We have come a long way in history. The technological developments have enabled to do things which were once impossible to think. There is no aspect of life and business that has remained untouched from tech.
People can now access the vast information and execute orders while on the go.
The tech has particularly impacted financial services like electronic payments and electronic trading. Trading online on stocks, forex and crypto currencies have seen an unprecedented growth thanks to enabling technologies. A major shift is happening in how we invest and how we use money.
Here we cover major shift and technological improvements in trading and investing.
1) APIs and Systems bring Online Connectivity to Exchanges
The global financial industry has gone through some remarkable tech-changes since the last two decades. First the online banking and payments technology and second, the electronic trading and use of APIs (application programming interfaces) to connect these systems. APIs have enabled connectivity in world’s financial markets. And they have become widely used in the financial markets with the rise of automated trading systems.
World’s major trading terminals like Bloomberg, Refinitiv work on electronic systems, and use APIs to connect trading platforms. Exchanges, market makers & financial markets worldwide are using existing trading and API systems from Bloomberg or Refinitiv or developing their own APIs and systems.
In simple terms, API acts as an intermediary that allows applications to interact with each other. For instance, when you execute an order on a trading platform, it is the API (your messenger) that delivers your request to the provider and you get the response back in return.
The APIs have enabled online brokers to provide trading services at lower costs. That’s the reason behind mammoth increase in online trade volume. For instance, forex market has increased by 40% in just last ten years. Today, people from all walks of life, from London to land-locked Uzbekistan, are investing in different financial instruments.
As explained by Kenyan forex trading website Trade Forex Kenya – “The APIs and electronic systems have also enabled African countries and its people to get involved in financial markets. Today, Sub-Saharan Africa alone has 29 stock exchanges and numerous online trading platforms which provide trading services in numerous instruments.
Many local stock exchanges and commodity exchanges worldwide are leveraging technology to bring more participation. In forex, many banks, market makers and liquidity providers are using these systems to provide liquidity to markets.”
These technologies are now widely used by banks, market makers and institutional investors, thus providing much needed liquidity to markets world over.
Apart from providing easy access to trading, these technologies have brought transparency in trading practices. As trading platforms are becoming highly automated, human interference and chances of errors are dramatically decreasing. Welcome to the automated and more transparent world of electronic trading.
2) Electronic & Mobile platforms and apps are allowing ease of access to markets to everyone
Financial trading has gone through a profound change thanks to the advent of online terminals and applications. Placing a trading order by calling a broker has become obsolete. Today, investors and traders can execute their orders using an online trading platform on their mobile, desktop or browser.
Most of the brokers have integrated the API and other software technologies to develop online trading platforms and mobile-apps. These easy to access applications provide plethora of information about stock-prices, charts, indices, financial news and much more along with trading facilities.
Trading in markets has now become more accessible to everyone. As retail traders and investors can easily access the markets using any device anywhere.
3) Efficiency and lack of human interaction
Earlier human interactions were necessary for trading. People used to call their broker before they could place their orders. But now human interaction is almost non-existent. The algorithmic driven technologies have simply replaced the need of human interference on trading platforms. Along with tremendous rise of smartphones and penetration of internet in every corner of the world, the financial market is now open to everyone. Millions of people are now investing in financial instruments without ever needing to call a broker.
The trading has become more efficient as it has cut time required to place an order.
4) Better Price Discovery
Market Participants now get better price discovery as exchanges and liquidity providers can now connect participants from all over the world.
Although countries are separated by artificial boundaries. The global financial world is virtually an integrated world where stock-exchanges, banks, market makers and investors are constantly communicating with each other. Investors from the every nook of the earth are using online platforms to discover better price for their trade.
The prices of various instruments are now determined by simple economic concept of demand and supply. In general conditions, price of an asset increases when the demand increases, and decreases when there is less demand. This is how the spot price is determined in the financial markets. In trading terms, this process is called Price Discovery. Thanks to the electronic trading, investors are now able to get ‘better price discovery’ on almost every financial instruments.
5) Technology has helped in Speedy Execution
Unlike many industries, financial industry has integrated automated technologies in almost every part of their process.
Gone are the days when you had to call a human to make a transaction or execute an order. Now everything is done online with automation.
Online transactions are done in lightning speed. More trades are being executed today as the result of speedy transactions.
The automated execution has made the dealer intervention nearly obsolete. Today, many trading platforms have a fully automated trading procedures where orders are executed without human intervention. The faster execution has enabled the investors to buy and sell various assets in just few seconds. The sheer volume of daily forex trading ($6 trillion) is a testimony of the profound impact of technology in transactions and trade executions.
6) Competition and low-cost smaller brokers
Various trading terminals and trading platforms today use cloud-based software and algorithms, which in turn have enabled online brokers to provide trading services at relatively lower rates. These terminals can be used on any computer or online device, providing easy access to real-time pricing, market news and much more.
While, Bloomberg and Refinitiv are world leaders in trading platforms but these are very expensive and use proprietary technologies which is not accessible to smaller traders. But, there are many other cloud trading platforms which are offered by smaller companies like Meta Quotes, CTrader, Chelsoft, Info WARE Limited, Caladata Limited etc.
In Africa, most brokers and exchanges use the low–cost platforms like – Meta Trader’s Forex & CFD platform is offered by all the popular forex brokers in Kenya including FXPesa, Scope Markets, Pepperstone Kenya. Also, in Nigeria & South Africa brokers like CM Trading, Hotforex, Avatrade offer Metatrader platform.
While OST (Online Share Trading) from Chelsoft is used by all NSE Kenya Brokers, FolioTrader by Caladata is used by many brokers on NSE Nigeria.
These platforms have made possible for many new, smaller stock & forex brokers in Kenya, Nigeria and South Africa to enter the market, get regulated and provide trading services at much cheaper rate. This competition is in turn benefiting African retail traders.
7) Availability of Real Time Data helps in Analysis and decision making
“Data is the new currency”, and it’s true. The real-time data available on trading platforms help investors to quickly respond and change their positions if required.
Today, investors don’t have to rely on wisdom of handful people or sources, or wait for news to be delivered to them via broadcast on television or wait for the newspaper to arrive. They are now able to do better analysis and make informed decisions based on real-time data provided by the trading platforms.
The availability of real time data has made markets more accessible to everyone and increased its participation. Unlike earlier where the data was available to handful institutional investors who traded directly on the trading floor.
8) More Participation, High Volume and Volatility
A combination of online and API technologies has trimmed down the transaction/execution time to micro-seconds. With easy to access platforms enabled with real-time data, participation in financial trading has multiplied over the years.
Investors around the globe are now involved in high frequency trading resulting in trillions of daily financial trades. But the same enabling factors have now resulted into market-volatility. Just look at the some of the market crashes (Asian 1997 and US 2008) happened in last two decades.
9) Circuit Breakers
As the trade volume rises so the volatility in the market. National stock exchanges employ circuit breakers as a means to safeguard investors and companies against panic selling.
For instance, if the US stock exchange pulls down to 20% in a single day, stock trading automatically comes to a halt for the remaining day.
Thanks to enabling technology, circuit breakers are now the handy tools for regulators ready to be employed in extreme volatile market conditions. The same circuit breakers were used during panic selling in March this year due to Covid-19.
10) Advanced Trading Terminals
Advanced Traders can now get direct market access terminals for different exchanges and markets using Cloud from companies like Bloomberg, Refinitiv.
Advanced traders mostly institutional investors use these terminals to invest in global indices.
Some low-cost brokers now even offer direct market access using STP or ECN accounts in forex.
11) Social Media’s impact on investing
The virtual world of social media has now become a new treasure trove for millennial investors. Many of these members now use social media to get market news, stock performance, sentiment analysis and expert advice on their investments.
Some companies now even use Social network analysis and data to judge the market sentiment.
12) Social Trading
Social trading or copy-trading enables investors to copy or mirror the successful executed orders of their peers and expert traders. Various forex trading platforms like eToro and others offer copy trading to investors.
13) Automation, Algorithms and AI
Central to almost all the technological developments in the financial industry is algorithmic trading. Algorithms are the backbone of trading platforms. They enable faster execution, show volatility, real-time data and other factors. These super-scripted programmatic algorithms are the reason behind the rise of online trading.
In today’s world where everything is being automated, how can financial industry remain untouched? Many trading platforms now provide fully automatic trading, and some of them are also offering Robo Trading (robots are placing orders on your behalf). Overall, automation is taking guesswork out of the financial trading.
Lastly, the AI and machine learning (ML) are expected to be the next technological revolution in financial industry. Investment banks are already using AI to detect fraud, journal-keeping and recognize trading patterns. The wide use of AI and ML are widely expected to be more disruptive.