The number and volume of traditional broker-driven equity transactions has been in a steady decline for the past several years, with an ever-increasing amount being executed electronically both at the institutional and the retail levels. The reasons for this growth are far more than commission savings alone but the degree of sophistication can vary widely.
More often than not, institutional clients receive commissions with a deep discount as a customary business practice. These customers also divide their business among a group of their prime brokers as a way to compensate these firms for research, the brokers' capital commitment to facilitate large trades and other ancillary services.
While saving money on commissions is important, there are other reasons why large, institutional investors and proprietary trading firms use computerized/electronic executions such as the anonymous nature of e-trading, low market impact and liquidity for large trades, and a platform to execute multiple strategies at the same time.
Certainly all of the reasons above are important but one of the main reasons that institutional investors and traders use computerized executions is algorithm-driven trading. The growth in algorithm trading has been enormous and is particularly popular with hedge funds.
Similar to institutional investors, one of the primary reasons individuals use e-trading is to save money on commissions by using a discount broker. The big question becomes: is this being "penny-wise but pound-foolish?" The odds are fairly good that most individuals do not have graduate and PhD level degrees in math and computer science, so developing your own algorithms is most likely not going to happen.
Does this mean that an individual cannot be effective? Of course not, if the individual has the proper resources at their disposal. Some of the questions an individual should ask are: what is the quality of executions? What is the interest rate cost of a margin account? Is fundamental research available, particularly from independent third party providers? Are technical analysis tools and indicators available along with "live" markets (not delayed)?
Depending upon the tools and indicators an individual might use, many are available free from a number of on-line sources. Exponential Moving Averages, Moving Average Convergence – Divergence, Relative Strength and Stochastic Oscillators are but just a few of those indicators readily available.
One of the impacts of electronic executions vs. broker-driven is the pressure it is putting on brokerage firms. A consequence of the expansion of e-trading is progressively fewer brokerage firms. Like anything else, there will come a point where supply will meet demand. Where that point is, is a matter of debate within the brokerage and financial services industry.
While different asset classes are becoming available to trade electronically such as foreign exchange, an individual investor or trader would be well advised to do their homework before they become involved.