The History of Automated Trading Systems
To understand a little better why binary option robots have become so popular, let’s take a little closer look into the history of automated trading systems and stocks trading.
If you ask the man on the street what he knows about trading stocks and currencies, you will be answered with a knowing look and the mention of a few words like Wall Street, New York Stock Exchange and maybe the Dow Jones. For somebody who knows a little more, there will be additional technical terms like assets, forex, commodities, futures, binary options and so on. Ask the same people about the history of these trades and you will be met with a blank stare. Where did it all begin?
In the 14th century Venice, money lenders started trading debts among each other. You would find one moneylender getting uncomfortable with a certain debt which he would deem to be of high risk, and he would sell it to another money lender who would deem it to be of low risk to him. He might have bought it cheaply and thought that if he collects the debt himself, he will make a good profit. This done, he would hold the debt until he collected it or he finds a buyer for the same debt for a profit. This is where most authorities believe to be the birthplace of trading values.Among these traders, there were dealers who did or did not hold debt, but they knew who had a debt to sell and who had some money to buy a debt. These are the people you know as brokers today.
These two aspects of trade then spread all over Europe.
Fast-forward to 1531. The city is Antwerp, Belgium. An exchange of some sort existed here. Moneylenders and brokers would meet at a location to deal in debt, business and government bonds. These were bought and sold to the highest bidder and the brokers facilitated these trades for a small commission. This is the more likely ancestor to the stock exchange that we have today.
14th century moneylenders in Venice, Italy. When the moneylenders started to sell some of their debts, the first market for currencies were born.
The East India Companies
At the height of exploration in the 1600s, exploration and trading charters were given to companies so that they would expand trade and be on the lookouts for these governments’ imperialistic desires in the East Indies and East Asia. The British, French and Dutch all gave these charters. The trouble with these trading voyages was that they were very risky ventures. There were all the dangers of the sea which included shipwrecks, pirates, disease, unpredictable weather and mutinies. Spreading the risk was the best way to counter such such risks.
What the ship owners would do was to seek people to invest in the voyage with the agreement that they would get a share of the proceeds when the ship returned to Europe. This investment went into the preparation of the ships for the voyages and for employing the crew for the long trip. This is where shares and stocks originated from. This agreement was at first confined to each voyage and dissolution of these agreements was complete when the ships returned to their home harbors and the wealth they came was divided proportionally each according to the size of their contribution towards the voyage. When the next voyage was planned, the ship-owners looked for other investors for the new voyage. Then came the East India Companies.
The East India Companies changed completely the investment in individual voyages. Instead of seeking investors for each individual voyage, the companies started giving dividends to the investors who held stocks of the companies. This means that they would get a share of the proceeds of the voyage, but their contribution remained with the company. To make their voyages more profitable, they asked for more contributions in the form of stocks. These companies grew in size and opportunities to make fortunes increased.
Seeing that the people who were investing in voyages got a windfall when the ships returned, the stocks experienced a high demand and people started trading in them. Lacking a central place to meet and trade the shares, brokers’ scurried form coffee shop to coffee shop in London to carry out trades for people who have shares to sell and those who had money to buy the shares.
The East India Companies therefore became the first joint stock companies. This era was a golden one for traders in goods from overseas and the investors in East India Companies. This was to go on until the monopoly which was supported by royal charters came crashing down. What happened was that people got to notice the wealth that was being created by these voyages. People started organizing themselves to plan their own voyages quite separate from East India and its Royal Charter. Before the ships left Southampton for the voyages, the shares of such voyages had already exchanged hands several times for profit. The main competitor here was the South Seas Company.
Soon after this, more business people started selling shares for dubious voyages. Concern grew about these questionable ventures but it was not until the South Seas Company failed to issue dividends to its investors that the government banned the selling of shares for any venture. No more shares were sold again until 1825.
The shipyard of the Dutch East India Company in Amsterdam. 1726 engraving by Joseph Mulder. The Dutch East Indian Company was firs company to sell dividends to its investors.
The NYSE is born
The buying and selling of shares spread all over Europe and to the new world, United States and Canada. People started to see the benefits of shares when issued for legitimate business. When the issuing of shares was banned in Britain, the trading of these shares continued in the United States unabated. Though the London Stock Exchange opened its doors in 1773, its activities were stymied by the shares sales ban. Trading in an official exchange in the United States did not start at the New York Stock Exchange (NYSE) but at the Philadelphia Stock Exchange. This was not to last very long because the NYSE opened in 1792 and soon enough, it surpassed the Philadelphia Stock Exchange in terms of trade and influence. NYSE continued to grow and it was not until the Civil War and the Great Depression years that growth was slowed down.
The NYSE started off in very humble circumstances. Brokers started to meet under a tree in Manhattan to discuss their issues and to see who had what to trade. It was around here that the first offices were opened on Wall Street, the NYSE’s home to date. Sitting in the heart of Manhattan in New York, the NYSE could not be in a better place. This was because the harbor here was the entry of all the main trade ships to the United States. All major banks and trading companies had their main offices here too.
The growth of the NYSE at this time was phenomenal. This was attributed to increase in business and the perfect location. It also became a well-funded organization because it soon started charging fees for listing shares and for demanding. The volume of business filled its coffers and every trader had a booming time for many years to come.
In the years that followed well into the 1800s, the NYSE made tremendous leaps in terms of trading volumes and the fortunes being made there. Locally, competition was very low, even with the opening of exchanges in other major cities in the United States. Apart from the Civil War years and the Great Depression years, the NYSE has been the leading stock exchange since then. With other exchanges being opened in other countries like Britain, France, Germany, Japan, Hong Kong, Canada and Australia, the NYSE continues to be the leader in the stocks and forex business.
NYSE in 1850’s. The trading was carried out in very in modest circumstances.
In 1971, a big thing happened. It was the formation of the NASDAQ. It was formed by the National Association of Securities Dealers, NASD, to offer its own shares separately from the NYSE. This forced the NTSE to change somewhat, but the NASDAQ forged on. Unlike the NYSE which is in a physical location, the NASDAQ trades virtually through networked computers. It is this exchange that brought forth computerized trading.
Computerized trading and trading systems
The NASDAQ, now run by the Financial Industry Regulatory Authority (FINRA) which is what NASD converted to became the birth of automatic trading. This development prompted the NYSE to change its trading systems too. The 1970s then became the time that trading stocks became fully computerized with the NYSE adopting the DOT (designated order turnaround) system where stock orders were transferred to the trading posts electronically before they were traded. This system was soon developed to the SuperDOT.
At this time, the NASDAQ continued to trade electronically and soon, it became the new normal and it eliminated a lot of paperwork and manual processes.
Apple II computer was introduced in 1977. It was one of the first computers which were widely used by Wall Street broker firms.
Trading systems are a fairly new phenomenon compared to stocks trading. When Richard Donchian founded the Futures Inc. in 1949, he did not know that he was laying the groundwork for a trading system that would spread all over the world. It was one of a very few commodity funds that were held by a public entity. It was Futures and the other entities that formulated a system of rules that would regulate the purchasing and sales of trading signals which would help traders determine how the values of commodities would swing over time.
At that time, computers were only the product of fertile minds and sci-fi. This means that most of the generation of signals was done by hand and other manual processes. The signals were then posted on a chart by hand and ticker tape. Despite these stuttering steps, trading systems were born and there was no looking back. The processes improved as technological advancements were adopted into their systems.
The use of trading systems became mainstream in the 1980s when traders adopted the rule based systems to trade commodities and currencies. Traders like John Henry and Richard Dennis championed this mode and soon it caught on. Soon, aided by the advancements in trading systems, it became a lot easier for retail commodities and currency traders to use the same systems. They could use the computers which were becoming commonplace to synthesize data to come up with signals. These signals would be sent to the broker who made the trades. These trades would be for the whole day as there was no way to transmit them in real time.
John W. Henry and Richard Dennis were pioneers of automated computer trading. They are both very rich men nowadays. Forbes estimated that net worth of John Henry as of November 2015 to be US$2.2 billion.
The late 90s things changed again. Now, the internet was here and individual traders could now generate their own signals, and transmit them in real-time to their brokers. This expanded trading because of the immediacy factor. Around this time, Globex, a computerized exchange went live. Traders could use this exchange to avoid the trading floor completely. Their computers now generated the signals and executed the trades directly in the Globex exchange.
The trading systems as we know them today began when one trader, Walter Gallwas a partner in a brokerage firm requested his client, a man named Jack Telford for some assistance. Telford had developed a program he named TradeStation that could be used to assist in trading commodities and futures. Gallwas asked if Telford could consider that for a fee, Gallwas’ other clients could use TradeStation’s signals. When Telford agreed, the trading systems that are so commonplace were born.
Currently in total over 60 trillion € are traded in stock exchanges all over the world. PCs and trading software has become a necessity for everyone who wants to earn as much money as possible.
The situation today
Most of the conveniences you enjoy today have been facilitated by the internet; its growth and widespread use and the opportunities it creates day after day. Trading has now become almost totally automated with traders and brokers never having to meet to execute a trade. With binary options gaining popularity and especially so the automated version, trading today is completely different from what was commonplace in the 1980s.
Today, with the rise in usage of smartphones and other smart devices, traders do not necessarily have to trade at their PCs at home or in offices; they can now do their trades on the go. Smart coders have developed smart applications which have made it possible to execute trades and access trading accounts from hand held devices. This can be done anywhere from anywhere, just as long as there is an internet signal.
Looking back at where trading in stocks, commodities and forex has come from, you cannot fail to admire the human spirit and its desire to better archaic systems to better things. What now does the future of trading and trading systems hold? Only time will tell.
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