How does technology shape the market after an economic downturn?

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In the last few decades, every crisis in the stock markets has resulted in a unique technological shift. 


In a nutshell

  • Every crisis presents an opportunity for the markets to come up with new technological solutions.
  • Trading based on AI, machine-learning, chatbots, etc. are just some of the examples of technological innovations in the past decade.
  • As technology creates new opportunities for market participants, it will also make some functions redundant.
  • As with all technological progress, all stakeholders have to adapt to keep up with the changes technology brings.

The current economic downturn we find ourselves in isn’t the first of its kind. And it certainly isn’t going to be the last one. What is certain is that we will eventually come out of the downturn, and it is worth looking back at how far we have come in the world of investments. 

The stock market has evolved over several centuries

The Dutch East India Company is believed to have unknowingly given the world the concept of a stock market. Seafarers from Europe travelled across the globe to find new countries and explore trading opportunities. They gave away portions of their businesses to rulers and the elite to raise capital and expand operations. Hence, trading in financial instruments back then remained the preserve of the wealthy.

Fast forward to a few decades ago, corporates such as General Motors realised that they could raise capital faster if they involved the general public. And thus, the stock markets became democratised. By the ’70s and ’80s, stock markets across the globe got digitised and traders no longer needed to sacrifice their lungs at the exchange-floors shouting bid prices. Computers took over the process of buying and selling stocks and other financial instruments.

Today, you open your trading app to set your stop-loss target and swipe right to place your order. We have already automated our investments through SIPs. In the near future, your smartphone may be able foresee a downturn and migrate your investments into safer, more recession-proof instruments without human intervention. That level of intelligence sounds scary, but you as an investor will surely be a beneficiary. 

In the last 25 years, every crisis in the stock markets has resulted in a unique technology shift in the markets. First there was online trading, then came algorithm-based trading, and we are currently witnessing artificial intelligence (AI)- and machine learning-based (ML) trading. The full potential of this technology may take years to realize, but expect it  to disrupt the stock markets. COVID-19 has already shaken up Dalal Street. How will it change the way we use technology in the so-called ‘new normal?

Towards more customized derivative strategies

The Indian derivative market is still largely a plain vanilla market. Trades are restricted to simple buying and selling of index options, index futures, stock options and stock futures. The future could be in complex and customized strategies in derivatives. For example, if the recovery is likely to help metal companies but be recovery for banks, then an automatic long short strategy (long metals/short banks) should be executable in the market. That is the kind of  future technology that the markets could move towards. The market could also offer distinct portfolios for different risk clusters.

Leveraging the power of chatbots

We’re at the receiving end of an information overload every day. How do we automate the processing of such information and enable actionable cues? Chatbots will be like digital avatars that hunt down opportunities according to your own specifications. In fact, you may soon be able to tell the chatbot to create a low risk/high dividend portfolio with low correlation with the Nifty. Your personalised portfolio will be created in a jiffy.

Welcome to the world of virtual road shows

Forget Skype and video conferences on Zoom and Teams. Think of Indian companies, along with their investment bankers, making sales pitches to FPIs sitting in Boston, London, New York and Singapore using a virtual reality tour of the business facilities. You save a lot of time and money in the process, and the virtual reality tour  lets the investors see  the finished real estate project in real time.

Technology-driven market for unstructured deals

This can be a lot more complicated and may face some legal hurdles at an international level. Take, for instance, a small company in Turkey, which wants to quickly raise $1 million by offering a 10% stake. The big challenge is to decide whether the company is really worth $10 million. That is possible through smart use of AI and ML which can compress GBs of data into a single actionable report. This is a huge opportunity but will need a high degree of technological sophistication and digitisation of data.

Can stock markets create its equivalent of the Deep Blue?

Deep Blue is the high-end supercomputer from IBM that took on the legendary Gary Kasparov in a chess contest in the ’90s. Back then, experts believed that it was impossible to create that special computer that could consistently beat humans at chess. But in the next few years, we saw the first few attempts at a program that could actually beat the index, again and again. In the age of information overload, the combination of high-power processing and a slice of human emotions, may give us that outperformer at the bourses.

Technology will displace a lot of roles in stock markets

We’re already seeing this shift, but it will only intensify going forward. Like electronic trading displaced many stock trading jobs, artificial intelligence will replace a number of analyst jobs, purely because of its ability to process so much information. This ability to crunch enormous amounts of data on new shares and other financial instruments will pave the way for many new roles in the financial services sector. It will also bring with it a massive opportunity for upskilling and re-skilling in the stock markets.


Disclaimer:

The above article is purely academic in nature and aims to provide knowledge about basic trading concepts & should not be construed as an opinion or advice to invest or trade.

Investments in the securities market are subject to market risks; please read all the related documents and/or consult your investment advisor before investing.

Past performance of an investment asset does not guarantee future returns.

Companies mentioned in the article are purely for illustrative purposes and are not meant as a recommendation to buy or sell any security.

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