This week in FinTech: Payments are out, wealth management is in! Global regulators worry about cybercrime and infrastructure, 26 new funding rounds, and Australia’s plan to build a fintech economy. Continue reading
How do investors get their information? We review the changing landscape since the tech boom in the 1990’s and take a look at the possibilities for artificial intelligence as mobile apps become yesterday’s news.
For over a hundred years, the newspaper was the go-to medium for stock information. The markets moved slowly, as reaction times were limited by the printing press and the time it took to call your stockbroker. While the Wall Street Journal had 1.7 Million subscribers in 1990, the digital revolution extended the newspaper’s reach to many more.
The internet drastically sped up the velocity of financial markets in the 1990s, with the invention of financial news sites like Yahoo! Finance and CNN Money. Suddenly, investors could view articles pulled from thousands of sources all in one place. This allowed investors to make quick, informed decisions based on a huge database of information. In 2016, Yahoo! Finance generates about 20 million unique monthly visitors, eclipsing the subscriber base of print newspapers during their peak popularity.
Beginning in the mid 2000s, curated news was not enough for savvy investors, who wanted to skip the raw data and seek the wisdom of the crowd through more quantitative insights. This gave rise to crowdsourced sites like Seeking Alpha and StockTwits, which gave unbiased insights into the collective predictions of the investing community, earning the term “social investing” before mainstream social networks were born. Today, these sites cater to a niche market of active traders, and the top 10 crowdsourced investing sites generate approximately 5 million visitors a month.
As mobile smartphones took over the consumer market, the “App” was born, allowing users to access these social and news products from anywhere, and freeing many day traders from their desks. At the same time, mobile trading became increasingly popular, now making up around 20% of all retail investor trades. Today there are hundreds of apps offering investment advice, boasting a combined active user base around 100 million.
In 2016, we look ahead to many promising post-app technologies, as messaging becomes an operating platform of its own with third party integrations, and bots allow users to instantly satisfy their needs with the help of artificial intelligence. Banks and brokerages have shown strong interest in Facebook messenger and Amazon Echo, as they continue to engage with their customers’ daily lives.
It’s an exciting time for the future of financial information, as your financial advisor could be just an instant message, or a voice command away at all times. Notably, while the user-facing technology is changing, the core features of investment information are not. Users demand instant access to earnings ratios, analyst opinions, and other intel on the trajectories of their investments. To make this information actionable, publishers can allow users to dig into their holdings and trade from anywhere.
Once the hype dies down over artificial intelligence, we can expect something even more innovative to take its place as the easiest, most efficient way for retail investors to research and transact. When this happens, trading technologies will be ready to penetrate the new medium for information exchange, as the retail investing market opportunity expands even further.
This week in FinTech: What can new devices like Amazon Echo and Bluetooth beacons do for financial institutions? FINRA takes a closer look at robo-advisors, and 22 companies who raised $160 million in venture funding.
In the 1960’s, stocks changed hands every 8 years, on average. Today, they change hands every 20 minutes, largely in part to the popularity of high-frequency trading. Italian, Japanese and Brazilian regulators have adapted to changing market dynamics. US regulators have yet to adapt, leaving retail investors vulnerable to getting ripped off.
In the early days of retail trading, value investing was a popular and reliable strategy. To build long-term wealth, investors researched the fundamentals to discover undervalued assets, then waited for them to appreciate to their market value. If they did their homework correctly, investors could expect to profit from their research and patience.
However, in the last few decades, value investing has been eclipsed by algorithmic high-frequency trading, or HFT. Analysts estimate that about 70% of Wall Street’s trade volume is through high-frequency channels. The US regulatory system has no formal definition of HFT, but the strategy is generally characterized by:
- High speed and complex algorithmic programs to place trade orders
- Buying and selling in short time frames, often just seconds
- Submitting orders and cancelling them before they are executed
- Liquidating most or all positions between trading sessions.
Admittedly, high-frequency trading provides some market benefits, including enhanced liquidity and pricing efficiency. However, its popularity has distorted the playing field to the point of market manipulation, putting the average retail investor at a distinct disadvantage.
High-frequency trading disrupts the level playing field in financial markets and encourages dangerous short-term trading strategies that rely on arbitrage and speed. For example, high-frequency traders have been busted for bribing the publishers of the Consumer Sentiment Index in order to gain early access to its report. They have cut deals with banks to enter into “dark pools,” which promised to protect retail investors from the effects of high-frequency trading. These traders are uninterested in the fundamentals of the companies they invest in; rather, they seek to beat the market reaction by a millisecond and turn a quick profit.
In 2014, Athena Capital Research was hit with a $1 million penalty for project “Gravy,” a high-frequency trading algorithm that placed huge trade orders during the last 2 seconds of trading in order to manipulate stock prices every day for six months. This strategy stole from millions of Americans, whose mutual funds relied on the price of the underlying equities at market close. An SEC investigation found internal emails warning cohorts not to “kill the golden goose,” while planning trips to Vegas after especially profitable days.
Our financial system has strong regulations in place to catch old-fashioned fraudsters and insider traders, but the complexity of high-frequency trading often conceals these exact crimes under the veil of an “algorithmic” strategy. While the Athena fraud case is disturbing, the most dangerous players are likely the most covert. They have developed the most confusing algorithms, and are smart enough to avoid gluttonous nicknames for their market-manipulating strategies.
Retail investors deserve governmental protection from these toxic practices, just as they receive protection as consumers by the Consumer Financial Protection Bureau. The stock market’s dynamics have changed, and it’s time to update the rulebook. Italy has implemented a small transactional tax to discourage abusive short-term trading, and Tokyo and Brazil are following suit. American stock exchanges shouldn’t be the last ones to the table. High-frequency trading is difficult to regulate, but given its popularity and the damage done to retail investors, the time to adapt is now.
Until changes are made, retail traders must take their own precautions. To start, don’t try to play the high-frequency game. You can’t beat computerized traders, and you’re likely to get slaughtered trying. Study the trade volumes of your investments, and avoid stocks with high volume and low prices. These stocks are the darlings of high-frequency traders, so you should lean towards buy and hold strategies for these equities.
$trip club$ and dollar bill$…
— RihannaDaily.com (@RihannaDaily) April 20, 2013
Finally, watch for algorithmic errors and pounce. Keep an eye on Walgreens ($WAG) and Hitachi ($HIT.) When a popular account tweets about “$trip club$ and dollar bill$,” human traders know it has nothing to do with Trip Advisor’s share price, but computers can slip up on these subtleties, leaving an opportunity for retail traders to beat them at their own game.
This week in FinTech: Why it’s time to stop focusing on “tech” and start looking at “fin,” 15 infographics that show a more detailed view of the industry, $75 million in new funding, and what the UK Brexit means for London’s fintech scene. Continue reading