Despite tragic setbacks brought by COVID-19, 2020 showed promise in one area: technology. From video calls replacing office meetings to pharmaceutical laboratories engineering vaccines, advances in innovation offered security and relief from the terrible virus. Not to be overlooked is the role that technology and automation played in our financial markets. Under withering volatility in March and April, and daily market swings as great as 12 percent, the technology engine that runs today’s markets kept humming along, no matter how far the trading tachometer lurched into the red.
As lawmakers look ahead to what 2021 might bring, technological innovation and further automation of the markets will play an increasingly vital role in our financial security. Among the key market structure trends:
(1) Increased retail investor participation, driven by zero-commission trading
The move to zero commission trading with platforms such as Robinhood, TD Ameritrade, Fidelity and Schwab is the latest development in technology offering new efficiencies and dramatic reductions in transaction costs to investors large and small over the past decade. During 2020 COVID-19 uncertainty, the markets saw renewed participation by individual investors, making up 20 to 25 percent of market share, an increase from a typical baseline of 10 to 15 percent. Further, the average daily volume of shares traded increased to 11 billion in 2020, up from 7 billion the previous year. This increased base of retail investor trading is predicted to continue into 2021, fueled in large part by low-cost trading.
(2) Broader electronification of the markets: HFT goes mainstream
The successful automation of the equities markets – with technology powering the markets to remain open and fully functioning during COVID lockdown – is anticipated to continue to widen to other market niche areas. This year, 44 percent of investment managers reported increasing their use of automated electronic execution technology. Fixed income markets – including corporate bond markets – will further embrace electronic trading in the years to come. Automation of the markets will play a positive role in efficiency of the markets, transparency and execution, so that investors are getting the best price.
The broader application of automated trading technology, as a trend, has already brought down the cost of trading by 50 percent for average retail investors, providing investors with 30 percent more in lifetime savings as a result of high frequency trading (HFT).
(3) Further deployment of artificial intelligence in trading
The role of artificial intelligence will likely increase in 2021, both from the perspective of trade decisionmaking, as well as “regtech” capacity, such as assisting firms with detecting cyberbreach or fraud, as well as from a compliance and back office capacity of regulatory filings. The deployment of Artificial Intelligence (AI) will be a useful tool in further driving down the cost of trading and increasing reliability and security of market participants. The global market for AI in fintech is projected to more than triple to $22.6 billion by 2025, up from $6.67 billion last year.
(4) Regtech matures to find new compliance efficiencies
Under President-elect Joe Biden’s administration, regulatory enforcement actions may take more prominence. Companies will further invest in compliance technology in the space of regtech, in which processes are automated for monitoring trading activities, utilizing AI, natural language processing, machine learning and other technologies for surveillance and compliance infrastructures solutions. Regtech spending across industries is estimated to grow to $127 billion by 2024, up from $25 billion in 2019.
(5) Global competition: Asia dominates IPO market; the US needs to promote more IPOs
As global competition increases, the U.S. must promote policies that encourage innovation. The stock exchange with the highest number of IPOs as of Q3 2020 was the Shanghai Stock Exchange; the second highest number of IPOs was NASDAQ; and the third exchange in terms of numbers of IPOs is the stock exchange of Hong Kong. The U.S. must encourage more firms to go public earlier, as the lack of IPOs in the U.S. is partially attributable to firms staying private longer before they go public, so that everyday investors can participate in the upside of early stage growth of innovative firms.
To compete in a global landscape, the U.S. must also be vigilant about intellectual property rights, to ensure that IP rights of innovative products are protected from misappropriation. Whether it is the source code in a trading algorithm, or a self-driving car, it is important that regulators continue to protect valuable IP rights from infringement and misappropriation, such that they are not reverse engineered by market competitors in a global economy.
Kirsten Wegner is the CEO of the Modern Markets Initiative, an education and advocacy organization for innovation in today’s financial markets.