EECS 3101 Lecture Notes - Lecture 6: Computer Network
28 Jun 2018
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EECS 3101 Lecture 6 Notes
Introduction
Reduction in Transaction Costs
The international trading of stocks has grown over time but has been limited by three
barriers: transaction costs, information costs, and exchange rate risk.
But in recent years these barriers have been reduced, as explained here.
Most countries tend to have their own stock exchanges, where the stocks of local
publicly held companies are traded.
Recently, however, exchanges have been consolidated within countries
This consolidation has increased efficiency and reduced transaction costs.
Some European stock exchanges now have extensive cross-listings so that investors in a
given European country can easily purchase stocks of companies based in other
European countries.
Trades are normally conducted by electronic communications networks (ECNs), which
match buyers and sellers of stocks.
These networks do not have a visible trading floor
The trades are executed by a computer network.
With an ECN, investors can place orders on their own computers that are then executed
by the trader’s computer system with the investor receiving confirmation via the
Internet.
Thus, computers are involved in all stages of the trading process, from placement of the
order to confirmation that the transaction has been executed.
When there are many more buy orders than sell orders for a given stock, the computer
is unable to accommodate all orders.
Some buyers will then increase the price they are willing to pay for the stock.
As a result, the price adjusts in response to the demand (buy orders) for the stock and
the supply (sell orders) of the stock for sale recorded by the computer system.
Document Summary
The international trading of stocks has grown over time but has been limited by three barriers: transaction costs, information costs, and exchange rate risk. Some buyers will then increase the price they are willing to pay for the stock. As a result, the price adjusts in response to the demand (buy orders) for the stock and the supply (sell orders) of the stock for sale recorded by the computer system. Similar dynamics would be evident on the trading floor as on the computer, but the computerized system follows documented criteria when prioritizing the execution of orders. Trading of stocks has grown over time but has been limited by three barriers: transaction costs, information costs, and exchange rate risk. But in recent years these barriers have been reduced, as explained here. Most countries tend to have their own stock exchanges, where the stocks of local publicly held companies are traded. Recently, however, exchanges have been consolidated within countries.
