InvestorQ : What is the link between technology and stock markets? Is it true that the stock markets are being disrupted by technology in a big way?
Mary Joseph made post

What is the link between technology and stock markets? Is it true that the stock markets are being disrupted by technology in a big way?

sara Kunju answered.
3 years ago

Do you know that Goldman Sachs reduced the number of staff at its London trading office from 400 to just 2 people? That was made possible by the power of technology as programmers and algorithms replaced most of the human work that was being done. Today if you look at the broking and investment industry nearly 40% of its employees are computer engineers? If you are following equity markets for some time in India, you may be wondering about the logic of Goldman cutting down its equity traders and employing so many computer engineers. This is the new world of broking where the trading and investments are being driven more by technology and programs than by manual intervention.

Indian markets have gone through some interesting stages in its technology journey over the last 25 years. The change started in 1994-1996 period when screen-based trading and demat were introduced. Internet trading in 1999 and algorithmic trading in 2007 made a big difference in empowering retail and institutional investors respectively. But what we are now beginning to see and what could be visible in the next 5-10 years is the convergence of finance and technology (FinTech as it is better known as) could be beyond even the wildest of imagination. Broadly there could be 5 big trends disrupting investment space and make trading simpler and more powerful.

Algorithmic trading

If you are in the markets then you have surely heard of algorithmic trading or programmed trading. Algo trading is all about using smart computer programs to execute your trades. Large institutional investors already use these algos for executing most of their trades, be it; for arbitrage, options matching or even for discovering the best average price. Because it is programmed, it is incredibly quick in execution. Scores of transactions can be executed with a speed and accuracy that is not possible with the human hand. But above all, algorithmic trading can pick up trends and conditions that cannot be done by the human eye.

While most retail investors are still outside the purview of algorithmic trading, it is likely to be offered more aggressively sooner than later. With algo trading, individuals will be able to trade based on conditions. For example, you can buy stocks when dividend yield goes above a certain level or sell when P/E crosses a certain level. Hundreds of such conditions can be fed into your computer and you do not even need to monitor the execution which will automatically happen.

Robo Advisory

Trading may be more routine but the next step is to combine the power of robotics where actual advice can be dished out to customers based on their unique needs. Robo advisory is a slightly broader term compared to algorithmic trading. While algo trading purely refers to execution of trades in equities, F&O, commodities and currencies, robo advisory covers the gamut of overall financial planning. Globally, financial advisory companies are increasingly shifting their focus to robo advisory. Robo advisory works well when you can template the output based on certain inputs that are keyed in. It can help you create a complete personal financial plan by collecting basic inputs from you. Robo Advisory will ensure that the solution is as customised as possible to your unique needs.

Firstly, it will simplify and make the advisory process more economical and feasible. Secondly, it removes the human bias in decision making substantially, if not entirely. This makes investment decisions more objective. Lastly, the customer is on auto mode and can monitor and modify on his own.

Machine Learning

It is one thing to right smart programs but it is another level to make your machines and programs smarter to the extent that they can replicate human thinking. Machine intelligence is a technically significant improvement to algo trading and to robo advisory. Machine intelligence goes a step further by including the feedback loop as well as the logistic intelligence into the trading and investment decisions. This is normally done through the use of artificial intelligence (AI), which is likely to be increasingly used in financial decision making. Financial decisions are impacted by a plethora of factors, not all of which are within your purview and control. Machine learning not only considers all these factors but also uses its learning capabilities to execute differently next time based on the feedback on the previous occasion. This makes computers as close to humans as is practically possible.

As investors we learn many things along the way but do not necessarily apply the same. Machine learning does that job for you so that the mistakes that you made in your financial decisions last time are not repeated the next time. That is surely a big value addition for investors.

Blockchain Technology

The late Mr. Arun Jaitley mentioned in one of his budget speeches that while the government was averse to Bitcoins they were open to the underlying technology of Blockchain. You must be aware that Bitcoins are a virtual currency that is based on the Blockchain technology. Just as you can hold dollars, pounds and Euros, you can also hold Bitcoins. So what exactly is this Blockchain technology and how it is likely to change investing in India? For large investment houses and brokers there is a huge cost involved in compliance, financial reporting, audit, settlement and clearing. While these are routine tasks, the impact in terms of infrastructure, operating cost and top management bandwidth is huge. Blockchain is basically a shared database approach wherein the multiplicity of data management and reconciliation can be reduced. It is estimated by Aon Hewitt that Blockchain could save $12 billion annually for the Top-10 brokers.

An RBI has expressed reservations over the safety and security of the Blockchain technology and the use of Bitcoins. Hence they may still be some time away in India. However, as and when it is implemented, Blockchain is likely to change the economics of brokers and advisors and make the services more affordable to consumers.

Social Trading Platforms

Can you imagine trading over Facebook or WhatsApp or even Instagram with appropriate security where you can create social groups and brokers get the benefit of viral marketing. Sounds far-fetched but that has already started in India. Social trading is a fairly new phenomenon. There are trading platforms in Europe like “etoro” which extensively relies on Social Trading. So what exactly is social trading all about? Today when individuals trade in the market they rely on the broker research, their own research as well as tips and ideas from outside. What if you were to go a step further and actually learn from the trading strategies of the super-performers? In social trading, there is a super-performer who is willing to share his trading strategies and small investors can actually benchmark their trading strategies against them. Soon a star trader could have many followers who will be eventually benchmarking their trade decisions on his view. For the customer it is a big boon as it offers them an opportunity to learn real time from the bosses in the business.