How the investment market should adapt to adapt to growing technologies or risk more repeats of the Robinhood debacle
The volume of actively trading retail investors today is growing exponentially, but as we saw in the midst of the GameStop saga, they still have to make do without the protection they need to trade as freely as their investors. institutional counterparts.
The app for retail investors, Robinhood, found itself at the center of the fiasco as the platform, along with other online trading apps, were forced to halt trading at the height of the contraction in GameStop (GME) at the start of the year – causing individual investor scores to lose by increasing the value of the stock.
Investors had rallied on Reddit with the simple plan to buy GME shares in an attempt to counter the masses of short positions taken by hedge funds. As a result, the stock’s value climbed 1,500% on January 27, leading Robinhood to halt trading in the unusually volatile stock.
While the investment app had to respond to calls to act underhandedly on behalf of third parties, Maxim Manturov, head of investment research at Freedom Finance Europe, noted that the chaos was likely caused by a lack of cash.
“One of Robinhood’s major problems is the lack of liquidity in the face of strong demand for GameStop (GME) stocks,” Manturov explained. “The company denies any involvement in providing assistance to third parties because no one outside the company influenced the decision on the limits. These restrictions are more likely to relate only to a technical need to provide liquidity, and the company had to take a hiatus to raise funds in order to cover the cost of transactions and reimburse investors who wanted to cash out. “
(Image: CB Insights)
Retail investors have increasingly flocked to Robinhood since the start of the Covid-19 pandemic for the promise of the commission-free trading platform and superior usability. But in light of the app’s behavior following the GameStop contraction, it’s clear that further modernization of the financial industry’s more traditional approach to investing is needed.
With that in mind, let’s take a closer look at some of the emerging technologies that may help prevent further repeats of the Robinhood debacle in the future:
Intuitive investment products
Even before the emergence of the pandemic, global institutions faced a series of challenges. In fintech, technology has developed by asset class, by region, leaving institutions with a very complex operating model with multiple books and records that entail greater risk and trap capital. The idea of standardizing these products into a single global system could bear fruit for these companies around the world.
Speaking to Bloomberg Live, Broadbridge CEO Tim Gokey believes cloud computing is the future of intuitive investment products. “In the short term, I think the impact of the cloud is profound. And I don’t know if that looms… but it’s much more than a game of infrastructure, ”explained Gokey.
“It’s about modernization. It is a complete suite of software microservices, DevOps, with continuous deployment and enhanced security. It has gone from customers who don’t ask for a cloud to a cloud-ready cloud only. And that may be one area where leveraging modern SaaS service can remove some of that work. ”
Cloud-based software will be complemented by the further development of artificial intelligence, which has the potential to be a key tool integrated within the industry. Institutions need a clean, comprehensive and open level of access to data, and AI can be essential to ensure that technology adapts to the growing need for more comprehensive financial services in an increasingly digital age. .
Finding a balance with blockchain
When it comes to envisioning the technology that will drive the future of finance, blockchain needs to be a central part of the discussion.
(Image: NIX United)
As we can see from the data above, 29.7% of the blockchain market value globally is stuck in banking services, and although the technology is more easily associated with the world of cryptocurrencies like Bitcoin , it can play a key role in delivering the next generation. of technology to use the complex algorithms needed to optimize the future of investing.
It didn’t take long for the blockchain to move beyond its initial use as a framework for cryptocurrencies and is instead being used for more complex roles across the fintech spectrum. Blockchain could essentially act as a financial intermediary to make transactions during an investment – helping to pave the way for faster speeds and lower commissions for investors compared to the kind of services we’re used to seeing. today.
Robinhood drew criticism from viewers for the gamification of stock investments. This type of business model may have been put in place due to the platform’s order flow payment method of leveraging commission-free trading – an approach that typically generates more money when more. of transactions occur. With blockchain, investment applications will be free to abandon these controversial approaches to making money with much more streamlined investment processes.
In search of a transparent future
To avoid an eventuality like the GameStop saga of Robinhood, higher levels of transparency could be exploited in private companies, allowing the ability to accurately rank and rate companies and offer this information to retail investors.
Speaking to Disruptor Daily, Keren Moynihan, Co-Founder of Boss Insights, said: “By reducing the risk associated with every investment, artificial intelligence and data science can make private investing more accessible to a wider range. investors. Rather than excluding retail investors, implementing new technology to address valid risk concerns creates a more inclusive environment for all investors. “
What is clear is that financial institutions need to embrace technology to help provide information, transparency, and intelligent processes that eliminate conflicts of interest for investors.
The events of 2021 with GameStop’s short squeeze and Robinhood’s subsequent decision to restrict trade have been a difficult episode to watch unfold, but with the advent of digital transformation in the financial industry, we may soon have access to solutions that will create a more equal financial ecosystem for all.
This article does not necessarily reflect the views of the editors or management of EconoTimes.