18 ways technology has changed investing

Written by:
November 25, 2017
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18 ways technology has changed investing

While the modern stock trader has access to endless information and advanced trading tools, many forget the humble origins of investing and the various technology trends that have fundamentally altered financial markets. From the birth of the first stock to the trading algorithms of today, advances in investing technology have supported a guiding goal: the efficient allocation of capital to generate value for companies and shareholders.

At Stacker, we set out to compile key technologies that have changed investing in the digital age. While headlines have been dominated by the rise of cryptocurrencies, high-frequency trading, and artificial intelligence, these advancements are just a handful of the technologies changing the investing landscape. Whether you're a casual or professional investor, check out our list of technology trends that have had the biggest impact in transforming modern-day investing.

#1. Terminals

Computerized trading terminals have advanced rapidly since their introduction in the 1960s. The first terminals were dedicated trading machines created by Ultronics and Scantlin Electronics, where an analyst could use simple keys to request stock quotes, representing a dramatic improvement in information availability.

Today, advanced terminals from Bloomberg and Reuters use cloud-based software that can be uploaded onto any computer, providing investors with a secure network to rapidly access real-time pricing and market news, execute trades, and even chat with clients and competitors. Before you race out to buy your own, keep in mind the cost per user for a terminal is typically $20,000 or more each year.

#2. Circuit breakers

While it may not seem like the most innovative of milestones considering the flashy technology of today, the advent of circuit breakers was crucial to creating stable financial markets.

A system designed to control for panic-selling, circuit breakers (or “collars”) temporarily halt trading on an exchange or security when prices become excessively volatile. Circuit breakers were put into effect after the market crash of October 19, 1987, when the DJIA dropped 22.6% in a single day, creating a catastrophic collapse in the market that came to be known as "Black Monday."

For the S&P 500, if the index falls to 7% below its previous close at any time before 3:25 pm, trading on all U.S. exchanges is automatically halted for 15 minutes, while a shift of 20% in the market halts all trading through the end of the day.

#3. Electronic stock exchanges

For centuries, trading was characterized by fast-paced buying and selling on crowded trading floors of famous institutions like the Chicago Mercantile Exchange (CME) and New York Stock Exchange (NYSE). 

In 1971, NASDAQ launched the first ever electronic stock market, allowing traders to post bids and offers digitally.  Access expanded in 1984, when the NYSE and NASDAQ launched SuperDot and Small Order Execution System respectively, allowing smaller investors to execute low volume trades through electronic channels.

#4. Online trading

While electronic trading reduced the necessity for traders, online trading changed the role of a broker. Prior to the proliferation of online trading platforms, investors had to actually call to place a trade with a full-service broker or financial advisor, typically paying up to a 2.5% commission on executed orders. By the late 1980s, major brokerages were developing online platforms to link individual investors with current stock price information and facilitate direct buying and selling.

Paired with easier access to vast public company information via the internet, common investing has opened up from a pure proprietary, broker-driven trading to direct analysis and execution by individual investors.

#5. Smartphones

The introduction of the first cell phones and PDAs in the 1970s rapidly improved the speed at which information could be disseminated to investors and trades could be executed. From the early brick phones of Gordon Gekko to the smartphones of today with considerable computing power, the cell phone has been a game changer for freeing investing from the physical constraints of an office or home.

#6. Personal finance apps

Personal finance and online budgeting tools such as Quicken, Mint, and LearnVest have fundamentally changed the way people track their investments and personal finances, providing a new level of visibility and hands-on management for investors.

The average consumer can now easily track and pay bills, manage their budget, and organize and benchmark their investments through these simple, user-friendly applications.

#7. Big data

Big data, entailing the collection and analysis of datasets on a massive scale, has become core to the regulation and management of financial markets. Agencies like the SEC use data analytics to monitor market activity and catch illegal trading activity. Meanwhile, retail traders, big banks, and hedge funds use big data for portfolio management, market sentiment measurement, and predictive analytics- with traditional finance players like Goldman Sach’s starting to realign themselves as technology and data-first companies.

#8. Social media

Social media has become a treasure trove of data for modern investors, as it's used to perform sentiment analysis or track the impact of news on global markets.

Dataminr, a company dedicated to analyzing the firehose of Twitter data for real-time event insights, has a client list of more than 75 financial clients with collectively over $1 trillion in assets. Need more proof? Check out how Trump’s tweets can move entire financial markets.

#9. Real estate portals

For many Americans, buying a home will be their single largest investment, and sites such as Zillow, Trulia, Redfin, and Realtor.com have brought a new level of information transparency and access to the real estate market. Prior to the internet, buyers relied solely on realtors, newspapers, and drive-bys to find their next house. Today, 44% of home buyers start their search for properties online, accessing photos, comparable sales, market trends, and transaction records to augment home buying decisions.

#10. Algorithms

Central to the development of many of the technologies on this list has been the rise of algorithmic trading. Algorithms use programmatic rules to analyze trading volume, volatility, timing, and other factors at super speed, ultimately giving investors the power to execute orders exponentially quicker and with less bias than human operators are able to.

Algorithms have given quantitative analysts and computer scientists an increased role in financial firms as companies race to develop faster and more powerful analytical platforms.

#11. High-frequency trading

High-frequency trading (HFT) is a form of automated trading characterized by advanced algorithms, near instantaneous execution, and short-term horizons.

In 2000, HFT accounted for less than 10% of total equity trading volume. Today, HFT represents nearly 52% of daily trading volume. However, not everyone is a new market dominated by high frequency traders. On May 6th, 2010, the infamous “flash crash” occurred when $1 trillion of value was obliterated from the market in a single day because of computer-driven sell-off over $4 billion. These abrupt moments of volatility have many proponents calling for the curtailing and even banning of HFT altogether.

#12. Equity crowdfunding

Crowdfunding got its start the late 1990s and early 2000s as a way for artists to raise money for their creative projectsThe Jumpstart Our Business Startups (JOBS) Act signed into law in 2012 helped open up approved channels for equity crowdfunding, allowing accredited investors meeting certain financial standards to buy shares of early company concepts for investment through approved marketplaces. In 2015, equity crowdfunding accessibility expanded to all investor types.

Popular platforms for equity crowdfunding include Indiegogo, AngelList, and CircleUp.

#16. Cryptocurrencies

Cryptocurrencies have emerged as one of the biggest financial stories of 2017. Cryptocurrencies are digital currencies that use cryptography to provide an anonymous and secure payment system. The underlying technology for cryptocurrencies is blockchain, which uses a network of distributed digital ledgers to post and verify transactions while preventing the fraudulent manipulation of records. 

Bitcoin, the first and most well-known cryptocurrency, has seen incredible growth in 2017, hitting a high of $9,500 per coin in November, representing a 1,300% one-year increase. Newer entrants like Ethereum and Litecoin have seen similar gains as cryptocurrencies have seen interest from casual investors and major institutional players alike.

#18. Artificial intelligence

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