For Better or Worse: How technology is disrupting online trading

Up until the latter years of the 20th century, financial trading was seen as an elitist activity, only available to a small group of people (compared to today’s numbers). The process of trading typically relied on over-the-phone or face-to-face orders, placed with an intermediary broker who would first find a counterpart, typically through an exchange, and then execute the order.

Today’s trading landscape is very different. The speed of execution is measured in milliseconds, rather than minutes, hours or even days, as used to be the case. Online trading platforms can execute trades almost instantaneously. This results from advances in technology and communications; the proliferation of smartphones and other mobile devices, the processing ability of modern day computers, powerful software and the Internet, all led to the emergence of new sophisticated trade venues, allowing over-the-counter deals where the broker is the counterpart.

These technological developments in some ways democratized trading, making it more widely available. The number of active online traders today exceeds 9.5 million, according to The Modern Trader report, issued by Broker Notes. In the UK alone, there are more than 250 Thousand active traders.

But the changes in technology are gathering momentum; today’s trading landscape is dominated by sophisticated cutting-edge technology, with quantum computers and machine learning playing an increasingly prominent role. According to research published by CNBC in December 2018, through the use of algorithms, machines are responsible for 80% of all stocks trade in the US. In 2010 one of these algorithms caused the so-called Flash Crash of the S&P500, the first market crash of the automated trading era, due to a malfunction. Since then other market disruption events attributed to machine-driven systems occurred and considerable efforts have been made, to minimize the chances of future repetitions. These are challenging times, especially for retail traders who may in the future find themselves disadvantaged in comparison to large institutional players, with the financial power to acquire and develop the latest technology. On the bright side, the divergence in technological resources between large corporations and individuals isn’t likely to remain an issue for a prolonged period, if recent history is something to go by – those who are old enough may remember the time, when computers with barely the processing power of modern day phones were a rarity and only available to a small elite.

However, the new mechanics of trading are only one of the angles through which technological advances will impact the activity of investors and day traders. We must not forget how tech developments affect the markets themselves. Fast pace technological advances (and the social impact some of these can have) make it harder to determine the longer-term value of a stock, or even of an entire asset class. Take GE for example; the American giant had a share price touching $55 back in 2002. Today GE’s shares trade at around $8. Going the opposite direction is Apple, whose shares traded at barely more than $1 back in 2002 and today sit comfortably above $150 (having reached as high as $222 in early 2018). The explanation for this divergence lies in the way both companies strategically managed and developed technology. While GE remained within their comfort zone, failing to deliver any industry-changing innovations, Apple did the opposite; the Cupertino based firm embraced disruption as a focal point of their strategy and launched revolutionary consumer goods, like the iPod and the iPhone. There are other examples of today’s tech giants having a dramatic effect on financial markets, by totally changing the dynamics within a sector.  Such is the case of Amazon, whose low margins and streamlined online shopping business model has been hurting traditional brick and mortar retail. As Amazon became the largest global company in market capitalization, traditional retail outfits, like Tesco or Debenhams, have seen their stock value more than halved during the last decade.

Technology is bringing about profound changes in the way traders operate, as well as introducing new market dynamics that dramatically affect the future valuation and performance of assets. In the long run those that keep up, understand the impact and embrace the pace of technological change will be more likely to succeed.

Written by Ricardo Evangelista, Senior Analyst, ActivTrades
Recognized for exceptional execution, personalized service and incessant innovation, ActivTrades is an award-winning financial broker based in London. Having recently launched its proprietary platform ActivTrader, ActivTrades is committed to empowering a new generation of traders to explore interesting opportunities in financial markets.

Find out more at www.activtrades.com