Guest Contributor: Renée Colyer, Forefactor
Perhaps I won’t be the most popular girl in high school for pontificating about technology in the markets in a less than flattering way. But I will go ahead and say I believe we take ourselves too seriously when it comes to articulating its importance.
Many times in the past during a ‘crisis’, I reminded my staff that we were not saving lives. No one will die if the OSC decides not to set a minimum order size in dark pools. The Order Protection Rule has had little impact on the way the market is run, according to many of my colleagues. And the world will not end if exchanges merge to provide a global platform – it will just enlarge what is already a sizable gambling venue.
Appropriately, markets support the growth of companies and thereby, jobs, economies and countries. But while financial markets were initially created to facilitate trade in commodities, they have morphed from that beneficent role and now handle trading in many instruments that have nothing to do with the ‘greater good’.
Historyworld.net confirms that as early as 2500 B.C., trade involved entrepreneurs and middlemen, including people willing to accept delay and risk in the hope of profit. The archive found at Ebla (near Syria) provides a glimpse of an early trading city, from the middle of the third millennium B.C. Obviously, a trading market is not a new concept.
The bottom line for technological evolution, regulation, and trading strategies has to be the impact on investors. And I’m not talking about shops that have set up specifically to line their own pockets using various strategies that do nothing to improve market conditions – I’m talking about someone saving for a child’s education through a mutual fund or someone saving for retirement via a pension plan.
Have you noticed we rarely see a new topic at industry conferences and the speakers are usually the same? Why is that? Where is the innovation? Where are the visionaries, those who can delineate the IMPACT of technology on investments? Not just on trading, but in our ability to create new instruments from market microstructure.
Yes, there are tighter spreads, increased efficiency with buyside costs and resources and increased transparency, but have these changes benefited the investment portfolios? We have certainly seen many indices rise. The Global Dow has more than doubled in 10 years’ time, from just under 1,000 in 2001 to 2,131 points as of March 10, 2011.
The sellside continues to invest in technology to aid in compliance with new regulations and the demands of their clients. And their margins continue to be squeezed. Personally, I find it amazing that the ones without the ability to underwrite continue to adapt and survive.
Canada, a country with a significant focus on commodities, is now in the crosshairs of technology and regulation. The rise of alternative trading venues, conversion to FIX and scrutiny of trade and investment activity forces one to ask the question – what, aside from automation (and all that it implies), is the difference between then and now?
That is a question too large to fully explore in this space, but it is something we should contemplate as we continue to alter our market microstructure to accommodate the technological revolution.