Market volatility ensures a larger role for FinTech in 2019

Ringing in the new year with recent market turbulence, it’s easy to see why investors are jittery about portfolios holding their nest eggs as the Dow Jones Industrial Average plunged and then rose 8 percent in the second half of December.  

There have been a number of media discussions as to the potential causes of the volatility: Is it political uncertainty? Interest rate swings? The global economy? Quantitative hedge funds with mathematical formulas triggering massive fluctuations? Or is it just a correction? 

ADVERTISEMENT

It is unclear what the cause of the volatility is, but one important market player — high frequency traders (HFTs) — played a big role in providing dependable liquidity in these uncertain times. 

Against this backdrop, below are three fintech trends to watch that will shape the markets in 2019: 

Demand for dependable liquidity 

There has been much discussion recently over the possible causes for wild swings in the stock market. The role of quantitative investors such as hedge funds using mathematical formulas that could trigger massive and rapid fluctuations in the markets is a top candidate.

It is important for there to be liquidity in the markets to ensure that retail investors have the ability to buy or sell regardless of market environment.

As we see growing volatility, we will see an increased demand for electronic intermediaries, such as HFT firms, to supply liquidity and ensure that investors have the ability to transact purchases or sales of stocks. 

This will be an opportunity for electronic intermediaries, such as HFTs, to provide liquidity regardless of whether the market is going up or down. 

RegTech to police for bad actors

Developments in “Regtech” — including algorithms and artificial intelligence — to help surveille the markets will be an asset to retail investors.

There is a trend that is anticipated to continue in 2019 of brokers managing retail accounts to use regtech to  detect potential fraud and abuse in the markets and to raise the bar on the ability to enforce regulatory requirements.

This is obviously paramount in order to maintain the trust of investors and to ensure there is a strong cop on the beat especially in times of market volatility.

Companies such as Behavox and ComplySci are also helping firms manage and mitigate irregular trading patterns that could spell trouble, and they will continue to play a bigger role in the sector as the c-suite embraces artificial intelligence as a troubleshooting asset. 

While regulators don’t have anything close to the big RegTech budgets of Wall Street banks and trading firms, they are also using technology applications to assess large pools of data and ensure market integrity.

Look for the Securities and Exchange Commission and Commodities Futures Trading Commission to continue shifting more resources to technology in the year ahead. Agency leaders will also continue ask congressional leaders to authorize more funds for tech improvements to keep pace with the private sector.  

Electronic intermediaries reduce trading fees 

When you buy or sell a house, you use a real estate agent to transact that purchase or sale. When you buy or sell a stock, “specialists” or floor-based traders have historically been used to exclusively transact those sales. 

That will continue to  change at a fast pace in the next year as more of those intermediaries are displaced by HFT firms as market makers. These electronic cost-effective intermediaries can perform the function at a fraction of the cost while adding efficiencies and collectively saving investors billions of dollars over a 10-year period.  

This is translating to lower costs, more accurate pricing and better data protection for the average household with a retirement account and defined benefit plan. These same dividends are also being realized by large institutions and endowments.  

ADVERTISEMENT

We will continue to see more partnerships on the horizon bringing more technology to mom and pop investors.  The term “automated trader” will no longer just apply to institutional market participants. 

For example, in the exchange traded fund (ETF) market, GTS, the New York Stock Exchange’s largest designated market maker, just recently acquired Cantor Fitzgerald’s ETF and retail stock trading businesses to ensure investors in ETFs have the most innovative technology for their transactions.  

Stock prices will fluctuate and markets will gyrate, but technology only knows one direction on Wall Street. The pendulum is permanently swinging toward an electronic marketplace where technological innovation will make our markets the most efficient, transparent and cost-effective in the world.

The financial sector has heard Main Street loud and clear: It’s time to use technology for good.

Kirsten Wegner is CEO of the Modern Markets Initiative, a group that advocates on behalf of algorithmic, quantitative and high-frequency trading.