ONLINE TRADING & MARKET LIQUIDITY
www.arabfinance.com
ASEA/CASE Conference September 2005
CONTENT
About ArabFinance What is Online Trading? What is Market Liquidity? Impact of Online Trading on Market Liquidity Facts Forecasts Conclusion
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ABOUT ARABFINANCE
ArabFinance was formed in 2000 to meet a growing demand for online trading, transparent financial information, and financial services in Egypt and the Arab world. The company is a subsidiary of LINKdotNET, the biggest ISP in Egypt and Orascom Telecom. Corporate Objectives:
Initiate and lead online trading across the Arab World starting with Egypt. Prepare users for online trading and create their need for financial information through educational programs Identify additional value added financial services / products and launch them in the most convenient form
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WHAT IS ONLINE TRADING?
On-line trading is every activity of securities trading directly integrated. It starts from:
Order Submission Order Validation Order Matching
Online transaction Settlement
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ONLINE TRADING
When servicing traditional brokerage clients, orders were manually entered into the system by a broker after the broker received instructions from the client.
In contrast, online investors place orders directly into the brokerage firm's trading system, via the Internet, and circumvent the need for order entry by a broker.
The implementation of direct order placement by online investors has revolutionized the securities industry with the facilitation of online trading.
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WHAT IS LIQUIDITY?
The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash.
An asset is said to be liquid if the market for that asset is liquid.
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MARKET LIQUIDITY
A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices.
An elegant definition of liquidity is also the probability that the next trade is executed at a price equal to the last one.
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MARKET LIQUIDITY
The common theme in all three contexts is cash. The liquidity of a market is often measured as the size of its bidask spread, but this is an imperfect metric at best.
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MARKET LIQUIDITY
More generally, three of the main components of market liquidity are:
tightness is the bid-ask spread; depth is the volume of transactions necessary to move prices;
resiliency is the speed with which prices return to equilibrium following a large trade.
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Does Online Trading affect Market Liquidity?
THE IMPACT
In broader terms, online trading does in fact have an impact on market liquidity for the very simple reason that it encourages new entrants in the market and leads to higher participation Furthermore, Investors shift from traditional trading to online to enjoy the benefits it provides. The following features Online Trading is characterized by are a good illustration on how it affects market liquidity.
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THE IMPACT
Accessibility Confidentiality Transparency
No Single Access Point No one knows about your trade Live quotes makes you act faster
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The Impact of Online Trading on Market Liquidity
THE IMPACT
Flexibility Cost Efficiency Day Trading Accuracy
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Frequent order modification Lower per cost trade makes trade you more
Faster Execution
No need for calculations
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Facts
On-line investors are using the Internet to their advantage, and the entire structure of Wall Street is changing as a result.
In Europe, the growth of the online brokerage industry is surpassing even the most generous forecasts. According to a research by Datamonitor, in the average workday, 466 new online accounts are opened in Sweden, 685 in the UK, and 1,178 in Germany.
One in every three individual investors' equity trades is now being made on-line
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World Internet Usage & Population Statistics
World Regions (July 2005) Population % of World Internet Usage Usage Growth 2000-2005 % Population (Penetration) % World Users
Africa
Asia
14.0%
56.4%
16,174,600
323,756,956
258.3%
183.2%
1.8%
8.9%
1.7%
34.5%
Europe
Middle East North America Latin America/Caribbean Oceania/Australia World Total
11.4%
4.1% 5.1% 8.5% 0.5% 100%
269,036,096
21,770,700 223,392,807 68,130,804 16,448,966 938,710,929
161.0%
311.98% 106.7% 277.1% 115.9% 160.0%
36.8%
8.3% 68.0% 12.5% 49.2% 14.6%
28.7%
2.3% 23.8% 7.3% 1.8% 100%
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Source: internetworldstats
Forecasts
As the Internet becomes a required distribution channel, the distinction between "on-line" and "regular" trading will disappear
By 2006, nearly all investors with access to personal computers will use the Internet for their stock and mutual fund investments-if not to enter trades and orders, then at least to gather information about the status of their accounts.
85 percent of all brokerage accounts could be online by 2006
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Simply Put…
The Internet is an absolutely revolutionary catalyst in the financial services arena The Internet has put so much money into action It enables individuals working their PCs at home to act like global financiers. The Internet provides near-perfect, market data and research at
real-time
The Internet is rapidly making markets of all types much more liquid and efficient
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Simply Put…
According to Bill Barret: “Online Trading is probably the only business in the world where u can …
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Point, Click & Make Money”