Chapter 1

Birth of High Frequency Trading

Equity Markets Go Electronic

Electronic trading defines modern day trading in global equities markets. While one can point to many different factors for the eventual proliferation of electronic trading, it is important to acknowledge that without the basic market structure framework for accommodating electronic trading, today's market reality of sub-second trading and hyper-competitive market centers would be unthinkable.

As such, the electronification of the U.S. equity markets can be traced back to launch of Instinet in 1969, which predated the so-called Electronic Communication Networks (ECNs) by close to 30 years. Figure 1.1 shows the historical perspective.

FIGURE 1.1 Historical Perspective on Market Competition in U.S. Equities Market

Source: Aite Group


Instinet provided a much needed service for buy-side firms looking for ways to trade listed securities in a private network. It became the largest alternative execution venue by the time the first generation alternative trading systems (ATSs) hit the U.S. equities market in the late 1990s.

Electronic trading occurred on the NASDAQ market first as market makers leveraged electronic communication tools to provide liquidity into the market. The 1987 crash, though, led to the development of SOES (Small Order Execution System), which provided automatic execution capabilities on a price-time ...

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