Disruptions in Financial Market due to Technology
Financial Market has shown dynamic change in behavior since past decades. The biggest reason for the same is Technology. It has changed the working and earning strategy altogether.
Type of Disruptions:
Manual Trading Vs. Algorithmic Trading
Earlier we used to trade manually. Investor had to visit sub-broker / member office and ask them to trade the stocks he desired. Nowadays, Algorithm based trading software has come into existence in market which takes decisions as per given parameters and trades in big quantity with speed and accuracy.
Advantage:
-Speed and accuracy has added a huge edge in trading and created a lot of opportunities
Disadvantage:
-If the user gives some wrong instruction by mistake, the system may complete the trading. This may result in big loss and impact the whole market.
Telephonic Trading Vs. Online Trading
In recent past, investor had to manually ask his member or sub broker to trade on his behalf. But now, mostly all the members have either developed their own internet-based trading terminal or provide third party trading terminal to their client.
Advantage:
- Day to day trading has become easy for all the investors and traders through online means
- Cost of business has reduced a lot for Brokers.
- Many brokers like Zerodha, has passed on this reduced cost to their clients by offering cheapest brokerages and have created disruption in broking industry.
Disadvantage:
-This change has created a large amount of unemployment for dealers / sub-brokers in broking industry.
Jobbing Vs. High Frequency Trading
Some time back, because of lack of speedy information flow there used to be huge difference between buyer and seller rate. Due to this difference, a lot of jobbing / arbitrage desk people earned from mispricing. Since algorithmic trading has entered in market, the bid ask difference has shrinked and has become more logical.
Advantage:
1. Low trading cost for investors
2. Prices are more logical
Disadvantage:
1. Jobbers and arbitragers trading manually has lost their business.
Who got affected:
Change in technology has disrupted everyone including:
- Brokers
- Investors
- Dealers
- Traders
- Proprietary Desk
Impact of Technology:
| Positive Impact | Negative Impact |
|---|---|
| Human Cost Reduction | Heavy Technological Cost |
| Speed, Accuracy, Consistency | Cyber Security |
| Volume | Algorithmic Errors |
Other Positive Impact
- Reports
- Reporting become easy for both members & clients. Now clients can get their reports on few clicks.
- Customer Intelligence
- Technology has increased the customers’ intelligence about market as well as members have also become active to increase awareness of customers through online portals.
- Data Testing
- New software has also become available to test any strategies on past EOD based data as well as tick by tick data. It helps traders and investors to develop innovative ideas and strategies for wealth creation.
- One Platform for all Exchange
- Since online trading platform has entered market, it has become easy for traders and investors to trade in multiple exchange from a single screen and single terminal.
- System Based Trading
- Investors have started focusing on system-based trading. Now they prepare, test and run a system for trading patterns. Many have stopped gambling and have started focusing on returns oriented trading.
Hence, though technology has created some big disruptions in financial market, it has also opened doors to a new and innovative trading world.