buying and selling prices

being quoted; it represents the profit being made by the market makers. The increased

liquidity, competition and transparency means that spread have tightened, especially f or

commoditized, exchange-traded instruments.

For retail investors, financial services on the web offer great benefits. The primary benefit is the

reduced cost of transactions f or all concerned as well as the ease and the convenience. Web-

driven financial transactions bypass traditional hurdles such as logistics.

TECHNOLOGY & SYSTEMS

Etrading systems are typically proprietary sof tware (etrading platforms), running on COTS

hardware and operating systems, of ten using common underlying protocols, such as TCP/IP.

Exchanges typically develop their own systems (sometimes referred to as matching engines),

although sometimes an exchange will use another exchange's technology (e.g. e-cbot, the

Chicago Board of Trade's electronic trading platf orm, uses LIFFE's Connect system), and some

newer electronic exchanges use 3rd-party specialist sof tware providers (e.g. the Budapest stock

exchange and the Moscow Interbank Currency Exchange) use automated trading sof tware

originally written and implemented by FMSC, an Australian technology company that was

acquired by Computershare, and whose intellectual property rights are now owned by OMX.

Exchanges and ECNs generally offer two methods of accessing their systems -

y an exchange-provided GUI, which the trader runs on his or her desktop and connects

directly to the exchange/ECN, and

y an API which allows dealers to plug their own in-house systems directly into the

exchange/ECN's.

From an inf rastructure point of view, most exchanges will provide "gateways" which sit on a

companies' network, acting in a manner similar to a proxy, connecting back to the exchange's

central system.

ECNs will generally f orego the gateway/proxy, and their GUI or the API will connect directly to a

central system, across a leased line.

Many brokers develop their own systems, although there are some third-party solutions

providers specializing in this area. Like ECNs, brokers will of ten offer both a GUI and an API

(although it's likely that a slightly smaller proportion of brokers offer an API, as compared with



ECNs), and connectivity is typically direct to the broker's systems, rather than through a

gateway.

Investment banks and other dealers have f ar more complex technology requirements, as they

have to interf ace with multiple exchanges, brokers and multi-dealer platf orms, as well as their

own pricing, P&L, trade processing and position-keeping systems. Some banks will develop their

own etrading systems in-house, but this can be costly, especially when they need to connect to

many exchanges, ECNs and brokers. There are a number of companies who offer solutions in

this area.

KINDS OF TRADES

FOREIGN EXCHANGE TRADING

WHAT IS FOREIGN EXCHANGE MARKET

Foreign Exchange is a currency market where the trading of one currency against another takes

place. It is of ten referred to as Forex or FX.

The f oreign exchange market is the largest most liquid and most influential market in the world.

It is a truly 24 hour global market, it trades f rom 9pm GMT Sunday until 10pm GMT Friday and

trades in excess of $1.5 trillion dollars a day, Making it f ar bigger than the combined total of all

the worlds stock exchanges.

Participants in Forex include central banks, corporations, individual investors and speculators,

and hedge funds. With the advent of electronic trading platf orms, self -directed investors and

smaller financial firms now have access to the same liquidity as larger market participants.

Trading, or speculation, makes up 95% of the daily volume. The other 5% of daily volume

consists of governments and commercial companies converting one currency into another f rom

buying and selling goods and services.

51% of the market is in spot FX transactions, f ollowed by 32% in currency swap transactions.

Forward outright FX transactions represent another 5% of this daily turnover. Options on inter-bank FX transactions making up another 8%.

WHY TRADE FX?

Liquidity



The Forex market is the most liquid market in the world. Most speculators f ocus on trading the

highly liquid Ma jors where approximately 85% of trading volume occurs. Other currency pairs

are less liquid and theref ore increases liquidity risk.

Unlike the stock market, where slippage can be a real concern, high liquidity in Forex means

that trades will generally be filled at the order price. There are always plenty of buyers and

sellers which helps make sure spreads are narrow.

24-Hour Trading

Since the market is almost always open, traders can react to market, economic and political

news as it happens, locking in profits, protecting profits and cutting losses. The main trading

centres are Sydney, Tokyo, London, Frankfurt and New York. Trading takes place during five

overlapping trading sessions starting at 9pm GMT Sunday evening and ending on 10pm GMT

Friday Evening.

Leverage - Trading on Margin

Trading on margin means that a trader can utilize more capital than they have in their account.

The volatility of currency pairs is usually less than other markets, such as futures and equities.

Since there is less movement, traders leverage their capital to make money on smaller moves.

The amount of margin available in Forex is as high as 1% (100:1 leverage), and generally up to

2% (50:1 leverage). With £2,000 of capital, you can trade up to £400,000 at 50:1 and £500,000

at 100:1. Your individual broker will set the level of margin required on your account.

If you were to trade £100,000 GBP/USD you would be required to have at least £1000 at 1%

margin or £2000 at 2% margin in your account to open the trade. Trading on margin is a double

edged sword. You can lose money equally as f ast as you make it. It is theref ore vital to have a

full understanding of the FX market and not commit too much of your equity to each trade.

Lower Transaction Costs Tighter Spreads - No Commissions

Most Forex brokers do not charge commissions, but instead make money on the dealing

spread. The Dealing Spread is difference between the bid and ask quote. The Bid is the price

buyers are willing to buy, and the Ask is the price that sellers are willing to sell at any given time. Under normal market conditions the dealing spread would be no more than 5 pips.

Trade in rising or falling markets

With FX Trading you can trade long or short which means you can take a view on any currency

pair and place a relevant trade. If you feel that the UK economy is strong and the US Dollar will



weaken against the Sterling you would execute a BUY GBP/USD order. By doing so you have

bought British pounds in the expectation that they will appreciate versus the US dollar. If you

feel the UK will continue to weaken and this will hurt the British Pound, you would execute a

SELL GBP/USD order. By doing so you have sold British pounds in the expectation that they will

depreciate versus theUS dollar.

Foreign Exchange Quoting Conventions

All currencies have a 3 letter code similar to an epic code f or equities that identifies the

currency; the most Commonly Traded Currencies are called the Ma jors.

USD US Dollar

JPY Japanese Yen

EUR Euro

GBP British Pound

CAD Canadian Dollar

AUD Australian Dollar

CHF Swiss Franc

When trading currencies, the trade is always done in pairs currency Pair. One currency is bought and the other sold. For example, you buy British pounds against Euros, anticipating, the

Pound to increase in value relative to the Euro. If the Pound rises relative to the Euro, you sell

the position and have made a profit.

Commonly Traded Currency Pairs

USD/JPY US Dollar and the Japanese Yen

EUR/USD Euro and US Dollar

USD/CHF US Dollar and Swiss f ranc

GBP/USD British Pound and US Dollar

When quoting currency pairs, the first currency is referred to as the base currency and the

second, the counter or quote currency. The base currency is always equal to 1 monetary unit of



exchange, f or example, 1 Dollar, 1 Pound, 1 Euro. The dominant base currencies are, in order of

f requency, the EUR, GBP, and USD. The quote currency is translated into a certain number of

units of the base currency. For example, a quote of USD/JPY at 1.20, says that f or every 1 US

Dollar, you get 1.20 Japanese Yen, while a quote f or AUD/JPY of 67.73 says that f or every 1

Australian

Dollar, you get 67.73

Yen.

Currency pairs are generally traded as set unit quantities of the base currency (i.e. 100,000

units) For example, if you were buying GBP/USD at 1.7999 you would be paying Dollars f or

British pounds as f ollows: 100,000 x 1.7999 = $179,990 f or 100,000 British pounds.

HOW ARE PRICES QUOTED?

Just like in all markets, there are two prices f or every currency pair. BID price on the lef t and

the ASK (or offer) price on the right. The difference between these two prices is the spread, or

the cost of the trade.

GBP/USD 1.7995 1.7999

Most currencies are quoted to f our decimal places (with the exception of the Japanese Yen

which is 2) you can see here that the difference is 4 units , each unit of price is known as a pip,

so the difference is 4 pips

PLACING A FX TRADE

Because you can trade long or short you have two options with each currency pair A) Buy in the expectation that the exchange rate will rise B) Sell in the expectation the exchange rate

will f all.

Example 1: BUY - Long Trade

Trader's Action

Exchange Rate

GBP Pos.

USD Pos.

1) Buys 100k GBP/USD

1.7995-1.7999

100,000



-179,990

2) Sells 100k GBP/USD to close their position

1.8101-1.8105

-100,000

181,010

End result the trader earned a gross profit of $1,020

0

1,020

Example 2: SELL - Short Trade

Trader's Action

Exchange Rate

USD Pos.

SGD Pos.

1) Sells 100k USD/SGD

1.6738-1.6745

-100,000

167,380

2) Buys 100k USD/SGD to close their position

1.6615-1.6619

100,000

-166,190

End result the trader earned a gross profit of SGD $1,190

0

1,190



You will see that the profit of a trade is always calculated in the second currency. If you are

trading an account that is denominated in sterling, this profit will then need to be exchanged

back into sterling using the current exchange rate.

Automatic Rollovers

The ma jority of FX Trades take place in what is called the spot market. This literally means that

the deal takes place immediately "on the spot" and will settle in 2 working days. Most traders

close out spot trades on the same day they are placed. However, any positions that are not

closed out are automatically rolled over or changed f or an identical position expiring on the

next settlement day. The rate at which this happens is called the tom/next rate. The market

sets this rate every day and it differs f or each currency.

STOP AND LIMIT ORDERS

Because of the geared nature of trading on margin, the volatility of the FX Market and the f act

that it trades 24 hours a day, it essential to have access to f acilities that let you open or close

positions if certain levels are reached.

Limit Order

A Limit order is one that is executed at a better price than the prevailing market price, i.e. f or a

Long FX Trade when the quoted currency drops to a certain level or f or a Short FX Trade when

the quoted currency rises to a certain level.

Example: GBP/USD is currently trading at 1.7995 1.7999

INVESTOR A wishes to buy 100,000 GBP/USD with a limit of 1.7990, theref ore they do not wish

the order to be opened unless GBP/USD reaches 1.7990.

This order is held by the FX Trading provider until the limit level is reached.

The next day the GBP/USD is 1.7986 1.7990 and an opening trade of 100000 GBP/USD is

opened at the limit level of 1.7990.

Stop orders

A stop order is one that is executed at a worse price than the prevailing market price one of the

most common uses of this is a stop loss order. It is possible to make substantial profits when

trading FX as well as substantial losses which is why many FX providers allow you to place a

stop loss when you open a trade.

Stop Loss



In the f orm of futures (or options), what is traded is not the good itself , but a contract to buy or

sell the commodity f or a certain price by a stated date in the future. Hence the name.

Most commodities trading is done in the f orm of futures or options and it's that scenario that

gives rise to most of the huge potential f or profit and loss. It also gives rise to all the interesting

aspects of trading, since it inherently involves predictions of the future and hence uncertainty

and risk.

Commodities trading has been around f or centuries, but the modern markets arose in the late

18th century when f arming began to be modernized. Though the pace of trade and many of the

detailed mechanisms has changed, the basics are still the same.

Growing wheat, f or example, took several months then f rom planting to harvest to delivery. It

still takes several months. A f armer might plant wheat in April and discover in June that the

price someone is willing to pay f or delivery in August has dipped over the past month.

For example, suppose on May 1st wheat to be delivered September 1st is selling f or $4.00 per

bushel. By June 1st, it has f allen to $3.80. The f armer may believe the price will continue to f all.

He offers a contract on his wheat to be delivered September 1st f or $3.80 per bushel, locking in

a price today at the current market level. In exchange, he accepts a legal obligation to deliver

the wheat on or bef ore September 1st.

Fortunately f or the f armer and others, some believe the price will in f act not f all but instead will

rise by September 1st to $4.20 per bushel.

That kind of prediction is typically based on a very complicated analysis of current conditions,

such as the total amount of acreage under plant, soil moisture levels, weather predictions f or

the coming months, political events and dozens of other variables.

No one knows the future price with certainty, that's why it's called speculation.

Come September 1st the f armer delivers his wheat and is paid $3.80 per bushel. If the price

turns out then to be $4.20 per bushel, the speculator makes a healthy profit. If the price is, say

$3.50 per bushel, the speculator has lost money.

That's commodities trading in a nutshell, or rather in a basket.

FUTURE TRADING



Novice investors generally shy away f rom future trading, because of the undeserved bad

reputation that this type of trading has. While it is true that people have been wiped out in the

Future market, many have become very wealthy as well. In reality, it is only as risky as you let it

be.

If you approach futures as a gambling game, like roulette, or craps, your odds of coming out a

winner will be as bad, or worse, as casino odds. However, if you arm yourself with education,

avoid fear and greed, and approach it as a serious investment opportunity, then the probability

of success is excellent.

The process of trading future is also known as commodities trading. Unlike buying stocks, when

you trade future you do not actually own anything. All you are doing is speculating on the

future direction of the price of the commodity. In other words you are betting that the price

will either go up (if you are a buyer), or it will go down (if you are a seller).

No one really has to take, or make, delivery of the underlying product that the contract

represents. In f act, most of the time, the trader merely off sets his position at some time bef ore

the date that the contract is due.

THE 3 TYPES OF FUTURES TRADERS

There are basically three types of people who trade in futures: Hedgers, Speculators, and Floor

Traders. Here is an look into each of their individual roles.

Hedgers

Hedgers are individuals or companies that trade in the futures market so they can establish a

known price level to satisfy a future need to buy or sell the underlying commodity. They do this

in an eff ort to protect themselves against the risk of an unf avorable price change when it is

time to fulfill their need. Some hedgers also use futures to guarantee a minimum profit margin

in some transaction.

Speculators

Speculators are more like stock traders. They are individuals or companies that try to make a

profit f rom the price fluctuations of the underlying commodity. Whenever someone speculates

in a futures trade, there is always someone who is taking the opposite position, or betting

against the speculator. This may be another speculator, or a hedger, or a floor trader.

Floor Traders



The third type is the floor trader or "local". These are people who buy and sell f or their own

accounts directly on the trading floors of the exchanges. These are a very elite group of traders,

not unlike Day Traders in the equities market. They are credited with giving the futures market

the liquidity that it needs in order to function.

The chances are that you are most likely to f all under the speculator category if you are reading

this article. This is extremely risky... you need to arm yourself with the right knowledge.

OPTION TRADING

Option trading is quickily becoming one of the investing world's hottest, most rewarding

opportunities and it's chosen as "ideal business" by lot of traders. Many of them have

indeed achieved their dreams and reach a level of financial independence and f reedom. Some

of the people even claim option trading as "Perfect Financial Freedom Vehicle".

Options give you the ability to participate when the market is moving uptrends, downtrends or

sideways. Just as importantly, it give you the ability to control your dollars at risk. As volatility

rises, it allow you to protect more of your starting capital in safer investments, while giving you

the opportunity to still participate in more aggressive growth by controlling the underlying

shares of stock f or a defined period of time.

Furthermore, you could trade it f rom anywhere in the world with a computer or a plain old

telephone, starting with a relatively small amount of money. It would have known limited risk

and offer extremely lucrative monthly profits in any kind of market conditions, up or down.

ONLINE TRADING TOOLS

Stock trading is the short-term buying and selling of shares. A new trader can get started by

opening a brokerage account and placing buy and sell orders. A successful trader needs some

additional tools to find the right stocks and the proper entry and exit prices f or the strategy the

trader is using. Most of the tools a trader needs are available in either an online or

downloadable sof tware f ormat.

STOCK SCREENER

A stock screener is used to find stocks f or trading. Traders program their screeners with the

criteria that match their strategies. The more advanced the trading strategy, the more data a

stock screener needs to be able to analyze. Many traders use a screener that comes with a data

package f or a monthly fee. The stock brokerage firms that cater to active traders will also offer

advanced screening packages.



STOCK CHARTING

Traders need a way to chart stock pricing patterns. The visual indication of prices is of ten the

best tool to find trading opportunities. Online charting services will allow traders to select

different time f rames and types of price charts. Bar charts and candle charts give traders

additional inf ormation compared to the simple line charts. Some trading strategies require

advanced charting capabilities like range or tick bars. The trader should choose a charting

service that provides the right inf ormation f or the trading strategy used.

TECHNICAL INDICATORS

Technical indicators are calculations that provide additional inf ormation on the stock price

charts. Indicators can range f rom the ability to be able to draw trend lines and resistance levels

to advanced calculations like exponential moving averages and Fibonacci retracements. Again,

the technical indicators needed are based on the trading strategy the trader wants to use.

MARKET DATA

Short term and day traders of ten make profits on very small moves in stock prices. To trade at

these levels, traders need accurate and timely market data. Packages like Level 2 pricing and

Nasdaq TotalView give traders access to the depth of market orders and prices. These levels of

data give better indications of the near-term price directions than the price data available f rom

the online brokerage website. There is a cost f or the more detailed data packages, but some

brokers provide them at no charge to active traders.

PRACTICE ACCOUNT

Traders both new and experienced need a practice trading account. A practice account allows a

trader to execute her trading strategies with real-time prices and simulated money. New

traders should use the practice account to get used to the platf orm and make sure the selected

strategies result in profitable trades. Experienced traders use their practice accounts to try out

refinements to their strategies bef ore taking them into the live market. Traders should work

with a broker that provides an online practice account.

MAKING AN E-TRADE

Since we're talking about electronic trading, the first step is to sit down at your keyboard and

log in to your brokerage account. Once you log in, regardless of the broker dealer, you'll be able

to do several things:



y Look at your account to see how much money you have and how many shares of stock

you have in your portf olio.

y Pull up stock quotes to see the current buy and sell prices of any stock.

y Enter an order to buy or sell a stock.

The systems that make this Web interf ace possible are Web servers very much like the servers

f or any Internet site. There may need to be hundreds of Web server machines -- a large broker

dealer can have millions of customers. And the Web servers need to be operating with secure

connections to protect privacy. But beyond that, the servers can be f airly ordinary. See How

Web Servers Work f or details.

So let's imagine you want to buy 100 shares of the ABC company. You check the price of that

stock on the quote screen and see that it costs $20.40 to buy it at this moment. You enter in an

order to buy 100 shares at $20.40 a share.

Your broker dealer will transmit your order to a stock exchange. If the ABC company trades on

the NASDAQ stock exchange, the order goes there. Inside the NASDAQ exchange, there's a

computer that's dedicated to handling all the orders coming f rom your broker dealer. (Since

there are several hundred broker dealers dealing on the NASDAQ exchange, there are several

hundred dedicated broker dealer machines.)

Having received your order f rom your broker dealer, the exchange will try to match your buy

order up with a sell order f rom someone else. If it can find a match, you'll have executed a stock

trade. If not, your trade will sit on the exchange waiting f or a matching order. See How the

NASDAQ Stock Exchange Works f or details on what actually happens inside the stock exchange.

Now, the exchange sends a message back to the broker dealer saying the trade is complete. He

updates your account inf ormation, withdraws money f rom your account and changes your

portf olio to reflect your new stock.

BROKER TRADER BACKUP SYSTEMS

The broker dealer is keeping track of the number of shares of stock you own. But that's not

enough. Somewhere, there needs to be a central repository that knows who owns what. This is

critical f or several reasons:

y Each company needs to know all the people who own its stock so it can pay dividends

and send notices to shareholders. If all the "who owns that stock" inf ormation was held

only by the broker dealers, it would be very hard f or companies to find all of its

shareholders.



y If broker dealers had to talk to each other to make every trade, it would complicate

things and introduce the chance of error. By centralizing things, life is easier f or

everyone.

y If a broker dealer were, f or any reason, to go down or go out of business, some entity

needs to know who owns what. In other words, there needs to be a backup system, separate f rom the broker dealer, that knows who owns every single share of stock.

The central entity that holds the "who owns what" inf ormation in the United States is called the

Depository Trust Company, or the DTC. When you trade stock, the DTC gets notification of the

trade and handles the actual change of ownership f rom one person to another. In other words,

the DTC handles the details of taking away the shares of stock f rom the seller and giving them

to the buyer. It also handles the movement of money between the broker dealers f or the buyer

and seller. This process is called clearance, and it can take several days.

E Trading First Sumbission

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Transcript of E Trading First Sumbission