online trading & market liquidity asea/case conference september 2005

ONLINE TRADING & MARKET LIQUIDITYONLINE TRADING & MARKET LIQUIDITY

ASEA/CASE ConferenceASEA/CASE Conference

September 2005September 2005

www.arabfinance.com

12-09-05 The Impact of Online Trading on Market Liquidity 2

CONTENTCONTENT

About ArabFinance What is Online Trading? What is Market Liquidity? Impact of Online Trading on Market Liquidity Facts Forecasts Conclusion


ABOUT ARABFINANCEABOUT 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


WHAT IS ONLINE TRADINGWHAT 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


ONLINE TRADINGONLINE 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.


WHAT IS LIQUIDITYWHAT 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.


MARKET LIQUIDITYMARKET 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.


MARKET LIQUIDITYMARKET LIQUIDITY

The common theme in all three contexts is cash.

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an imperfect metric at best.


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.

Does Online Trading affect Does Online Trading affect

Market Liquidity Market Liquidity??


THE IMPACTTHE 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.


THE IMPACTTHE IMPACT

Accessibility No Single Access Point

Confidentiality No one knows about your trade

Transparency Live quotes makes you act faster


THE IMPACTTHE IMPACT Flexibility Frequent order

modification Cost Efficiency Lower per cost

trade makes trade you more

Day Trading Faster Execution

Accuracy No need for calculations


FactsFacts On-line investors are using the Internet to their

advantage, and the entire structure of Wall Streetis 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


World Internet Usage & Population StatisticsWorld Internet Usage & Population Statistics

World Regions

(July 2005)Population % of World

Internet Usage

Usage Growth 2000-2005

%Population (Penetration)

%World Users

Africa14.0%16,174,600258.3%1.8%1.7%

Asia56.4%323,756,956183.2%8.9%34.5%

Europe11.4%269,036,096161.0%36.8%28.7%

Middle East4.1%21,770,700311.98%8.3%2.3%

North America5.1%223,392,807106.7%68.0%23.8%

Latin America/Caribbean

8.5%68,130,804277.1%12.5%7.3%

Oceania/Australia0.5%16,448,966115.9%49.2%1.8%

World Total100%938,710,929160.0%14.6%100%

Source: internetworldstats


ForecastsForecasts

As the Internet becomes a required distribution channel, the distinction between "on-line" and "regular" trading will disappear

By 2006, nearly all investors withaccess 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


Simply PutSimply 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 attheir PCs at home to act like global financiers.

The Internet provides near-perfect, real-time market data and research

The Internet is rapidly making markets of all types much more liquid and efficient


Simply PutSimply Put……

According to Bill Barret:

“Online Trading is probably the only business in the world where u can …

Point, Click & Make Money”Point, Click & Make Money”

online trading & market liquidity asea/case conference september 2005

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