Before the 1980s, fulfilling stock orders used to involve running onto the trading floor, shouting a bunch of names around, and waving sheets of paper. From the mid-80s onwards, the process of ‘buy’ and ‘sell’ moved to a screen and the trading floor became a relic of the past as brokers digitized a large part of their investing/trading process. But as things become digital, the function of capturing returns starts to include how good your tech is to the investing equation as well. Meaning that capturing that highly coveted alpha in the investing world over the last decade or so has become a bit more intricate.
During the pandemic's peak, shares traded by US retail investors grew by 93% in Q2 2021, compared to the prior quarter, while the number of retail investors in the UK saw a 15% year-on-year increase. This means that as demand for public market investments grew, so did the demand for self-directed platforms — not the real-life trading floors predating the 1980s, but digital platforms for armchair investors ready to build their portfolios.
Man vs. machine
You might think that picking stocks is a simple case of learning about the company, looking at its financials, dialing into its earnings call, and then making an informed decision about whether you want to put your money where your mouth is (btw, this is what we call ‘fundamental analysis’). While that is still the case for a large number of investors — over the last few years, as tech has become more ingrained into the trading world, some investment decisions aren’t necessarily human-driven. Today, we’ll be delving into how tech has allowed investors to relegate even the decision-making process to machines through the use of fancy software and power-hungry computing rigs, and whether it’s enough to compete with self-directed, human-driven trading platforms.
Self-directed investing is the type of stuff you see on TV and in the movies — people commanding which stocks to buy and sell. Very Wolf of Wall Street like. These days, FinTechs have made trading quite accessible to the average retail investor. People who want to trade can download a trading app (or go to the platform's website), scroll through a bunch of stocks, read up on the companies that align with their strategy, and then invest in them — easy-peasy (supposedly).
Interestingly, though, most new investors these days tend to be younger, first-time investors — and as a result, self-directed platforms like Robinhood (HOOD), Freetrade, and yours truly have begun to innovate to capture this segment on the basis of content. They release marketing material like newsletters, TikTok videos, and podcasts that promote financial literacy. There have also been other features that these platforms are adding, which are focused on empowering the single investor, like Q&As during earnings calls and access to IPOs. The idea behind these platforms is to support this digitally native generation by providing them access to markets and tools to help them build their financial literacy.
Sprinkling some tech into the mix
Technology has revolutionized almost every aspect of societal progress, with even our phones packing computing power equivalent to a 90s PC. Hence, it is no surprise that the rapid growth of technology has impacted even the investing world. In the 1970s, you needed a whole team of brokers and dealers to provide quotations and process transactions for a certain fee. Today, a large chunk of it is managed by leveraging bespoke technologies and providing access to electronic markets and automatic order executions.
In fact, the current revolution in retail investment is driven by the perception of customer experience geared towards the digital age. Unlike in the past, technology has lowered the entry barrier into investing. With multiple online trading platforms and apps providing several services, anyone who wants to invest can do so all by the click of a button.
Investing powered by digital platforms, providing financial advice, and portfolio management with minimal human interaction is one way to invest. This digital financial advisor collects information about clients covering their current financial situation and future goals combined with software to build your investment portfolio. Once established, they monitor those portfolios to rebalance asset allocation, even after markets move.
In recent years, some retail platforms have built upon such tech — these are called Robo-advisory platforms, like UK-based Nutmeg or US-based WealthFront. Robo-advisory services often bucket investors into profiles based on their risk appetite and then allocate their funds into stock bundles expected to give returns that mirror their respective risk profiles. This type of investing is ideal for long-term investors that are fine with their money being passively tied up, making returns in the background.
Calling the shots
While this type of passive investing might be ideal for someone wanting to have limited involvement in the trading process, it can also be replicated through more ‘active’ self-directed platforms. Passive investors who want to allocate their money towards a portfolio and not have to think about it all the time can also pick ‘lower risk’ stocks or indices and then carry those holdings over month after month using a self-directed platform. The distinction between self-directed and more passive platforms is ‘choice.’ With self-directed platforms, individual investors call the shots by building and managing their own portfolios whilst reaping the rewards, if any.
Over the past year, we have witnessed a rise in DIY investors, evidenced by the growing number of modern-day retail investing apps offering multiple asset classes from Crypto to stocks – the DIY investor is spoiled for choice. However, despite the financial benefits of commission-free investment options, the power of these apps is the invaluable learning experience and independence gained from making investment decisions in your own time and at par with your values.
All in all, self-directed platforms put investors in the driving seat, giving them increased control of their investments and the tools to help steer their learning.