Trading in the equity markets has been mostly digital for several years now. Almost all brokers and trading platforms already employ digital technology. They allow online trading through desktop, mobile, or web apps. Digitization in trading, however, does not start and end with the ability to trade via the web. There are other ways for digital transformation to enhance the trading experience especially in the context of the next normal.
Blast from the past
Here’s a little look at the history of digitization in stock trading. It started in 1987 when the financial markets crashed. Back then, many brokers refused to answer their phones, fearing the massive losses they would incur if they proceeded with the transactions. Brokers were practically sabotaging the system.
In response to this problem, the Securities and Exchange Commission (SEC) in the U.S. pushed for the implementation of electronic trading. The rationale: If transactions were automatically handled by electronic routers, it will be difficult for malicious human intervention or inaction to happen. The digitalization move was a success and has since evolved into something more sophisticated.
Years later, custodial services were allowed, which led to the development of APIs to digitally handle custodial processes. This digitalization in custodial processes gave rise to robo-advisors, a new kind of brokerage platform that harnesses the power of artificial intelligence to provide inexpensive investment services.
Around 2015, artificial intelligence and financial intelligence have risen to prominence. Many consumer investment apps have started collecting and offering useful data for traders and investors. Big Data has also become a common buzzword in the financial circles.
Crisis-driven digital transformation
The current pandemic will not produce a digital revolution that is as impactful as the one that took place more than three decades ago. Advances in digital technology over the past years have been mostly incremental. Technology has progressed significantly that even Moore’s Law has already died. Still, trading in the financial markets will continue to benefit from digital innovations.
The next normal leads to greater reliance on digital technologies. Brokerage firms will deploy more advanced technologies to better serve their customers. Hedge fund managers and other financial companies are betting on technology to enhance their services. Of note, a large percentage of the new hires of banks and financial behemoths are in the field of financial technology.
Goldman Sachs’ new position openings for 2020, for example, relate to tech functions. Around 44 percent of the 2,080 jobs posted by the company are for software engineers, data professionals, strategists, quants, and others involved in financial technology. Barclays similarly intends to hire a considerable number of technologists this year. Likewise, more than 20 percent of the position announcements of Credit Suisse, JPMorgan, Morgan Stanley, and Citi are also for tech-related professionals.
Indeed, the current health and economic crises are accelerating digital transformation. Goldman Sachs (NYSE:GS) CEO David Solomon says that the global investment banking company’s focus at present is about platform businesses. This shift in business strategy is in line with the goal of attaining an annualized growth rate of 11.1% in the second quarter.
The company’s second quarter call notably mentions the keyword “platform” more than a dozen times. Accordingly, Goldman Sachs seeks to establish technology-based platforms that can yield healthy margins without limits even though they tend to require high amounts of upfront investments.
Steven Scherr, Goldman Sachs CFO, enthuses: “Across global markets we continue to invest in technology platforms to enhance user experience and straight through processing.” Sachs takes note of the growing number of users of their securities “digital storefront” platform. “We also saw continued high levels of client activity on our Marquee platform through the second quarter, with our highest ever external engagement in April,” the CFO adds.
Digitalization in the next normal
The next normal entails several elements that are expected to influence business decisions. The most notable of which are growing government intervention, more business scrutiny, the need for resilience and efficiency, changing industry structures, and opportunity seeking. These elements affect the adoption of digital solutions or innovations to level up the experience.
As brokerages, hedge fund managers, and other financial service businesses adopt new technologies and systems, regulation and compliance are set to become crucial issues. Companies cannot just proceed with the changes they want to implement and the new products they intend to offer. To ensure that everyone is one the same page with the new technologies and systems set in place, it is vital to provide adequate training, seminars, or orientation. A digital adoption platform can be palpably useful.
Companies like Goldman Sachs are responding to the changes in industry while proactively seeking out opportunities and optimizing operations to achieve resilience and efficiency. They take advantage of new technologies and innovative solutions to provide better financial products to their customers while making sure that their employees are also able to keep up.
They cannot risk being at the receiving end of government sanctions or bad press for speedily pushing through with their digital transformation plans. Government regulators and customers alike are increasingly becoming watchful of business activities to avoid the worsening of the economic downturn and expedite recovery.
Improving the digital trading experience
Even without the pandemic and the next normal, digitalization is a must for businesses including brokerages and trading platforms. Digital solutions facilitate the development of new, innovative products and allow traders to become more efficient. Going digital and embracing new financial products benefits everyone. There are challenges or drawbacks along the way, but these are insignificant compared to the advantages and new opportunities created.
Disclosure: No positions.