Internet-trading is the provision of financial institutions services for the effective use of financial instruments in the financial markets with the help of information and communication technologies.
Such services are provided by an intermediary (brokerage company or Bank) and allow the client to carry out transactions of purchase and sale of financial assets in the financial markets and to form its own investment portfolio. The main advantage of Internet-trading as a specific type of service is the ability to provide opportunities for non-professional private investors to invest in profitable assets. At the same time, individuals do not have the right to participate directly in operations on the exchange. Such functions rely on the broker.
In the field of Internet-trading, there are such types of brokers:
- classic broker (full service broker), which provides its clients with a full range of services: receiving orders and bringing them to the market, individual advice on the purchase and sale of securities, investment portfolio management and its full financial and legal support;
- discount broker – a broker that only brings a transaction to the market without providing advice. In this case, there is no staff of consultants and analysts, thereby reducing overhead costs and it is possible to establish a low level of commissions;
- online broker – a broker that carries out operations and provides its services through the Internet on – line. Both classic and discount brokers can act as such.
In some cases, there are a number of intermediaries for the conclusion of exchange transactions. For example, an order for NASDAQ (National Association of securities dealers) goes the following way: investor – broker – trading participant – trading system. Using the Internet does not change the route of the order, but only allows you to increase the speed of requests. However, control over the promotion of the order remains insufficient. This issue is addressed by using direct access systems that are implemented through electronic communication networks (ECN).
Such a system provides for automatic withdrawal of orders to the market and gives the client the opportunity to manage the placement of their own orders, including the choice of trading platform, the ability to change the parameters of the order and its cancellation, control the correctness of execution, receiving a report on transactions and the like.
At the same time, direct access is a purely technical characteristic, since the client does not have the right to enter into a transaction on the stock exchange on his own behalf. Therefore, in this case, the broker acts not as intermediary for the conclusion of transactions on the market, and the face, tracking the client’s limits to the transactions engaged in supply of Fund assets, payments, prepares the transfer of ownership of the assets.
ECN is actually an electronic trading platform, which implements the basic functions of the classical stock exchange. They are the environment for processing and execution of limit orders (instruction to the broker with a certain restrictive condition). The mechanism of the transaction is as follows: all orders entering the ECN are entered into the “order book” (a database available to all participants of the system) and processed in the search system of matching orders (OSM-Order Matching System). In the case of singing a drop in price and quantity, two counter orders (one for the purchase, the other for the sale of securities) are automatically executed within the computer system.
There are two main technological ways to provide brokerage services via the Internet:
- the User buys (sells) securities, forms its own investment portfolio directly on the website of the intermediary company, using a conventional Web browser.
- the User installs special software on his / her computer, with the help of which he / she receives information and makes transactions on financial markets.
The first method is easier and cheaper for the user, but provides for separate restrictions on the provision of financial information. The second method is more effective, because it allows you to adjust the interface, build graphics, receive special information and the like.
Electronic brokerage systems facilitate access to financial markets for small and medium-sized banks, providing operational analysis of operations in the financial market, rapid assessment of potential profits and risks in different market segments. The most well-known electronic brokerage systems include alternative Trading Systems (TradePoint, Nextrade, Market XT).