Technology and Innovation Transforming Financial Markets

Credit: ThisisEngineering RAEng

How Technology And Innovation Are Evolving Financial Markets, intrigues a Forbes news source.

Essential component of market evolution

An essential component of market evolution comes from technological innovation that enhances the ability to execute ideas at multiple levels.

Examples of these innovations include the depth of analysis one can do with today’s computing power, the data available through multiple platforms, the geographic and thematic offerings in today’s market, and the information channels available worldwide to receive live information. These trends are transformational and, as such, need to be considered when developing a vision of markets and risk.

I’ll focus on a couple of cases that illustrate why I believe technology has become a significant element in financial market behavior.

Artificial intelligence and machine learning have become buzzwords in the finance industry. These technologies have benefits, but also challenges associated with their complexity.

In using analytical tools to interpret data, no matter how advanced the technology might seem, you need to understand what happens inside to avoid, as much as possible, the black box effect. While these algorithms allow you to analyze large amounts of data, the output will only be reliable and efficient with carefully curated input. If you are not thorough, you could be blinded by apparent good results that are nothing but the product of luck and a constellation of errors canceling each other out.

Understanding these opportunities and challenges allows institutions and market participants to build technologies and design analytical and financial frameworks that would have been impossible decades ago. Nevertheless, it is crucial to recognize the relationship among data that’s relevant to a desired outcome. Today’s tools give us a broader view of what the data says, allowing for simulations to analyze the behavior of specific theories and hypotheses through various investment regimes.

Advanced algorithms and software are continuously being developed to help formulate investment ideas and execute complex strategies. These are usually built within institutional investment firms, and their use can range from simulations to automated execution (e.g., systematic investing). Many funds are evolving toward a mix of automated software with limited human intervention.

In short, new technologies and data availability are opening the industry to opportunities never thought of before.

Technology Spurs More Market Participants

Technology has also proven to be essential for offering other types of automated solutions, which has provided some investors with a more efficient way to reach their investment goals. For example, automated solutions are an inexpensive way for less savvy investors to create portfolios that align with their needs and appetite for risk.

This type of software allows investors to set specific parameters, such as regional exposure, volatility and tax implications, and target the mix of assets they want their portfolio to have based on those. Automated software can be a good solution to meet the basic needs of this level of investor.

Technological innovation is also evident in how markets operate and the availability of investment platforms. The offer of ultra-low-cost electronic brokers has been a popular topic of discussion as an argument for price distortions due to increased participation by less “sophisticated” investors. That view is flawed and should be used as an example of a disruption that should be considered a natural evolution of markets and risk behavior. Market participation needs to be treated as an additional component of the market system.

Industry Needs To Focus On Smart Data

Gadgets such as smartphones, indispensable in our daily lives, are examples of technological evolution in the communications industry that have made information available globally and in real time. The increasing availability of data through a fast-evolving communication industry has taken us to a point where the challenge is no longer data accessibility, but the ability to hone valuable insights from a sea of information.

The focus should be on smart data, not big data or alternative data. That is, you see more value in better analyzing the information you know has a relationship with the outcome you seek than aggregating data that might be irrelevant just because the machine can process it. Technology allows you to see those relationships from multiple angles and understand the interdependency of variables you use to predict an outcome.

But information still needs to be profoundly understood for it to be exploitable. Garbage will come out when garbage goes into a machine. Otherwise, we would set ourselves on a quest for modern alchemy.

All these advances have changed how people think, investors interact, risk flows and markets evolve.


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Source: Fortune


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