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 What is eTrading on Online Trading?

eTrading or Online Trading is a process by which you place buy order or sell order on financial instruments and Square those positions with the use of internet based trading platforms. If you have placed a buy order, then you have to place sell order to complete that transaction. If you have placed a sell order, then you have to place a buy order. The counter transaction, by which a transaction is closed, is called as Squaring.

How Online Trading works?

Let us take an example of how commodities are traded in exchanges.


Participants:
  • Commodity Exchanges
  • Commodity Brokers
  • Customers


Commodity Exchange: is the place where trading (Buying and selling) is done. They do have sophisticated IT infrastructure for these transactions to happen. Data is stored in Databases, which resides on server. Data means all buy orders and sell orders they get from Commodity Brokers for all types of Commodities (example: gold, silver). Apart from this they do have relevant technologies for all transactions from their clients.

Commodity Brokers: They do have IT infrastructure and have databases to store all buy orders, sell orders from you. They also have relevant technologies to calculate your profit, brokerage, balance amount available, outstanding transactions etc. Based on your buy order/sell order and squaring orders they connect to Commodity Exchange Databases and square off your positions.

Customer: You are the customer and open an online trading account with Commodity Broker. If you do have high speed internet connection, you can see trading transactions in a faster way and you can also request your commodity broker to provide faster access to connect to them, for which they may charge monthly or annual subscription fees.
To retrieve the data and transactions to happen in a faster way, different technologies are present with Commodity Exchange and Commodity Brokers. With help of these technologies, Commodity brokers display the data on your screen.

  • You have a laptop/desktop and with internet connection, you connect to online trading terminal of commodity broker. Online trading terminal may be a software application installed on your system or just broker’s website. For you to connect, you will need username and password.
  • After connecting, you watch/observe the commodities. You make a decision that you can take a long call (example: buying gold) and sell it later. For this to happen, you place a buy order for commodity GOLD. Similarly many customers subscribed to your online broker will place their orders for gold or for different commodities.
  • These orders from customers are stored in Commodity Brokers Database, and are sent to Commodity Exchanges.
  • Your buy order will get executed in commodity exchanges based on your buying price, selling price from other customers. If you buying price is not matching with other’s selling price, your buy order will not get executed and it will be in pending stage.
  • If your buy order is executed, you will get message that your order is executed in your order book on your online trading screen.
  • You observe the market and if gold price goes up, and if you are satisfied with your Gross profits (selling price – buying price), then you place a sell order.
  • This sell order is again sent to commodity exchange by your commodity broker.
  • If your sell order gets executed, again it is displayed on your order book.

All these above mentioned transactions are done through ONLINE TRADING or eTrading.





Introduction to Online Trading in India       Overview of the Indian Securities Market/Capital Market





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