Stock markets: once it was top hats, blue buttons and Black Mondays; Eton meets the East End. Now it is denims, "day" traders and dotcoms. Technology is changing how dealing is conducted. A once cosy world faces a revolution. Traditional players are having to fight nimbler rivals.

Even relative newcomers in the derivatives markets - not so long ago at the cutting edge of financial market development - are having to bow to change. On London's International Financial Futures and Options Exchange (LIFFE) traders have hung up their garishly striped jackets and quit the manic, noisy pits of the old trading floor in the City of London for quieter quarters in places such as Islington.

The changes are affecting the big financial institutions which trade billions of pounds worth of shares a year and small investors alike. One casualty could be British government revenue in the shape of stamp duty. At 0.5% it is higher in the United Kingdom than in other European financial centres. In the days of defined national markets the relative higher cost of doing business in London was not a crucial factor. But it could become one in the new technology driven environment. Hence this week's initiative from the Stock Exchange to get rid of the tax, with the argument that the government would benefit from higher yields from capital gains tax.

Traditionally stock exchanges allowed companies to offer investors their shares. They listed the standards companies had to meet to be granted a quotation. They supervised, making sure everyone played by the rules when shares were traded. Market professionals were intermediaries and in London one group, market makers, put up their own capital to facilitate trading.

Technology has changed all that. Trading floors, physical embodiment of the market, have been replaced by networks of computers; investors sit in offices using banks of screens both as a source of information and a mechanism for dealing. Walking into a dealing room now is like entering Dixons and seeing all the television screens showing Teletext.

That did not matter as long as the established stock exchanges still controlled the new electronic trading networks. But alternatives aplenty are springing up, rivals such as London's Tradepoint and Easdaq, a Brussels-based exchange aiming to replicate the success of Nasdaq in the United States, listing such companies as Microsoft and Dell.

Groups of big investors, investment banks and fund managers are finding new ways to trade. They are backing alternative trading "platforms" where at set times every day an investor who want to unload a block of shares in one company can explore, electronically and anonymously, whether there is another institution prepared to buy.

A combination of globalisation, technology and the advent of the euro have made institutions hungry to trade across borders and jurisdictions. City-based investors, including American and Japanese houses for which the Square Mile is their European base, want to trade in the shares of (say) German or French companies as easily as they can in British ones. The established European exchanges spotted the danger and for the past 18 months have been planning an eight-member alliance.

Progress has been slow. Old rivalries die hard. Ownership of the exchanges has proved a problem, too. The London Stock Exchange is demutualising - switching from being owned by its members to a corporate structure. Frankfurt is pondering changes to allow foreign members a greater say in what is happening. The French bourse has already demutualised and is now planning to list itself. The threat of invasion by Nasdaq (which plans to launch its own European trading scheme later this year) is another spur. Frankfurt has sought, successfully, to be competitive in attracting hi-tech companies to its Neuer Markt. Paris has just listed its first pure dot com company. London has its techMark.

For small investors technology has arrived in the form of the internet. Even those who would never be described as seriously rich are being wooed. Share dealing via the internet is booming. The number of internet share deals hit 371,000 in the last quarter of 1999 - more than double the previous quarter's figure. The Association of Private Client Investment Managers and Stockbrokers calculates there are now more than 100,000 on-line accounts; it expects the internet to account for almost one in five of all execution-only trades by the end of March.

The American phenomenon of the "day trader" is arriving here. While most small investors are content to either squirrel away a modest portfolio as a form of saving and others seek to dip in and out of the market from time to time, day traders look to make money through dealing heavily and rapidly every day. In the UK Deal4free.com provides a service which allows those with the money and the nerve to trade share price movements, rather than the shares themselves.

As use of the internet grows more effort will be made to promote services to attract yet more retail investors. The number of UK brokers offering online dealing trebled in the past year.

Big investors have already discovered competition gives the customer more clout. Small investors may get the same message.

• Mark Milner is the Guardian's deputy financial editor