Could Live Trading On the Stock Exchange Be Dead


A new study shows that fully electronic trading could lead to better prices and more volume for investors.

As New York Stock Exchange and other trading floors are forced to close amid the coronavirus pandemic, new research suggests that electronic trading might be more efficient and yield better results for traders than in-person trading floors, The Wall Street Journal reported.

The New York Stock Exchange has been closed since March 23 and plans to reopen at the end of next week. This is the first time in 228 years of NYSE history that it operated fully electronically. An unforeseen benefit to the fully electronic trading is that investors in some cases received better prices on specific products. Brokerages such as Charles Schwab Corp. found that individual investors found better prices in popular options contracts while the Cboe Global Markets was electronic.

Supporters of the live trading floors believe that “by funneling trades into one place and allowing traders to exercise human judgment about how to execute them,” traders benefit from the information on the trading floor the particularly in larger and more complex deals.

The research conducted at New York University and the University of Illinois at Chicago centered around the NYSE 4p.m. closing auction. This auction determines the end -of-day prices for thousands of stocks. It is one of the last areas where live trading on the floor still has a significant hold. In fact big banks make about 7% of their trades during this auction. The study found that the closure of the trading floor made the trading process more orderly. The “indicative” auction prices at NYSE also grew more accurate.

The researchers wrote, “These improvements in closing auction market quality on NYSE are especially notable given the widespread market turmoil during the Covid-19 pandemic.”

NYSE Chief Operating Officer Michael Blaugrund said that the study “ignores real-world investor outcomes,” and “the only credible conclusion from analyses evaluating the best outcomes for investors is that the NYSE closing auction, in conjunction with its trading floor, leads to the fairest prices for investors.”

Meanwhile, Cboe’s floor closure turned out to help investors save money, as Cboe activated a mechanism that lets investors get better prices for S&P 500 options than publicly posted since it went electronic.

Cboe said that the change might be permanent when it reopens its floor on June 1. “That’s been a great outcome for retail,” said Bryan Harkins, head of Cboe’s markets division. “We’re going to preserve the experience that they’ve come to enjoy.”

See the full report here.


Economics, Finance and Investing