Brief History of Trading
It was a time that sailors were dominating most of the power of the world, it was the time that many European nations wants to be superior among each other including British, Dutch, Portugal and France. Few nations were controlling most of Africa and Asia. Dutch East India Company or VOC could be the most gigantic business entity that ever operated on the planet, who ruled over 200 years on two major continents; it used to be a company not only with precise roles of business administration and operations but also with its own navy and military power.
Approximately 415 years ago the world’s largest company had taken a major breakthrough as they announce to Dutch citizens that they could also be a part of the company and they could also own the company if they are interested, undoubtedly this news could shake the mind of people in many ways. Weather they are wealth seekers or power seekers or just lazy workers becoming a part of the world’s largest company used to be a dream of many.
If you were living in that time and if you are interested in to become the part of the company then you must buy shares of the company, VOC has open a counter for this specific reason. People will physically go in to the counter and buy shares worth for the money they had. This way of stock selling is known as Over the Counter trading or OTC trading which a practice is still being continue in many countries. This is also known as the primary market of trading.
When many people owns shares then some of them may require to resell it for various reasons, this is where world’s first Stock Exchange required to be born at 1602, Amsterdam Stock Exchange the world’s first stock exchange still being operational today. They introduced a one common place to buy and sell same stock over and over again for various prices as only interested by buyers and sellers without involvement of the primary issuer of the assert. So they created the secondary market of trading. Which is most important and killing event in world’s financial pathway.
After that many such stock markets evolved all around the world; at 1792 New York stock exchange born under a buttonwood tree. it’s used to be that simple where traders were trading under a shade of a tree. Today there are so many types of markets available, it’s very complicated and unpredictable while many assert classes were trading on them including simple Equity to Derivatives to coffee and pork. In future there will be many other types of assert classes will be listed in exchanges including more conceptual entities such as Crypto currency and electricity.
Few decades ago stock selling and buying process was rather simple as brokers will go in to the trading floor of the exchange and completing the transaction with their colleagues in the exchange while its more looks like an auction. There would be set of people who want to sell the assert and will be asking for certain price for it, while in the other side buyers will never want to pay exact ask price and they would come up with bids, whenever bid matches ask the trade will be completed and assert ownership will be transfers to buying side while money transfers to selling side.
In 1980s with adventures of computer technology New York stock exchange started electronic trading, where brokers no longer required to be present in trading floor, they can trade from remote locations. Each and every broker maintain their own order management system to trade with the exchange. Some of brokers then open their electronic platform directly to customers, then customer directly can buy or sell shares without going through the dealer desk. This level of trading is call Direct Market Access or DMA.
Electronic trading and DMA is not anymore magical as they used to be in long ago, today it’s the de facto standard among most of the world’s trading, almost all brokerages provide direct market access facility to their customers while various other forms of facilities.
Throughout the history people were trying various strategies to for fortune seeking process in financial markets, those who trade basically based on big picture and trusted source of information are call fundamental analysts or fundamental traders, while those who were believing that history is something repeat over and over again will be more focused on well-defined mathematical models call technical analysis. Both models were very traditional and very useful in the time of markets were less complex than today but still those models might be very useful in some contexts and situations.
Little by little algorithmic trading becoming popular in most of world’s major markets, software program that participate for trading on behalf of the human trader will be very fast, accurate and free from emotional bondage. In future the picture of trading might be completely different from what it is today, it would be several millions of computer competing with each other instead of human traders, with the modern trend of Artificial Intelligence and deep learning discoveries future financial industry would looks more like a cyber-war zone.
From simple over the counter trading and simple exchanges under large trees those financial markets have come in to the place that most of future Artificial Intelligence discoveries will be possible. There are number of quantum physicist work for Wall Street investment banks, they have come up with many new mathematical models combining financial data with models discussed in physics.
In next article we will discuss some of very well defined algorithms in the perspective of the trader. And later we will dig in to the technical solution and architecture of those complex requirements.