Stock trading used to be pretty simple.
A handful of exchanges, led by the New York Stock Exchange and Nasdaq, dominated share trading. A buyer would place an order with a broker, who would then execute the trade on the exchange floor.
It meant all the people buying and selling shares of a particular company would wind up in the same place. Trading was relatively straightforward.
Then things started to get more complicated.
It started when the Securities and Exchange Commission made some rule changes in 1997 that opened the door for alternatives to the big exchange floors.
To wrest market share away from big rivals, small electronic exchanges adopted what’s called the maker-taker pricing model in which they use fees and credits to encourage traders to place orders on their platforms.
Then price quotes went from being in fractions — the smallest increment was once one-sixteenth of a dollar, or a teenie — to decimals in 2001. The switch aided automated and high-frequency trading, which took off in a big way. More electronic exchanges were set up. The market fragmented even further.
Now, with 13 stock exchanges, 12 options exchanges, and 40 dark pools (small venues run by banks and exchanges where large orders can be placed without being seen by the rest of the market), there are concerns that things are too complex.
The concern is over the fact that the fragmentation gives some firms — namely those with the fastest technology — an unfair advantage over others. And competition among the exchanges has them giving some clients perks, like access to data that others don’t get.
These complaints are coming from all corners of the financial community, including Dick Grasso, the former chairman of the New York Stock Exchange; Yale’s chief investment officer; and Goldman Sachs, which has one of the biggest stock-trading businesses in the world.
Amid that debate, Firm58, a trading firm and back office automation specialist, put together a handy graphic showing how this all happened: