Adoption of electronic trading is a certainty for almost all markets virtually every liquid market in the world where electronic trading has gained a foothold is now dominated by electronic trading. The only questions have been who will dominate, how long it will take and the completeness of the transition. Of note is that in almost all cases the incumbent, non electronic offerings have lost volume hand-over-fist to the newer electronic offerings.

This phenomena has occurred in quite a broad range of financial markets, including futures (consider that Eurex, the worlds largest fully electronic derivatives exchange, was founded in December of 1996 and is now leagues ahead of its non-electronic competitors, leading Liffe, its chief European rival, by three times the volume), spot foreign exchange in the interdealer market (consider that Reuters and EBS are fully electronic and have almost completely displaced old-time voice brokers, leaving them less than twenty percent of the volume), and equities (consider ECNs with the exception of Instinet were founded when Nasdaq was forced to change its order handling rules in the late 1990s, now handle roughly 40% of Nasdaq share volume).

There are many other examples, including US government bonds and foreign exchange forwards, which are rapidly gaining ground against their voice competitors. The bottom line is that if there is a liquid and standard instrument to be traded, the market has always chosen electronic trading as its primary means to get this done.

Now for some sobering news. The rate of adoption in electronic markets when there is an existing non electronic, people based provider is precarious indeed. While adoption is close to certain, the exact timing is anything but. Still worse, the pattern of volume growth is distinct from traditional businesses where slow steady growth makes extrapolation and forecasting relatively straightforward. Adoption trends in almost every financial market have followed more of a sideways S shaped model, with a long period of low usage, followed by a sudden surge in activity. This pattern is best explained by the necessity of a critical mass of participants and activity before serious trading volume can emerge. It is also predicted by the basic theory of network economics, which states that the value of a market in which all participants can interact with all others, grows in importance proportional to the square of the number of participants.

Be that as it may, market participants do not care about the mathematics or the historical precedent. They are rightly focused on their markets and their particular problems. Thus despite the strong historical precedent for markets becoming electronic, each new market with electronic offerings faces a contingent of doubters decrying the impossibility of this market going electronic, because this market is different and has certain peculiarities that will prevent electronic trading from taking hold. And so it is the case with many of the foreign exchange offerings today such as electronic markets for foreign exchange derivatives.

In the case of derivative markets, the chief set of doubts focuses on the strength of the relationship between brokers and traders: the traders need the brokers to provide the liquidity, doubters say. It might surprise some to know that this is quite a common objection to all sorts of situations where a machine is proposed as a replacement for a job traditionally for a person. In fact, the ubiquitous automatic teller machine, variously called an ATM, cash-point and cash station around the world, faced exactly the same skepticism just over thirty years ago. At the time, Don Wetzel, who co-invented the automatic teller machine, was trying to get banks interested in using his new system and remembers the reaction well:

The mentality of people at that time was, remember, we want to deal face-to-face with people. People are not going to walk up to a machine and use it. In fact we don't want them to do that, we want them coming to the bank and talking to us, because then we can sell them on some other things.

The problem was that nobody really saw the need for an automatic teller machinein principle they might be more convenient, but tellers know their customers in a way that a machine will never be able to, and can help with an array of complicated transactions that a machine would have difficulty handling. Plus, tellers are fast, convenient and nobody sees the need for improvement, even if there is room for it.

Today, of course, that ATMs are the preferred choice for customers for all but the most complicated transactions is an understatement. Most banking customers would rather wait five minutes on an ATM line in an ice storm than use a teller. Yet thirty years ago bank executives viewed the ATM with tremendous skepticism. They argued variously, People will never trust the machine, customers prefer tellers, tellers point out mistakes and protect their customers, tellers can suggest other transactions from which people might benefit. All important points, but not one of them means a thing to customers or bankers today. And the reason? It has to do with the fundamental way customersall customersview business transactions.

People think of business transactions not in terms of the nature of the interaction necessary to complete the transaction, but in terms of the results they hope to achieve. People rarely say, I am looking forward to having a nice chat with my broker and Ill also get some business done too. A trader thinks about a transaction in terms of a certain product, a certain amount and a certain price. The rest is just a means to an end, and what the trader wants is to get to that end as quickly and efficiently as possible. Therefore, again and again, individuals across all different kinds of markets and a vast array of businesses gravitate toward the easiest, quickest and most efficient way to transact.

And, even more importantly, it turns out there is no such thing as fast enough, easy enough, or cheap enough when it comes to business dealings. If a faster, easier and less expensive way emerges, customers jump. This was the experience with ATMs as Mr. Wetzel relates:

The bankers always said, "Our customers, they know Susie [a hypothetical bank teller], they've known her for a long time, and they feel very comfortable coming in and talking to her. And Susie likes to talk to them." Neither was true. Susie didn't know the customer. I didn't know my teller. I didn't go to the same teller, especially if this line over here was shorter. I went over there and I couldn't have cared less who the teller was.

What they found was the relationships did not run as deep as people thought. All the customer wants is the fastest, easiest and cheapest way to transact. And there is no way, it is impossible, that voice brokeringor even something brokers are calling hybrid tradingcan compete with the speed and efficiency of electronic trading (imagine calling your broker after making a stock trade on-line to check to see if everything went through ok).

Despite electronic tradings bright future, the transition to a fully electronic market does take time. Some traders are reluctant to walk away from tried and true relationships with their favourite brokers. Others are quick to point out potential difficulties in using electronic broking as opposed to brokersbrokers can protect my prices in fast moving markets, systems cannot, brokers can point out mistakes, systems cannot. But every new technology, no matter what advantages it offers, requires an adjustment from its adopters, and there are always some who can only see the pitfalls.

Interestingly, every market from ATM machines to futures markets, that has made the transition from a people based to an electronic based system has offered the exact same set of reasons why it is differ